**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-K**

 

**(MarkOne)**

 

**ý****ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE**

**ACT OF 1934**

 

**FOR THEFISCAL YEAR ENDED JUNE 30, 2004**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES**

**EXCHANGE ACT OF 1934**

 

**FOR THETRANSITION PERIOD FROM          TO          **

 

**COMMISSIONFILE NUMBER 333-75984**

 

**INSIGHT HEALTH SERVICES HOLDINGS CORP.**

(Exact name ofRegistrant as specified in its charter)

 

| **DELAWARE**                                                      | ** ** | **04-3570028**                         |
|-------------------------------------------------------------------|------------|----------------------------------------|
| (State or other  jurisdiction  of incorporation or  organization) |       | (I.R.S. Employer  Identification  No.) |
|                                                              |       |                                   |
| **26250  ENTERPRISE COURT, SUITE 100, LAKE FOREST,**              |       | **CA  92630**                     |
| (Address of  principal executive offices)                         |       | (Zip code)                             |

 

**(949)282-6000**

(Registrant’stelephone number including area code)

 

SECURITIES REGISTEREDPURSUANT TO SECTION 12(b) OF THE ACT:**NONE**

SECURITIES REGISTEREDPURSUANT TO SECTION 12(g) OF THE ACT:**NONE**

(Title of Class)

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes oNo ý

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein and will not be contained, to the best of the Registrant’sknowledge, in definitive proxy or informative statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.  ý

 

Indicate by check markwhether the Registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).  Yes oNo ý

 

The aggregatemarket value of the voting stock held by non-affiliates of the Registrant as ofDecember 31, 2003 (based on the price at which the common stock was valuedon that date) was $141,347.  The numberof shares outstanding of the Registrant’s common stock as of August 31,2004 was 5,468,814.

 

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**PARTI**

 

**ITEM 1.****                                       BUSINESS**

 

**OVERVIEW**

 

*All references to*“*we,*”**“*us,*”**“*our,*”**“*our company,*”**“*the Company*”*or*“*InSightHoldings*”*in this annual reporton Form 10-K mean InSight Health Services Holdings Corp., a Delawarecorporation, and all entities and subsidiaries owned or controlled by InSightHealth Services Holdings Corp. All references to*“*InSight*”*in this annual report on Form 10-K mean our wholly owned subsidiary, InSightHealth Services Corp., a Delaware corporation, and all entities andsubsidiaries owned or controlled by InSight Health Services Corp.*

 

We are a provider of diagnostic imaging services. Weprovide our services through an integrated network of fixed-site centers andmobile facilities focused in targeted regions throughout the United States. Ourservices include magnetic resonance imaging, or MRI, positron emissiontomography, or PET, computed tomography, or CT, and other technologies. Theseservices are noninvasive techniques that generate representations of internalanatomy on film or digital media which are used by physicians for the diagnosisand assessment of diseases and disorders.

 

As ofJune 30, 2004, our network consists of 118 fixed-site centers and 118mobile facilities.  This combinationallows us to provide a full continuum of imaging services to better meet theneeds of our customers, including healthcare providers, such as hospitals andphysicians, and payors such as managed care organizations, Medicare, Medicaidand insurance companies. Our fixed-site centers include freestanding centersand joint ventures with hospitals and radiology groups. Physicians referpatients to our fixed-site centers based on our service reputation, equipment,breadth of managed care contracts and convenient locations. Our mobilefacilities provide hospitals and physician groups access to imagingtechnologies when they lack either the resources or patient volume to providetheir own imaging services or require incremental capacity. We enter intoagreements with radiologists to provide professional services, which includesupervision and interpretation of radiological procedures and qualityassurance. We do not engage in the practice of medicine.  We operate as two divisions, the mobiledivision and fixed division, which also constitute our two reportablesegments.  Our mobile division includes29 parked mobile facilities, each of which serves a single customer.  Our fixed division includes four mobilefacilities as part of our fixed division operations in Maine.  Certain financial information regarding ourreportable segments is included in Note 18 to our consolidated financialstatements, which are a part of this Form 10-K

 

We were incorporated inJune 2001.  On October 17,2001, we acquired InSight and InSight became our wholly owned subsidiary.  We refer to our acquisition of InSight as the“Acquisition” in this Form 10-K.  Our consolidated operations after theAcquisition are substantially consistent with the operations of InSight priorto the Acquisition.  In addition, we haveno operations other than our investment in InSight.  InSight is considered our predecessor inaccordance with Regulation S-X.

 

Our principalexecutive offices are located at 26250 Enterprise Court, Suite 100, LakeForest, California 92630, and our telephone number is (949) 282-6000.  Our internet address iswww.insighthealth.com. www.insighthealth.com is a textual reference only,meaning that the information contained on the website is not part of this Form10-K and is not incorporated by reference in this Form 10-K or in any otherfilings we make with the Securities and Exchange Commission, or SEC.

 

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**Fixed-Site Business**

 

Our fixed-site centers provide a full spectrum ofdiagnostic imaging services to patients, physicians, insurance payors andmanaged care organizations. Of our 118 fixed-site centers, 74 offer MRIservices exclusively and four offer either PET or another type of serviceexclusively.  Our remaining 40 fixed-sitecenters are multi-modality sites typically offering MRI and one or more of PET,CT, x-ray, mammography, ultrasound, nuclear medicine, bone densitometry,nuclear cardiology and cardiovascular services. Diagnostic services areprovided to a patient upon referral by a physician. Physicians refer patientsto our fixed-site centers based on our service reputation, equipment, breadthof managed care contracts and convenient locations. Our fixed-site centersprovide the equipment and technologists for the procedures, contract withradiologists to interpret the scans, and bill payors directly. We have morethan 1,000 managed care contracts with managed care organizations at ourfixed-site centers.  These managed carecontracts often last for a period of multiple years because (1) they do nothave specific terms or specific termination dates or (2) they contain annual“evergreen” provisions that provide for the contract to automatically renewunless either party terminates the contract.

 

In addition to our independent facilities, we enterinto joint ventures with hospitals and radiology groups. Under thesearrangements, the hospital outsources its radiology function (primarily MRI) tous and we then install the appropriate imaging equipment on the hospitalcampus. Joint ventures are attractive to hospitals that lack the resources,management expertise or patient volume to provide their own imaging services orrequire incremental capacity. Joint ventures provide us with motivated partnerscapable of generating significant in-patient scan volumes through fixed-sitecenters. Furthermore, our joint ventures allow us to charge a management andbilling fee for supporting the day-to-day operations of the jointly ownedcenters.

 

 

**Mobile Business**

 

Hospitals can obtain access to our diverse diagnosticimaging technology through our network of 118 mobile facilities. We currentlyhave contracts with more than 300 hospitals, physician groups and otherhealthcare providers. We enable hospitals, physician groups and otherhealthcare providers to benefit from our advanced equipment without investingtheir own capital directly. We do not provide interpretation services for thediagnostic images produced. Interpretation services are provided by the hospital’s radiologists orphysician groups.

 

After reviewing the needs of our customers, routepatterns, travel times, fuel costs and equipment utilization, our fieldmanagers implement planning and route management to maximize the utilization ofour mobile equipment while controlling the costs to locate and relocate themobile facilities. Our mobile facilities are scheduled for as little asone-half day and up to seven days per week at any particular site. We generallyenter into one to five year-term contracts with hospitals, physician groups andother healthcare providers under which they assume responsibility for billingand collections. We are paid directly by the hospitals, physician groups andother healthcare providers on a contracted amount for our services, regardlessof their reimbursement.

 

Our mobile business provides a significant advantagefor establishing joint venture arrangements with hospitals, physician groupsand other healthcare providers and expanding our fixed-site business. Weestablish mobile routes in selected markets with the intent of growing with ourcustomers. Our mobile facilities give us the flexibility to (1) supplementfixed-site centers operating at or near capacity until volume has grownsufficiently to warrant additional fixed-site centers, and (2) test new marketson a short-term basis prior to establishing new mobile routes or opening newfixed-site centers. Our goal is to enter into long-term joint venturerelationships with our mobile customers once the local market matures andsufficient patient volume is attained to support a fixed-site center.

 

**DIAGNOSTIC IMAGING TECHNOLOGY**

 

The diagnostic imagingsystems we currently offer are MRI systems, PET scanners, CT scanners,digital ultrasound systems, computer-based nuclear medicine gamma cameras,x-ray, mammography, radiography/fluoroscopy systems and bone densitometry.  Each of these types of imaging systems (otherthan x-ray) represents the marriage of computer technology and various medicalimaging modalities. The following highlights our primary imaging systems:

 

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*MagneticResonance Imaging or MRI*

 

MRI is a technique thatinvolves the use of high-strength magnetic fields to producecomputer-processed, three-dimensional, cross-sectional images of the body. Theresulting image reproduces soft tissue anatomy (as found in the brain, spinalcord and interior ligaments of body joints such as the knee) with superiorclarity, not available by any other currently existing imaging modality, andwithout exposing patients to ionizing radiation.  MRI systems are classified into two classes,conventional MRI systems and Open MRI systems. The structure of conventional MRI systems (including the narrow tubes intowhich a patient is inserted) allows for higher magnet field strengths, betterimage quality and faster scanning times than Open MRI systems.  However, Open MRI systems are able to servicepatients who have access difficulties with the narrow tubes of conventional MRIsystems, including pediatric patients and patients suffering frompost-traumatic stress, claustrophobia or significant obesity.  A typical conventional  MRI examination takes from 20 to 45minutes.  A typical Open MRI examinationtakes from 30 to 60 minutes.  MRIgenerally reduces the cost and amount of care needed and often eliminates theneed for invasive diagnostic procedures. MRI systems are typically priced in the range of $0.9 million to$2.5 million each.

 

 *Positron Emission Tomography or PET*

 

PET is a nuclear medicineprocedure that produces pictures of the body’s metabolic and biological functions. PET can provideearlier detection as well as monitoring of certain cancers, coronary diseasesor neurological problems than other diagnostic imaging systems. The informationprovided by PET technology often obviates the need to perform further highlyinvasive or diagnostic surgical procedures. Interest in PET scanning hasincreased recently due to several factors including a growing recognition byclinicians that PET is a powerful diagnostic tool, increased third-party payorcoverage and reimbursement and the availability of the isotopes used for PETscanning.  PET/CT is a “fusion” scanner,which makes it possible to collect both anatomical and biological informationduring a single procedure.  A typical PETor PET/CT examination takes from 20 to 60 minutes.  PET systems are typically priced in the rangeof $0.8 million to $1.2 million each. PET/CT systems are typicallypriced in the range of $1.8 million to $2.3 million each.

 

* ComputedTomography or CT*

 

InCT imaging, a computer analyzes the information received from an x-ray beam toproduce multiple cross-sectional images of a particular organ or area of thebody. CT imaging is used to detect tumors and other conditions affecting bones and internal organs.A typical CT examination takes from 15 to 45 minutes. CT systems aretypically priced in the range of $0.3 million to $1.1 million each.

 

*OtherImaging Technologies*

 

•                  Ultrasoundsystems use, detect and process high frequency sound waves to generate imagesof soft tissues and internal body organs.

 

•                  X-ray is themost common energy source used in imaging the body and is now employed inconventional x-ray systems, CT scanners and digital x-ray systems.

 

•                  Mammography isa low-level conventional examination of the breasts. Its primary purpose is todetect lesions in the breast that may be too small or deeply buried to be feltin a regular breast examination. The benefits of digital mammography are lowerradiation doses to the breast, higher sensitivity to lesions, and reducedprocedure times compared to conventional film mammography.

 

•                  Bonedensitometry uses an advanced technology called dual-energy x-rayabsorptiometry, or DEXA, which safely, accurately and painlessly measures bonedensity and the mineral content of bone for the diagnosis of osteoporosis.

 

•                  Nuclearmedicine gamma cameras, which are based upon the detection of gamma radiationgenerated by radioactive pharmaceuticals injected or inhaled into the body, areused to provide information about organ function as opposed to anatomicalstructure.

 

**BUSINESS DEVELOPMENT**

 

Our objective is to bethe leading provider of outsourced diagnostic imaging services in our existingregional markets.  We plan to furtherdevelop and expand our regional markets by continuing to emphasize quality ofcare,

 

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produce cost-effectivediagnostic information and provide superior service and convenience to ourcustomers.  Our strategy is focused on three components.

 

Firstly, we intend tomaximize utilization of our existing facilities by:

 

•                  broadening ourphysician referral base and generating new sources of revenues throughselective marketing activities;

 

•                  focusing ourmarketing efforts on attracting additional managed care customers;

 

•                  focusing onconverting mobile facilities to fixed-site centers;

 

•                  expanding current imaging applications ofexisting modalities to increase overall procedure volume; and

 

•                  maximizing cost efficiencies throughincreased purchasing power and continued reduction of expenses.

 

Secondly, we intend topursue expansion opportunities within our existing regional markets by openingnew fixed-site centers and developing mobile facilities where attractivereturns on investment can be achieved and sustained.  In addition, webelieve that mobile PET and PET/CT facilities present a growth opportunity dueto increased physician acceptance of PET and PET/CT as a diagnostic tool,expanded Medicare coverage of PET and PET/CT procedures and favorablereimbursement levels.  We also intend to pursue joint ventureopportunities with hospitals because we believe that they have the potential toprovide us with a steady source of procedure volume.  Management believesthat this will be an area for additional growth because we expect hospitals andother healthcare providers to respond to federal healthcare regulatoryrequirements by outsourcing radiology services to imaging centers that arejointly owned and managed with third parties.

 

Finally, we intend tocontinue to increase our market presence in our existing regional markets wherewe can increase economies of scale or new markets where we believe we canestablish a strong regional network, through disciplined and strategicacquisitions.  We believe we are well positioned to capitalize on theongoing consolidation of the imaging industry.  We believe that theexpansion of our business through such acquisitions is a key factor inimproving profitability.  Generally, acquisition opportunities are aimedat increasing revenues and gross profit, and maximizing utilization of existingcapacity and increasing economies of scale.  Incremental gross profitresulting from future acquisitions will vary depending on geographic location,whether facilities are mobile or fixed, the range of services provided and ourability to integrate the acquired businesses into its existinginfrastructure.  We cannot assure you, however, that we will be able toidentify suitable acquisition candidates, obtain suitable financing for suchacquisitions or thereafter complete such acquisitions on terms acceptable tous.

 

**GOVERNMENT REGULATION**

 

The healthcare industryis highly regulated and changes in laws and regulations can be significant.Changes in the law or new interpretation of existing laws can have a materialeffect on our permissible activities, the relative costs associated with doingbusiness and the amount of reimbursement by government and other third-partypayors. The federal government and all states in which we currently operateregulate various aspects of our business. Failure to comply with these lawscould adversely affect our ability to receive reimbursement for our servicesand subject us and our officers and agents to civil and criminal penalties.

 

*FederalFalse Claims Act:*There has been an increase in qui tam actions brought under the federal FalseClaims Act and, in particular, under the False Claims Act’s “qui tam” or “whistleblower” provisions. Those provisions allow a privateindividual to bring actions in the name of the government alleging that thedefendant has made false claims for payment from federal funds. After theindividual has initiated the lawsuit, the government must decide whether tointervene in the lawsuit and to become the primary prosecutor. Until thegovernment makes a decision, the lawsuit is kept secret. If the governmentdeclines to join the lawsuit, the individual may choose to pursue the casealone, in which case the individual’s counsel will have primary control over theprosecution, although the government must be kept apprised of the progress ofthe lawsuit, and may intervene later. Whether or not the federal governmentintervenes in the case, it will receive the majority of any recovery. If thelitigation is successful, the individual is entitled to no less than 15%, butno more than 30%, of whatever amount the government recovers that is related tothe whistleblower’s allegations. The percentage of the individual’s recovery varies, depending on

 

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whether the governmentintervened in the case and other factors. Recently, the number of suits broughtagainst healthcare providers by government regulators and private individualshas increased dramatically. In addition, various states are considering or haveenacted laws modeled after the federal False Claims Act, penalizing falseclaims against state funds. If a whistleblower action is brought against us,even if it is dismissed with no judgment or settlement, we may incursubstantial legal fees and other costs relating to an investigation. Actionsbrought under the False Claims Act may result in significant fines and legalfees and distract our management’s attention, which would adversely affect ourbusiness, financial condition and results of operations.

 

When an entity isdetermined to have violated the federal False Claims Act, it must pay threetimes the actual damages sustained by the government, plus mandatory civilpenalties of between $5,500 to $11,000 for each separate false claim, as wellas the government’s attorneys fees. Liability arises when an entity knowingly submits, orcauses someone else to submit, a false claim for reimbursement to the federalgovernment or submits a false claim with reckless disregard for, or indeliberate ignorance of, its truth or falsity. Simple negligence should notgive rise to liability. Examples of the other actions which may lead toliability under the False Claims Act:

 

•                  Failure tocomply with the many technical billing requirements applicable to our Medicareand Medicaid business.

 

•                  Failure tocomply with Medicare requirements concerning the circumstances in which ahospital, rather than we, must bill Medicare for diagnostic imaging services weprovide to outpatients treated by the hospital.

 

•                  Failure of ourhospital customers to accurately identify and report our reimbursable andallowable services to Medicare.

 

•                  Failure tocomply with the prohibition against billing for services ordered or supervisedby a physician who is excluded from any federal healthcare programs, or theprohibition against employing or contracting with any person or entity excludedfrom any federal healthcare programs.

 

•                  Failure tocomply with the Medicare physician supervision requirements for the services weprovide, or the Medicare documentation requirements concerning physiciansupervision.

 

•                  The pastconduct of the businesses we have acquired.

 

We strive to ensure thatwe meet applicable billing requirements. However, the costs of defending claimsunder the False Claims Act, as well as sanctions imposed under the Act, couldsignificantly affect our business, financial condition and results ofoperations.

 

*Anti-kickbackStatutes:* We aresubject to federal and state laws which govern financial and other arrangementsbetween healthcare providers. These include the federal anti-kickback statutewhich, among other things, prohibits the knowing and willful solicitation,offer, payment or receipt of any remuneration, direct or indirect, in cash orin kind, in return for or to induce the referral of patients for items orservices covered by Medicare, Medicaid and certain other governmental healthprograms. Violation of the anti-kickback statute may result in civil orcriminal penalties and exclusion from the Medicare, Medicaid and other federalhealthcare programs. In addition, it is possible that private parties may file “qui tam” actions based on claims resulting from relationshipsthat violate this statute, seeking significant financial rewards. Many stateshave enacted similar statutes, which are not limited to items and services paidfor under Medicare or a federally funded healthcare program. In recent years,there has been increasing scrutiny by law enforcement authorities, theDepartment of Health and Human Services, or HHS, the courts and Congress offinancial arrangements between healthcare providers and potential sources ofreferrals to ensure that such arrangements do not violate the anti-kickbackprovisions. HHS and the federal courts interpret “remuneration” broadly to apply to a wide range of financialincentives, including, under certain circumstances, distributions ofpartnership and corporate profits to investors who refer federal healthcareprogram patients to a corporation or partnership in which they have anownership interest and to payments for service contracts and equipment leasesthat are designed, even if only in part, to provide direct or indirectremuneration for patient referrals or similar opportunities to furnishreimbursable items or services. HHS has issued “safe harbor” regulations that set forth certain provisions which,if met, will assure that healthcare providers and other parties who referpatients or other business opportunities, or who provide reimbursable items orservices, will be deemed not to

 

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violate the anti-kickbackstatutes. The safe harbors are narrowly drawn and some of our relationships maynot qualify for any “safe harbor”; however, failure to comply with a “safe harbor” does not create a presumption of liability. Webelieve that our operations materially comply with the anti-kickback statutes;however, because these provisions are interpreted broadly by regulatoryauthorities, we cannot assure you that law enforcement officials or others willnot challenge our operations under these statutes.

 

*CivilMoney Penalty Law and Other Federal Statutes:* The Civil Money Penalty, or CMP, law covers a varietyof practices. It provides a means of administrative enforcement of theanti-kickback statute, and prohibits false claims, claims for medicallyunnecessary services, violations of Medicare participating provider orassignment agreements and other practices. The statute gives the Office ofInspector General of the HHS the power to seek substantial civil fines, exclusionand other sanctions against providers or others who violate the CMPprohibitions.

 

In addition, in 1996,Congress created the new federal crimes of healthcare fraud and making falsestatements relating to healthcare matters. The healthcare fraud statuteprohibits knowingly and willfully executing a scheme to defraud any healthcarebenefit program, including private payors. A violation of this statute is afelony and may result in fines, imprisonment or exclusion from governmentsponsored programs such as the Medicare and Medicaid programs. The falsestatements statute prohibits knowingly and willfully falsifying, concealing orcovering up a material fact or making any materially false, fictitious orfraudulent statement in connection with the delivery of or payment forhealthcare benefits, items or services, including those provided by privatepayors. A violation of this statute is a felony and may result in fines orimprisonment.

 

Webelieve that our operations materially comply with the CMP law and thehealthcare fraud statutes. These prohibitions, however, are broadly worded andthere is limited authority interpreting their parameters. Therefore, we cangive no assurance that the government will not pursue a claim against us basedon these statutes. Such a claim would divert the attention of management andcould result in substantial penalties which could adversely affect ourbusiness, financial condition and results of operations.

 

*HealthInsurance Portability and Accountability Act:* In 1996, Congress passed the Health InsurancePortability and Accountability Act, or HIPAA. Although the main focus of HIPAAwas to make health insurance coverage portable, HIPAA has become a short-handreference to new standards for electronic transactions and privacy and securityobligations imposed on providers and others who handle personal healthinformation. HIPAA requires healthcare providers to adopt standard formats forcommon electronic transactions with health plans, and to maintain the privacyand security of individual patients’ health information. The privacy standards went intoeffect on April 14, 2003 and the electronic standards for transactionswent into effect on October 16, 2003. Covered providers must comply withthe security standards by April 2005. A violation of HIPAA’s privacy provisions may result incriminal and civil penalties, which could adversely affect our business,financial condition and results of operations.

 

*Stark II,State Physician Self-referral Laws:* The federal Physician Self-Referral or “Stark” law prohibits a physician from referring Medicarepatients for certain “designated health services” to an entity with which the physician (or animmediate family member of the physician) has a financial relationship unlessan exception applies. In addition, the receiving entity is prohibited frombilling for services provided pursuant to the prohibited referral.

 

Designated healthservices under Stark include radiology services (MRI, CT, x-ray, ultrasound andothers), radiation therapy, inpatient and outpatient hospital services andseveral other services. A violation of the Stark law does not require a showingof intent. If a physician has a financial relationship with an entity that doesnot qualify for an exception, the referral of Medicare patients to that entityfor designated health services is prohibited and, if the entity bills for suchservices, the Stark sanctions apply.

 

Sanctions for violatingStark include denial of payment, mandatory refunds, civil money penaltiesand/or exclusion from the Medicare program. In addition, some courts haveallowed federal False Claims Act lawsuits premised on Stark Law violations.

 

The federal Stark Lawprohibition is expansive, and its statutory language and implementingregulations are ambiguous. Consequently, the statute has been difficult tointerpret. In 1995, the Centers for Medicare and Medicaid Services, or CMS,published final regulations interpreting the Stark prohibition as applied toclinical laboratory services. In 1998, CMS released proposed regulationsinterpreting Stark as applied to all designated health services. In 2001, CMSpublished Phase I of the final Stark regulations which went into effect inJanuary 2002. On March 26,

 

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2004, CMS publishedPhase II of the final Stark regulations which became effective inJuly 2004. Phase II included some additional regulatory exceptionsand definitions providing more flexibility in some areas and more specificityin others, but did not extend designated health services to PET or nuclearmedicine.

 

With each set ofregulations, CMS’ interpretation of the statute has evolved. This has resulted inconsiderable confusion concerning the scope of the referral prohibition and therequirements of the various exceptions. It is noteworthy, however, that CMS hastaken the position that the Stark Law is self-effectuating and does not requireimplementing regulations. Thus, the government believes that physicians andothers must comply with the Stark Law prohibitions regardless of the state ofthe regulatory guidance.

 

TheStark Law does not directly prohibit referral of Medicaid patients, but ratherdenies federal financial participation to state Medicaid programs for servicesprovided pursuant to a tainted referral. Thus, Medicaid referrals are subjectto whatever sanctions the relevant state has adopted. Several states in whichwe operate have enacted or are considering legislation that prohibits“self-referral” arrangements or requires physicians or other healthcareproviders to disclose to patients any financial interest they have in ahealthcare provider to whom they refer patients. Possible sanctions forviolating these state statutes include loss of licensure, civil fines andcriminal penalties. The laws vary from state to state and seldom have beeninterpreted by the courts or regulatory agencies. Nonetheless, strictenforcement of these requirements is likely.

 

We believe our operationsmaterially comply with the federal and state physician self-referral laws.However, given the ambiguity of these statutes, the uncertainty of theregulations and the lack of judicial guidance on many key issues, we can giveno assurance that the Stark Law or other physician self-referral regulationswill not be interpreted in a manner that could adversely affect our business,financial condition and results of operations.

 

*FDA:* The U.S. Food and DrugAdministration, or FDA, has issued the requisite premarket approval for all ofour MRI, PET, PET/CT and CT systems. We do not believe that any further FDAapproval is required in connection with equipment currently in operation orproposed to be operated; except under regulations issued by the FDA pursuant tothe Mammography Quality Standards Act of 1992, all mammography facilities musthave a certificate issued by the FDA. In order to obtain a certificate, amammography facility is required to be accredited by an FDA approvedaccrediting body (a private, non-profit organization or state agency) or otherentity designated by the FDA. Pursuant to the accreditation process, eachfacility providing mammography services must comply with certain standardsincluding annual inspection.

 

Compliance with thesestandards is required to obtain payment for Medicare services and to avoidvarious sanctions, including monetary penalties, or suspension ofcertification. Although all of our facilities which provide mammographyservices are currently accredited by the Mammography Accreditation Program ofthe American College of Radiology and we anticipate continuing to meet therequirements for accreditation, the withdrawal of such accreditation couldresult in the revocation or suspension of certification by the FDA,ineligibility for Medicare reimbursement and sanctions, including monetarypenalties. Congress has extended Medicare benefits to include coverage ofscreening mammography subject to the prescribed quality standards describedabove. The regulations apply to diagnostic mammography as well as screeningmammography.

 

*Radiologistand Facility Licensing:* The radiologists with whom we contract to provide professionalservices are subject to licensing and related regulations by the states,including registrations to use radioactive materials. As a result, we requireour radiologists to have and maintain appropriate licensure and registrations.In addition, some states also impose licensing or other requirements on us atour facilities and other states may impose similar requirements in the future.Some local authorities may also require us to obtain various licenses, permitsand approvals. We believe that we have obtained all required licenses andpermits; however, the criteria governing licensing or permitting may change oradditional laws and licensing requirements governing our facilities may be enacted.These changes could adversely affect our business, financial condition andresults of operations.

 

*LiabilityInsurance:* Thehospitals and physicians who use our diagnostic imaging systems are involved inthe delivery of healthcare services to the public and, therefore, are exposedto the risk of liability claims. Our position is that we do not engage in thepractice of medicine. We provide only the equipment and technical components ofdiagnostic imaging, including certain limited nursing services, and we have notexperienced any material losses due to claims for malpractice. Nevertheless,claims for malpractice have been asserted against us in the past and any futureclaims, if successful, could entail significant defense costs and could resultin substantial damage awards to the claimants, which may exceed the limits ofany applicable insurance coverage. We maintain professional liability

 

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insurance in amounts webelieve are adequate for our business of providing diagnostic imaging,treatment and management services. In addition, the radiologists or otherhealthcare professionals with whom we contract are required by such contractsto carry adequate medical malpractice insurance. Successful malpractice claimsasserted against us, to the extent not covered by our liability insurance,could have a material adverse effect on our business, financial condition andresults of operations.

 

*Independent Diagnostic Treatment Facilities:* CMS hasestablished a category of Medicare provider referred to as IndependentDiagnostic Treatment Facilities, or IDTFs. Imaging centers have the option toparticipate in the Medicare program as either IDTFs or medical groups. Most ofour fixed-site centers are IDTFs. IDTFs are being monitored by CMS,particularly with respect to physician supervision requirements; however, ifCMS exercised increased oversight of IDTFs, our business, financial conditionand results of operations could be adversely affected.

 

*Certificates of Need**:* Some states require hospitals andcertain other healthcare facilities and providers to obtain a certificate ofneed, or CON, or similar regulatory approval prior to establishing certainhealthcare operations or services, incurring certain capital expendituresand/or the acquisition of major medical equipment including MRI and PETsystems. We believe that we have complied or will comply with applicable CONrequirements in those states where we operate. Nevertheless, this is an area ofcontinuing legislative activity, and CON and licensing statutes may be modifiedin the future in a manner that may have a material adverse effect on ourbusiness, financial condition and results of operations.

 

*Environmental,Health and Safety Laws:***** Our PET service and some of our other imagingservices require the use of radioactive materials, which are subject tofederal, state and local regulations governing the storage, use and disposal ofmaterials and waste products. We could incur significant costs in order tocomply with current or future environmental, health and safety laws andregulations.  However, we believe thatenvironmental, health and safety laws and regulations will not (1) cause us toincur any material capital expenditures in our current year or the succeedingyear, including costs for environmental control facilities or (2) materiallyimpact our revenues or our competitive position.

 

**SALES AND MARKETING**

 

Weengage in marketing activities to obtain new sources of revenues, expandbusiness relationships, grow revenues at existing facilities, and maintainpresent business alliances and contractual relationships. Marketing activitiesfor the fixed-site business include educating physicians on new applicationsand uses of the technology and customer service programs. In addition, oursales force leverages our targeted regional market concentration to developcontractual relationships with managed care payors to increase patient volume.Marketing activities for our mobile business include direct marketing to hospitals anddeveloping leads through current customers, equipment manufacturers, and othervendors. In addition, marketing activities for the mobile business includecontacting referring physicians associated with hospital customers andeducating physicians.

 

**COMPETITION**

 

The healthcare industryin general, and the market for diagnostic imaging services in particular, ishighly competitive and fragmented, with only a few national providers. Wecompete principally on the basis of our service reputation, equipment, breadthof managed care contracts and convenient locations. Our operations must competewith groups of radiologists, established hospitals and certain otherindependent organizations, including equipment manufacturers and leasingcompanies that own and operate imaging equipment. We will continue to encountersubstantial competition from hospitals and independent organizations, includingAlliance Imaging, Inc., HEALTHSOUTH Corporation, MedQuest, Inc. and Radiologix,Inc. Some of our direct competitors that provide diagnostic imaging servicesmay have access to greater financial resources than we do.

 

Certain hospitals,particularly the larger hospitals, may be expected to directly acquire andoperate imaging and treatment equipment on-site as part of their overallinpatient servicing capability, assume the associated financial risk, employthe necessary technologists and satisfy applicable CON and licensurerequirements, if any. In addition, some physician practices that have refrainedfrom establishing diagnostic imaging capability may decide to do so, in lightof the increased availability of lower-cost specialty MRI scanners.Historically, smaller hospitals have been reluctant to purchase imaging andtreatment equipment, but have chosen to do so with attractive financing offeredby original equipment manufacturers.

 

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**CUSTOMERS AND CONTRACTS**

 

Our revenues areprimarily generated from patient services and contract services. Patientservices revenues are generally earned from services billed directly topatients or third-party payors (such as managed care organizations, Medicare,Medicaid, commercial insurance carriers and workers’ compensation funds) on a fee-for-service basis.Patient services revenues and management fees are primarily earned throughfixed-site centers. Contract services revenues are generally earned fromservices billed to a hospital, physician group or other healthcare provider,which include fee-for-service arrangements in which revenues are based upon acontractual rate per procedure and fixed fee contracts.  Contract services revenues are primarilyearned through mobile facilities and are generally paid pursuant to contractswith a term from one to five years.  Eachyear approximately 33% of the contract services agreements for mobilefacilities are subject to renewal.  Ourmobile facility contract renewal rate was 82% for the year ended June 30,2004.  However, we expect that some highvolume customer accounts will elect not to renew their agreements and insteadwill purchase or lease their own diagnostic imaging equipment and somecustomers may choose an alternative services provider.

 

During the year endedJune 30, 2004, approximately 56% of our revenues were generated frompatient services and approximately 44% were generated from contract services.

 

**DIAGNOSTIC IMAGING AND OTHEREQUIPMENT**

 

As of June 30, 2004,we owned or leased 275 diagnostic imaging and treatment systems, with thefollowing classifications: 1.5 Tesla MRI, 1.0 Tesla MRI, Open MRI, PET, PET/CT,CT and other technology.  Magnetic fieldstrength is the measurement of the magnet used inside the MRI system.  If the magnetic field strength is increasedthe image quality of the scan is improved and the time required to complete scansis decreased.  Magnetic field strength onMRI systems currently ranges from 0.2 to 3.0 Tesla.  Of our 171 conventional MRI systems, 147 havea magnet field of 1.5 Tesla, which is the industry standard magnet strength forconventional fixed and mobile MRI systems.

 

We continue to evaluatethe mix of our diagnostic imaging equipment in response to changes intechnology and to any surplus capacity in the marketplace. The overalltechnological competitiveness of our equipment continues to improve through upgrades,disposal and/or trade-in of older equipment and the purchase or execution ofleases for new equipment.

 

Several substantialcompanies presently manufacture MRI (including Open MRI), PET,  PET/CT, CT and other diagnostic imagingequipment, including General Electric Medical Systems, Hitachi Medical Systems,Siemens Medical Systems, Toshiba American Medical Systems and Phillips MedicalSystems. Wehave acquired MRI and CT systems that were manufactured by each of theforegoing companies.  We have acquiredPET or PET/CT systems that were manufactured by General Electric MedicalSystems, Siemens Medical Systems and CTI Molecular Imaging, Inc.  We enter into individual purchase orders for each system that weacquire, and we do not have long-term purchase arrangements with any equipmentmanufacturer.  We maintain good working relationshipswith many of the major manufacturers to better ensure adequate supply as wellas access to those types of diagnostic imaging systems which appear mostappropriate for the specific imaging facility to be established.

 

**INFORMATIONSYSTEMS**

 

Our internal informationtechnology systems allow us to manage our operations, accounting and finance,human resources, payroll, document imaging, and data warehousing. Our primaryoperating system is the InSight Radiology Information System, or IRIS, ourproprietary information system. IRIS provides front-office support forscheduling and administration of imaging procedures and back office support forbilling and collections. Additional functionality includes workflow,transcription, and image management.

 

In connection with theimplementation of the electronic transactions, security and privacy standardsmandated by HIPAA, we have spent approximately $1.1 million as ofJune 30, 2004 to make necessary software upgrades to IRIS to conform itwith the privacy and electronic standards. We expect to spend an additional$0.4 million to conform IRIS with the security standards byApril 2005.

 

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**COMPLIANCE PROGRAM**

 

We havevoluntarily implemented a program to monitor compliance with federal and statelaws and regulations applicable to healthcare entities. We have appointed acompliance officer who is charged with implementing and supervising our complianceprogram, which includes a code of ethical conduct for our employees andaffiliates and a process for reporting regulatory or ethical concerns to ourcompliance officer, including a toll-free telephone hotline. We believe thatour compliance program meets the relevant standards provided by the Office ofInspector General of the HHS. An important part of our compliance programconsists of conducting periodic reviews of various aspects of our operations.Our compliance program also contemplates mandatory education programs designedto familiarize our employees with the regulatory requirements and specificelements of our compliance program.

 

**EMPLOYEES**

 

As of August 31,2004, we had approximately 1,700 full-time, 110 part-time and480 per diem employees.  None of ouremployees is covered by a collective bargaining agreement. Management believesits employee relations to be satisfactory.

 

**FORWARD-LOOKING STATEMENTSDISCLOSURE**

 

This report onForm 10-K includes “forward-looking statements.”  Forward-looking statements include statementsconcerning our plans, objectives, goals, strategies, future events, futurerevenues or performance, capital expenditures, financing needs, plans orintentions relating to acquisitions, competitive strengths and weaknesses, businessstrategy and the trends that we anticipate in the industry and economies inwhich we operate and other information that is not historical information and,in particular, appear under “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations.” When used in this report the words“estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,”“believes,” and variations of such words or similar expressions are intended toidentify forward-looking statements.  Allforward-looking statements, including, without limitation, our examination ofhistorical operating trends, are based upon our current expectations andvarious assumptions.  Our expectations,beliefs and projections are expressed in good faith, and we believe there is areasonable basis for them, but we can give no assurance that our expectations,beliefs and projections will be realized.

 

There are a numberof risks and uncertainties that could cause our actual results to differmaterially from the forward-looking statements contained in this report.  Important factors that could cause our actualresults to differ materially from the forward-looking statements made in thisreport are set forth in this report, including the factors described in thesection entitled “Risk Factors,” and the following:

 

•                  limitations and delays inreimbursement by third-party payors;

•                  contract renewals and financialstability of customers;

•                  conditions within the healthcareenvironment;

•                  adverse utilization trends forcertain diagnostic imaging procedures;

•                  our ability to successfully integrateacquisitions;

•                  market competition;

•                  the potential for rapid andsignificant changes in technology and their effect on our operations;

•                  operating, legal, governmental andregulatory risks; and

•                  economic, political and competitiveforces affecting our business.

 

If any of theserisks or uncertainties materialize, or if any of our underlying assumptions isincorrect, our actual results may differ significantly from the results that weexpress in or imply by any of our forward-looking statements.  We do not undertake any obligation to revisethese forward-looking statements to reflect future events or circumstances.

 

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**RISKFACTORS**

 

In addition to the other information contained in thisForm 10-K, the following risk factors should be carefully considered.  Ifany of these risks actually occur, our business, financial condition oroperating results could be adversely affected.

 

RISKS RELATING TO OURINDEBTEDNESS

 

***Our substantial indebtedness could adversely affect ourfinancial health.***

 

As of June 30, 2004,we had total indebtedness of approximately $539.8 million which comprisedapproximately 85% of our total capitalization. Our substantial indebtedness could have important consequences to us.For example, it could:

 

•                  make it moredifficult for us to satisfy our obligations with respect to our seniorsubordinated notes and our credit facility;

 

•                  increase our vulnerabilityto general adverse economic and industry conditions;

 

•                  require us todedicate a substantial portion of our cash flow from operations to payments onour indebtedness, thereby reducing the availability of our cash flow to fundworking capital, capital expenditures, acquisitions and investments and othergeneral corporate purposes;

 

•                  limit ourflexibility in planning for, or reacting to, changes in our business and themarkets in which we operate;

 

•                  place us at acompetitive disadvantage compared to our competitors that have lessdebt; and

 

•                  limit ourability to borrow additional funds.

 

In addition, we may incursubstantial additional indebtedness in the future.  The terms of the indenture governing oursenior subordinated notes and the credit agreement governing our creditfacility allow us to issue and incur additional debt subject to certainlimitations.  If new debt is added tocurrent debt levels, the related risks described above could increase.

 

***We are subject to restrictive debt covenants that imposeoperating and financial restrictions on our operations and could limit ourbusiness flexibility.***

 

The agreements governingour indebtedness impose significant operating and financial restrictions on us.These restrictions prohibit or limit, among other things:

 

•                  the incurrenceof additional indebtedness and the issuance of preferred stock and certainredeemable capital stock;

 

•                  a number ofother restricted payments, including investments;

 

•                  specified salesof assets;

 

•                  specifiedtransactions with affiliates;

 

•                  the creation ofa certain types of liens;

 

•                  consolidations,mergers and transfers of all or substantially all of our assets; and

 

•                  our ability tochange the nature of our business.

 

These restrictions couldlimit our ability to obtain future financing, make acquisitions, withstanddownturns in our business or take advantage of business opportunities.

 

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The terms of our creditfacility include several restrictive covenants that prohibit us from prepayingour other indebtedness, including the senior subordinated notes, whileindebtedness under our credit facility is outstanding. Our credit facility alsorequires us to maintain certain specified financial ratios and satisfyfinancial condition tests. Our ability to comply with the ratios or tests maybe affected by events beyond our control, including prevailing economic,financial and industry conditions.

 

A breach of any of thesecovenants, ratios or tests could result in a default under our credit facilityor the indenture. Events of default under our credit facility would prohibit usfrom making payments on the senior subordinated notes in cash, includingpayment of interest when due. In addition, upon the occurrence of an event of defaultunder our credit facility, the lenders could elect to declare all amountsoutstanding under our credit facility, together with accrued interest, to beimmediately due and payable. If we were unable to repay those amounts, thelenders could proceed against the security granted to them to secure thatindebtedness.

 

***If we are unable to generate or borrow sufficient cash tomake payments on our indebtedness or to refinance our indebtedness onacceptable terms, our financial condition could be materially harmed.***

 

Our ability to makepayments on our indebtedness will depend on our ability to generate cash flowin the future which, to a certain extent, is subject to general economic,financial, competitive, legislative, regulatory and other factors that are beyondour control. In addition, future borrowings may not be available to us underour credit facility in an amount sufficient to enable us to pay ourindebtedness or to fund our other cash needs. We may not be able to refinance any of our indebtedness, including ourcredit facility and our senior subordinated notes, on commercially reasonableterms or at all. Any refinancing of our debt could be at higher interest ratesand may require us to comply with more onerous covenants which could furtherrestrict our business operations.

 

***The realizable value of our assets upon liquidation may beinsufficient to satisfy claims.***

 

At June 30, 2004,our assets included approximately $319.5 million of intangible assets,representing approximately 47.3% of our total consolidated assets.  These assets primarily consist of the excessof the acquisition cost over the fair market value of the net assets acquiredin purchase transactions. The value of these intangible assets will continue todepend significantly upon the success of our business as a going concern andthe growth in future cash flows. As a result, in the event of a default underour credit facility or our indenture or any bankruptcy or dissolution of ourcompany, the realizable value of these assets may be substantially lower andmay be insufficient to satisfy the claims of our creditors.

 

***Because of the subordinated nature of our seniorsubordinated notes, holders of our senior subordinated notes may not beentitled to be paid in full, if at all, in a bankruptcy, liquidation orreorganization or similar proceeding.***

 

As a result of thesubordinated nature of our notes and related guarantees, upon any distributionto our creditors or the creditors of the subsidiary guarantors in bankruptcy,liquidation or reorganization or similar proceeding relating to us or thesubsidiary guarantors or our or their property, the holders of our seniorindebtedness and senior indebtedness of the subsidiary guarantors will beentitled to be paid in full in cash before any payment may be made with respectto our senior subordinated notes or the subsidiary guarantees.

 

In the event of abankruptcy, liquidation or reorganization or similar proceeding relating to usor the subsidiary guarantors, holders of our senior subordinated notes willparticipate with all other holders of unsecured indebtedness of ours or thesubsidiary guarantors that are similarly subordinated in the assets remainingafter we and the subsidiary guarantors have paid all senior indebtedness.However, because of the existence of the subordination provisions, includingthe requirement that holders of the senior subordinated notes pay overdistributions to holders of senior indebtedness, holders of the seniorsubordinated notes may receive less, ratably, than our other unsecuredcreditors, including trade creditors. In any of these cases, we and thesubsidiary guarantors may not have sufficient funds to pay all of ourcreditors. Holders of our senior subordinated notes may, therefore, receiveless, ratably, than the holders of our senior indebtedness.

 

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*** Rises in interest rates could adversely affect ourfinancial condition.***

 

An increase in prevailinginterest rates would have an immediate effect on the interest rates charged onour variable rate debt, which rise and fall upon changes in interest rates. AtJune 30, 2004, approximately 52% of our debt was variable rate debt.Increases in interest rates would also impact the refinancing of our fixed ratedebt. If interest rates are higher when our fixed debt becomes due, we may beforced to borrow at the higher rates. If prevailing interest rates or otherfactors result in higher interest rates, the increased interest expense wouldadversely affect our cash flow and our ability to service our debt. As aprotection against rising interest rates, we may enter into agreements such asinterest rate swaps, caps, floors and other interest rate exchange contracts.These agreements, however, increase our risks as to the other parties to theagreements not performing or that the agreements could be unenforceable.

 

RISKS RELATING TO OURBUSINESS

 

***Changes in the rates or methods of third-partyreimbursements for diagnostic imaging and therapeutic services could result inreduced demand for our services or create downward pricing pressure, whichwould result in a decline in our revenues and harm our financial position.***

 

For the year endedJune 30, 2004, we derived approximately 56% of our revenues from directbillings to patients and third-party payors such as Medicare, Medicaid, managedcare and private health insurance companies. Changes in the rates or methods ofreimbursement for the services we provide could have a significant negativeimpact on those revenues. Moreover, our healthcare provider customers on whomwe depend for approximately 44% of our revenues generally rely on reimbursementfrom third-party payors. In the past, initiatives have been proposed andimplemented which have the effect of substantially decreasing reimbursementrates for diagnostic imaging services provided at non-hospital facilities.Similar initiatives enacted in the future may have an adverse impact on ourfinancial condition and our operations.

 

Under Medicare’soutpatient prospective payment system, or OPPS, a hospital is paid foroutpatient services on a rate per service basis that varies according to theambulatory payment classification group, or APC, to which the service isassigned rather than on a hospital’s costs. OPPS was implemented on August 1,2000 and due to the anticipated adverse economic effect on hospitals, Congressprovided for outlier payments for especially costly cases, as well astransitional payments for new technologies and innovative medical devices,drugs and biologics.  While most of thetransitional payments expired in 2003, the CMS continues to make payments fornew technology until sufficient data is collected to assign the new technologyto an APC.  Each year CMS publishes newAPC rates that are determined in accordance with the promulgatedmethodology.  However, the overall effectof OPPS is to decrease reimbursement rates from those paid under the priorcost-based system.

 

Any changes in the ratesof or conditions for reimbursement could substantially reduce the number ofprocedures for which we or our customers can obtain reimbursement or theamounts reimbursed to us or our customers for services provided by us. Ifthird-party payors reduce the amount of their payments to our customers, ourcustomers may seek to reduce their payments to us or seek an alternate supplierof diagnostic imaging services. Because unfavorable reimbursement policies haveconstricted and may continue to constrict the profit margins of the hospitals,physician groups and other healthcare providers we bill directly, we havelowered and may continue to need to lower our fees to retain existing customersand attract new ones. These reductions could have a significant adverse effecton our revenues and financial results by decreasing demand for our services or creatingdownward pricing pressure.

 

***If we are unable to renew our existing customer contracts onfavorable terms or at all, our financial results would be adversely affected.***

 

Our financial resultsdepend on our ability to sustain and grow our revenues from existing customers.Our revenues would decline if we are unable to renew our existing customercontracts or renew these contracts on favorable terms. For our mobilefacilities, we generally enter into contracts with hospitals having one to fiveyear terms. Approximately 33% of our mobile contracts will expire each year.Our mobile facility contract renewal rate was 82% for the year endedJune 30, 2004. We may not, however, achieve these renewal rates in thefuture. To the extent we do not renew a customer contract, it is not alwayspossible to immediately obtain replacement customers. Historically, manyreplacement customers have been smaller facilities which have lower procedurevolumes. In addition, attractive financing from original equipment manufacturersmay cause hospitals and physician groups who have utilized shared mobileservices from our company and our competitors to purchase and operate their own

 

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equipment. If attractivefinancing causes hospitals and physician groups to establish their owndiagnostic imaging centers, our business, financial condition andresults of operations would be materiallyadversely affected. Although the non-renewal of a single customer contractwould not have a material impact on our contract services revenues, non-renewalof several contracts on favorable terms or at all could have a significantnegative impact on our revenues.

 

***We may experience competition from hospitals, physiciangroups, other diagnostic imaging companies and this competition could adverselyaffect our revenues and our business.***

 

The healthcare industryin general, and the market for diagnostic imaging services in particular, ishighly competitive and fragmented, with only a few national providers. Wecompete principally on the basis of our service reputation, equipment, breadthof managed care contracts and convenient locations. Our operations must competewith groups of radiologists, established hospitals and certain otherindependent organizations, including equipment manufacturers and leasingcompanies that own and operate imaging equipment. We will also encountercompetition from hospitals and physician groups that purchase their owndiagnostic imaging equipment from original equipment manufacturers who providelow-cost financing. Some of our direct competitors that provide diagnosticimaging services may have access to greater financial resources than we do. Ifwe are unable to successfully compete, our customer base would decline and ourbusiness, financial condition and results of operations would be adverselyaffected.

 

***Managed care organizations may limit healthcare providersfrom using our services, causing us to lose procedure volume.***

 

Our fixed-site centersare principally dependent on our ability to attract referrals from physiciansand other healthcare providers representing a variety of specialties. Oureligibility to provide service in response to a referral is often dependent onthe existence of a contractual arrangement with the referred patient’s managed care organization. We currentlyhave more than 1,000 contracts with managed care organizations for diagnosticimaging services provided at our fixed-site centers. Despite having a largenumber of contracts with managed care organizations, healthcare providers maybe inhibited from referring patients to us in cases where the patient is notassociated with one of the managed care organizations with which we havecontracted. The loss of patient referrals causes us to lose procedure volumewhich adversely impacts our revenues. A significant decline in referrals wouldhave a material adverse effect on our business, financial condition and resultsof operations.

 

***Technological change in our industry could reduce the demandfor our services and require us to incur significant costs to upgrade ourequipment.***

 

Weoperate in a competitive, capital intensive, high fixed-cost industry thatrequires significant amounts of capital. The development of new technologies orrefinements of existing ones might (1) make our existing systemstechnologically or economically obsolete, or (2) reduce the need for oursystems.  MRI and other diagnosticimaging systems are currently manufactured by numerous companies.  Competition among manufacturers for a greatershare of the MRI and other diagnostic imaging systems market has resulted inand likely will continue to result in technological advances in the speed andimaging capacity of these new systems. Consequently, the obsolescence of oursystems may be accelerated. Other than ultra-high field MRI systems (a3.0 Tesla MRI scanner costs approximately 40% to 60% more than a1.5 Tesla MRI scanner and has higher annual maintenance costs) and PET/CTor “fusion” scanners (a PET/CT scanner costs approximately 35% to 50% more thana standard PET scanner and has higher annual maintenance costs), we are awareof no imminent substantial technological changes; however, should such changesoccur, we may not be able to acquire the new or improved systems.  In thefuture,  to the extent we are unable to generate sufficient cash from ouroperations or obtain additional funds through bank financing or the issuance ofequity or debt securities, we may be unable to maintain a competitive equipmentbase. In addition, advancing technology may enable hospitals, physicians orother diagnostic service providers to perform procedures without the assistanceof diagnostic service providers such as ourselves. As a result, we may not beable to maintain our competitive position in our targeted regions or expand ourbusiness.

 

***Our ability to maximize the utilization of our diagnosticimaging equipment may be adversely impacted by harsh weather conditions.***

 

Harsh weather conditionscan adversely impact our operations and financial condition. To the extentsevere weather patterns affect our targeted regions, potential patients mayfind it difficult to travel to our centers and we may have

 

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difficulty moving ourmobile facilities along their scheduled routes. As a result, we wouldexperience a decrease in procedure volume during that period.  Our equipment utilization, procedure volumeor revenues could be adversely affected by similar conditions in the future.

 

***Because a high percentage of our operating expenses arefixed, a relatively small decrease in revenues could have a significantnegative impact on our financial results.***

 

A high percentage of ourexpenses are fixed, meaning they do not vary significantly with the increase ordecrease in revenues. Such expenses include, but are not limited to, debtservice and capital lease payments, rent and operating lease payments,salaries, maintenance, insurance and vehicle operation costs. As a result, arelatively small reduction in the prices we charge for our services orprocedure volume could have a disproportionate negative effect on our financialresults.

 

***We may be subject to professional liability risks whichcould be costly and negatively impact our business and financial results.***

 

We have not experiencedany material losses due to claims for malpractice. However, claims formalpractice have been asserted against us in the past and any future claims, ifsuccessful, could entail significant defense costs and could result insubstantial damage awards to the claimants, which may exceed the limits of anyapplicable insurance coverage. Successful malpractice claims asserted againstus, to the extent not covered by its liability insurance, could have a materialadverse affect on our business, financial condition and results of operations.In addition to being exposed to claims for malpractice, there are otherprofessional liability risks to which we are exposed through our operation ofdiagnostic imaging systems, including liabilities associated with the improperuse or malfunction of our diagnostic imaging equipment.

 

To protect againstpossible professional liability from malpractice claims, we maintainprofessional liability insurance in amounts that we believe are appropriate inlight of the risks and industry practice. However, if we are unable to maintaininsurance in the future at an acceptable cost or at all or if our insurancedoes not fully cover us in the event a successful claim was made against us, wecould incur substantial losses. Any successful malpractice or otherprofessional liability claim made against us not fully covered by insurancecould be costly to defend against, result in a substantial damage award againstus and divert the attention of our management from our operations, which couldhave a material adverse effect on our business, financial condition and resultsof operations.

 

***Our failure to effectively integrate acquisitions andestablish joint venture arrangements through partnerships with hospitals andother healthcare providers could impair our business.***

 

As part of our businessstrategy, we have pursued selective acquisitions and arrangements throughpartnerships and joint ventures with hospitals and other healthcare providers.Our acquisition and joint venture strategies require substantial capital whichmay exceed the funds available to us from internally generated funds and ourcredit facility. We may not be able to raise any necessary additional fundsthrough bank financing or through the issuance of equity or debt securities onterms acceptable to us, if at all.

 

Additionally,acquisitions involve the integration of acquired operations with ouroperations. Integration involves a number of risks, including:

 

•                  demands onmanagement related to the increase in our size after an acquisition;

 

•                  the diversionof our management’s attention from the management of daily operations to theintegration of operations;

 

•                  integration ofinformation systems;

 

•                  risksassociated with unanticipated events or liabilities;

 

•                  difficulties inthe assimilation and retention of employees;

 

•                  potentialadverse effects on operating results;

 

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•                  challenges inretaining customers and referral sources; and

 

•                  amortization orwrite-offs of acquired intangible assets.

 

Although we believe wehave successfully integrated acquisitions in the past, we may not be able tosuccessfully integrate the operations from any future acquisitions. If we donot successfully integrate our acquisitions, we may not realize anticipatedoperating advantages, economies of scale and cost savings. Also, we may not beable to maintain the levels of operating efficiency that the acquired companieswould have achieved or might have achieved separately. Successful integrationof each of their operations will depend upon our ability to manage thoseoperations and to eliminate excess costs.

 

***Loss of, and failure to attract, qualified employees,particularly technologists, could limit our growth and negatively impact ouroperations.***

 

Our future successdepends on our continuing ability to identify, hire, develop, motivate andretain highly skilled personnel for all areas of our organization.  Competition in our industry for qualifiedemployees is intense.  In particular,there is a very high demand for qualified technologists who are necessary tooperate our systems. We may not be able to hire and retain a sufficient numberof technologists, and we may be required to pay bonuses and higher salaries toour technologists, which would increase our expenses.  Our continued ability to compete effectivelydepends on our ability to attract new employees and to retain and motivate ourexisting employees.

 

***Our PET service and some of our other imaging servicesrequire the use of radioactive materials, which could subject us to regulation,related costs and delays and potential liabilities for injuries or violationsof environmental, health and safety laws.***

 

Our PET service and someof our other imaging and therapeutic services require the use of radioactivematerials to produce the images. While this radioactive material has a shorthalf-life, meaning it quickly breaks down into non-radioactive substances,storage, use and disposal of these materials present the risk of accidentalenvironmental contamination and physical injury. We are subject to federal,state and local regulations governing storage, handling and disposal of thesematerials and waste products. Although we believe that our safety proceduresfor storing, handling and disposing of these hazardous materials comply withthe standards prescribed by law and regulation, we cannot completely eliminatethe risk of accidental contamination or injury from those hazardous materials.In the event of an accident, we would be held liable for any resulting damages,and any liability could exceed the limits of or fall outside the coverage ofour insurance. In addition, we may not be able to maintain insurance onacceptable terms, or at all. We could incur significant costs in order tocomply with current or future environmental, health and safety laws andregulations.

 

***An earthquake could adversely affect our business andoperations.***

 

Our corporateheadquarters and a significant portion of our fixed-site centers are located inCalifornia, which has a high risk for earthquakes. Depending upon itsmagnitude, an earthquake could severely damage our facilities or preventpotential patients from traveling to our centers. Damage to our equipment orany interruption in our business would adversely affect our financialcondition. While we presently carry earthquake insurance in amounts we believeare appropriate in light of the risks, the amount of our earthquake insurancecoverage may not be sufficient to cover losses from earthquakes. In addition,we may discontinue earthquake insurance on some or all of our facilities in thefuture if the cost of premiums for earthquake insurance exceeds the value ofthe coverage discounted for the risk of loss. If we experience a loss which isuninsured or which exceeds policy limits, we could lose the capital invested inthe damaged facilities as well as the anticipated future cash flows from thosefacilities.

 

RISKS RELATINGTO GOVERNMENT REGULATION OF OUR BUSINESS

 

***Complying with federal and state regulations pertaining to ourbusiness is an expensive and time-consuming process, and any failure to complycould result in substantial penalties.***

 

We are directly orindirectly through our customers subject to extensive regulation by both thefederal government and the states in which we conduct our business, including:

 

•                  the federalFalse Claims Act;

 

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•                  the federalMedicare and Medicaid Anti-kickback Law, and state anti-kickback prohibitions;

 

•                  the federalCivil Money Penalty Law;

 

•                  the federalHealth Insurance Portability and Accountability Act of 1996;

 

•                  the federalphysician self-referral prohibition commonly known as the Stark Law and thestate law equivalents of the Stark Law;

 

•                  state laws thatprohibit the practice of medicine by non-physicians, and prohibit fee-splittingarrangements involving physicians;

 

•                  federal FDArequirements;

 

•                  state licensingand certification requirements, including certificates of need; and

 

•                  federal andstate laws governing the diagnostic imaging and therapeutic equipment used inour business concerning patient safety, equipment operating specifications andradiation exposure levels.

 

If our operations arefound to be in violation of any of the laws and regulations to which we or ourcustomers are subject, we may be subject to the applicable penalty associatedwith the violation, including civil and criminal penalties, damages, fines andthe curtailment of our operations. Any penalties, damages, fines or curtailmentof our operations, individually or in the aggregate, could adversely affect ourability to operate our business and our financial results. The risks of ourbeing found in violation of these laws and regulations is increased by the factthat many of them have not been fully interpreted by the regulatory authoritiesor the courts, and their provisions are open to a variety of interpretations.Any action brought against us for violation of these laws or regulations, evenif we successfully defend against it, could cause us to incur significant legalexpenses and divert our management’s attention from the operation of our business.

 

***The regulatory framework is uncertain and evolving.***

 

Healthcare laws andregulations may change significantly in the future. We continuously monitorthese developments and modify our operations from time to time as theregulatory environment changes. However, we may not be able to adapt ouroperations to address new regulations, which could adversely affect ourbusiness. In addition, although we believe that we are operating in compliancewith applicable federal and state laws, neither our current or anticipatedbusiness operations nor the operations of our contracted radiology groups havebeen the subject of judicial or regulatory interpretation. A review of ourbusiness by courts or regulatory authorities may result in a determination thatcould adversely affect our operations or the healthcare regulatory environmentmay change in a way that restricts our operations.

 

**ITEM 2.             PROPERTIES**

 

We lease approximately48,400 square feet of office space for our corporate headquarters and abilling office at 26250 Enterprise Court, Lake Forest, California 92630.The lease for this location expires in 2007.

 

**ITEM 3.****                                       LEGALPROCEEDINGS**

 

We are engaged from timeto time in the defense of lawsuits arising out of the ordinary course andconduct of our business and have insurance policies covering such potentialinsurable losses where such coverage is cost-effective. We believe that theoutcome of any such lawsuits will not have a material adverse impact on ourbusiness, financial condition and results of operations.

 

**ITEM 4.             SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

None.

 

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**PART II**

 

**ITEM 5.             MARKET FOR REGISTRANT**’**S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

Our common stock is notpublicly traded on any exchange or in any market.  At August 31, 2004, we had six recordholders of our common stock.  We havenever paid a cash dividend on our common stock and do not expect to do so inthe foreseeable future.  The creditagreement governing our credit facility and the indenture governing our seniorsubordinated notes contain restrictions on our ability to pay dividends on ourcommon stock.

 

Informationregarding securities authorized for issuance under our equity compensationplans is set forth under “Item 12.  Security Ownership of Certain BeneficialOwners and Management.”

 

**ITEM 6.****                                       SELECTEDFINANCIAL DATA**

 

The selectedconsolidated financial data presented as of and for the years endedJune 30, 2004, 2003 and 2002 has been derived from our auditedconsolidated financial statements.  Theselected consolidated financial data presented as of and for the period fromJuly 1, 2001 to October 17, 2001 and for the years ended June 30,2001 and 2000, has been derived from the audited consolidated financialstatements of InSight.  The informationin the following table should be read together with our audited consolidatedfinancial statements and related notes, and “Item 7.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations,”included elsewhere in this report on Form 10-K.  Our consolidatedoperations after our acquisition of InSight are substantially consistent withthe operations of InSight.  We have no operations other than ourinvestment in InSight.  InSight is considered our predecessor inaccordance with Regulation S-X.

 
| ** **                   | ** ** | **Company**                   | ** ** | **Predecessor** | ** **                    |
|------------------------------|------------|-------------------------------|------------|-----------------|-------------------------------|
| ** **                   | ** ** | ** **                    | ** ** | ** **      | ** **                    | ** ** | ** ** | **Period from  July 1 to  October 17,  2001** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | ** **                    | ** ** | ** **      | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **Years Ended June 30,** | ** ** | ** **      | **Years Ended June 30,** | ** ** |
| ** **                   | ** ** | **2004**                      | ** ** | **2003**        | ** **                    | **2002 (1)** | ** ** | ** ** | **2001** | ** ** | **2000** | ** ** |
|                         |       | **(Amounts in thousands)**    |       |
| STATEMENT  OF INCOME DATA:   |       |                          |       |            |                          |   |   |   |   |   |   |   |   |
| Revenues                     |       | $                             | 290,884    |            | $                             | 237,752 |   | $ | 155,407 |   | $ | 63,678 |   | $ | 211,503 |   | $ | 188,574 |   |
| Gross  profit                |       | 57,463                        |       | 57,708          |                          | 39,823 |   | 17,991 |   | 49,631 |   | 37,145 |   |
| Interest  expense, net       |       | 40,682                        |       | 37,514          |                          | 32,546 |   | 6,321 |   | 23,394 |   | 18,696 |   |
| Net  income (loss) (2)(3)(4) |       | 2,924                         |       | 4,922           |                          | 9 |   | (4,648 | ) | 13,801 |   | 7,189 |   |
|                              |            |                               |            |                 |                               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                  |   | **June 30,** |       |       |       | **June 30,** |       |
|---------------------------------------|--------|-------------------|------------|------------|------------|-------------------|------------|
|                                  |   | **2004**          | ** ** | **2003**   | ** ** | **2002**          | ** ** | ** ** | ** ** | **2001** | ** ** | **2000** |   |
| BALANCE  SHEET DATA:                  |   | ** **        | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Working  capital                      |   | $                 | 48,116     |       | $          | 32,580            |       | $ | 35,907 |   |   |   | $ | 16,791 |   | $ | 20,814 |   |
| Property  and equipment, net          |   | 242,336           |       | 219,121    |       | 172,056           |       |   |   | 148,255 |   | 148,469 |   |
| Goodwill  and other intangible assets |   | 319,463           |       | 260,292    |       | 234,644           |       |   |   | 89,202 |   | 93,930 |   |
| Total  assets                         |   | 675,631           |       | 577,317    |       | 499,401           |       |   |   | 321,056 |   | 328,872 |   |
| Total  long-term liabilities          |   | 537,177           |       | 442,484    |       | 378,234           |       |   |   | 197,388 |   | 221,307 |   |
| Stockholders’  equity            |   | 94,941            |       | 91,614     |       | 87,376            |       |   |   | 65,471 |   | 51,487 |   |
|                                       |        |                   |            |            |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |

 

(1)                                  Includesthe results of operations of InSight from the date we acquired it.

(2)                                  Includesan acquisition related compensation charge of $15.6 million in the period fromJuly 1, 2001 to October 17, 2001.

(3)                                  Includesan income tax benefit of $2.1 million in the period from July 1, 2001 toOctober 17, 2001.

(4)                                  Nocash dividends have been paid on our or InSight’s common stock for the periodsindicated above.

 

19

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**ITEM 7.****                                       MANAGEMENT**’**S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

*Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with our consolidated financialstatements and accompanying notes which appear elsewhere in this report. Itcontains forward-looking statements that reflect our plans, estimates andbeliefs, and which involve risks, uncertainties and assumptions. Please see*“*Forward-Looking Statements Disclosure*”*for more information. Our actual results coulddiffer materially from those anticipated in these forward-looking statements asa result of various factors, including those discussed below and elsewhere inthis report, particularly under the headings*“*Risk Factors*”*and   *“*Forward-Looking Statements Disclosure.*” 

 

**Overview**

 

We are a provider ofdiagnostic imaging services. We serve a diverse portfolio of customers,including healthcare providers, such as hospitals and physicians, and payors,such as managed care organizations, Medicare, Medicaid and insurance companies.We provide our services through an integrated network of fixed-site centers andmobile facilities in targeted regions throughout the United States. We operatein 37 states with a substantial presence in California, Arizona, NewEngland, the Carolinas, Florida and the Mid-Atlantic states. While we generatedapproximately 69% of our total revenues from MRI services during the year endedJune 30, 2004, we provide a comprehensive offering of diagnostic imagingand treatment services, including PET, CT, mammography, bone densitometry,diagnostic ultrasound, lithotripsy and x-ray. We have developed and continue todevelop strong regional networks of diagnostic imaging centers and facilities,enabling us to effectively serve our customers and maximize utilization of ourimaging equipment. We provide our services through 118 fixed-site centers and118 mobile facilities.

 

Given our size andexpertise, we believe we are well positioned to capitalize on the ongoinggrowth in the diagnostic imaging industry. Growth in the diagnostic imagingindustry has been and will continue to be driven by (1) an agingpopulation, (2) the increasing acceptance of diagnostic imaging,particularly PET, (3) expanding applications of MRI and PET technologies, and(4) a currently stable reimbursement environment.

 

**Segments**

 

We have two reportablesegments, the fixed division and mobile division:

 

*FixedDivision.*Generally, our fixed division operates freestanding imaging centers which werefer to as fixed-site centers.  However,our fixed division also includes four mobile facilities as part of our fixeddivision in Maine.  Revenues at ourfixed-site centers are primarily generated from services billed, on afee-for-service basis, directly to patients or third-party payors such asmanaged care organizations, Medicare, Medicaid, commercial insurance carriersand workers’compensation funds, which we generally refer to as our patient servicesrevenues and management fees.  Our fixeddivision revenues are dependent on our ability to:

 

•                  attract patientreferrals from physician groups and hospitals;

 

•                  increaseprocedure volume to maximize equipment utilization;

 

•                  maintain ourexisting contracts and enter into new ones with managed care organizations andcommercial insurance carriers; and

 

•                  develop newfixed-site centers.

 

Our fixed divisionrevenues have been and will continue to be driven by the growth in thediagnostic imaging industry discussed above. These positive trends may beoffset by:

 

•                  an increase in competition from otherfreestanding imaging centers within our targeted regions;

 

•                  an increase in deductibles and co-paymentcharges to patients; and

 

•                  an increase in the pre-authorizationrequirements applicable to diagnostic imaging services by certain managed careorganizations.

 

20

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*MobileDivision.* Ourmobile division operates mobile facilities, which provide services tohospitals, physician groups and other healthcare providers. Our mobile divisionincludes 29 parked mobile facilities, each of which serves a single customer.Revenues from our mobile division are primarily generated from fee-for-servicearrangements and fixed fee contracts billed directly to our hospital, physiciangroup customers and other healthcare providers, which we generally refer to ascontract services revenues. Our mobile division revenues are dependent on ourability to:

 

•                  establish newmobile customers within our targeted regions;

 

•                  structureefficient mobile routes that maximize equipment utilization; and

 

•                  renew ourexisting mobile contracts with our hospital, physician group and otherhealthcare provider customers.

 

Our mobile divisionrevenues have been and will continue to be driven by the growth in thediagnostic imaging industry as discussed above. These positive trends may beoffset by;

 

•                  an increase in competition in ourtargeted regions from other mobile service providers;

 

•                  attractive financing arrangements byoriginal equipment manufacturers which cause some of our customers to invest intheir own diagnostic imaging equipment;

 

•                  a reduction in inpatient volumes at ourfee-for-service customers due to higher unemployment rates and increaseddeductibles and co-payments to patients; and

 

•                  a reduction in short–term rentalactivities.

 

Our revenues in bothdivisions could also be affected by the timing of holidays, patient andreferring physician vacation schedules and inclement weather.

 

**Reimbursement**

 

*Medicare:* The Medicare program providesreimbursement for hospitalization, physician, diagnostic and certain otherservices to eligible persons 65 years of age and over and certain others.Beginning in late 1983, prospective payment regulations for hospital inpatientservices became effective under the federal Medicare program. Providers arepaid by the federal government in accordance with regulations promulgated bythe Department of Health and Human Services, or HHS, and generally accept thepayment with nominal deductible and co-insurance amounts required to be paid bythe service recipient, as payment in full. In general, these regulationsprovide for a specific prospective payment to reimburse hospitals for inpatienttreatment services based upon the diagnosis of the patient.

 

In 2000, the Centers forMedicare and Medicaid Services, or CMS, published its final rules concerningthe new hospital OPPS for most outpatient services in Medicare-participatinghospitals. As a result of the implementation of the OPPS, effectiveAugust 1, 2000, Medicare began paying hospitals, except critical accesshospitals, for outpatient services on a rate per service basis that variesaccording to the ambulatory payment classification (APC) group the service isassigned rather than on a hospital’s costs.  Due to OPPS’ anticipated adverseeconomic effect on hospitals, Congress provided for outlier payments forespecially costly cases, as well as transitional payments for new technologiesand innovative medical devices, drugs and biologics.  While most of the transitional payments expiredin 2003, CMS continues to make payments for new technology until sufficientdata is collected to assign the new technology to an APC. Each year CMSpublishes new APC rates that are determined in accordance with the promulgatedmethodology.  However, the overall effectof OPPS is to decrease reimbursement rates from those paid under the priorcost-based system.  Multi-modalityand certain fixed-site centers which are freestanding are not directly affectedby OPPS, which applies only to hospital-based facilities. Congressional andregulatory actions reflect industry-wide cost-containment pressures that webelieve will affect all healthcare providers for the foreseeable future.

 

21

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CMS has indicated that itwill continue to evaluate diagnostic imaging technical component reimbursement.Accordingly, Medicare payment for diagnostic imaging services may be furtherreduced in the future, which would have a material adverse effect on ourfinancial condition and results of operations.

 

*Medicaid:* The Medicaid program is a jointly-fundedfederal and state program providing coverage for low-income persons. Inaddition to federally-mandated basic services, the services offered andreimbursement methods vary from state to state. In many states, Medicaid reimbursementis patterned after the Medicare program; however, an increasing number ofstates have established or are establishing payment methodologies intended toprovide healthcare services to Medicaid patients through managed carearrangements.

 

*ManagedCare:* HealthMaintenance Organizations, or HMOs, and Preferred Provider Organizations, orPPOs, and other managed care organizations attempt to control the cost ofhealthcare services by a variety of measures, including, imposing lower paymentrates, preauthorization requirements, limiting services or mandating lesscostly treatment alternatives. Managed care contracting has become verycompetitive and reimbursement schedules are at or below Medicare reimbursementlevels. The development and expansion of HMOs, PPOs and other managed careorganizations within our targeted regional networks could have a negativeimpact on utilization of our services in certain markets and/or affect therevenues per procedure which we can collect, since such organizations willexert greater control over patients’ access to diagnostic imaging services, the selectionof the provider of such services and the reimbursement thereof.  See “Item 1. Business—Customers and Contracts. “

 

Some states have adoptedor expanded laws or regulations restricting the assumption of financial risk byhealthcare providers which contract with health plans. While we are notcurrently subject to such regulation, we or our customers may in the future berestricted in our ability to assume financial risk, or may be subjected toreporting requirements if we do so. Any such restrictions or reportingrequirements could negatively affect our contracting relationships with healthplans.

 

*PrivateInsurance:*Private health insurance programs generally have authorized payment for ourservices on satisfactory terms. However, if Medicare reimbursement is reduced,we believe that private health insurance programs will also reducereimbursement in response to reductions in government reimbursement, whichcould have an adverse impact on our business, financial condition and resultsof operations.

 

**Revenues**

 

We receive revenues byproviding services to patients, hospitals and other healthcare providers.  Our patient services revenues are billed, ona fee-for-service basis, directly to patients or third-party payors such asmanaged care organizations, Medicare, Medicaid, commercial insurance carriersand worker’s compensation funds (collectively, “payors”).  Patient services revenues also includesbalances due from patients, which are primarily collected at the time theprocedure is performed.  Our charge for aprocedure is primarily comprised of charges for both the technical andprofessional components of the service. Patient services revenues are presented net of (1) related contractualadjustments, which represent the difference between our charge for a procedureand what we will ultimately receive from the payors, and (2) payments due toradiologists for interpreting the results of the diagnostic imaging procedures.  In estimating the amount of contractualadjustments, we rely on a combination of in-house analysis, which includes areview of contractual payment rates from the payors, and our historicalexperience.

 

We refer to our revenuesfrom hospital, physician groups and other healthcare providers as contractservices revenues.   Contract servicesrevenues are primarily generated from fee-for-service arrangements, fixed feecontracts and management fees billed to the hospital, physician group or otherhealthcare provider.  Contract servicesrevenues are recognized over the applicable contract period.  Revenues collected in advance are recorded asunearned revenue.

 

The provision fordoubtful accounts related to revenues is reflected as an operating expenserather than a reduction of revenues and represents our estimate of amounts thatwill be uncollectible from patients, payors, hospitals and other healthcareproviders.  The provision for doubtfulaccounts includes amounts to be written off on specific accounts and unidentifiedaccounts based on our historical collection experience, including payor mix andthe aging of patient accounts receivable balances.  Our historical write-offs for uncollectibleaccounts is not concentrated in a specific payor class.  As these factors change, revisions are madein the appropriate period.

 

22

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The following illustratesour payor mix based on revenues for the year ended June 30, 2004:

 
| **Payor**                                                       | ** ** | **Percent of Total Revenues** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------|------------|
|                                                            |       |                          |       |
| Hospital,  physician groups, and other healthcare providers (1) |       | 46                            | %          |
| Managed  Care and Insurance                                     |       | 36                            | %          |
| Medicare/Medicaid                                               |       | 14                            | %          |
| Workers’  Compensation                                     |       | 3                             | %          |
| Other                                                           |       | 1                             | %          |

 

----

(1)          No single hospital,physician groups, and other healthcare providers accounted for more than 5% ofour total revenues.

 

**OperatingExpenses**

 

We operate in a capitalintensive industry that requires significant amounts of capital to fundoperations. As a result, a high percentage of our total operating expenses arefixed. Our fixed costs include debt service and capital lease payments, rentand operating lease payments, salaries and benefit obligations, equipmentmaintenance expenses, and insurance and vehicle operation costs. Because alarge portion of our operating expenses are fixed, any increase in ourprocedure volume disproportionately increases our operating cash flow.Conversely, any decrease in our procedure volume disproportionately decreasesour operating cash flow. Our variable costs, which comprise only a smallportion of our total operating expenses, include the cost of service suppliessuch as film and contrast media.

 

**RecentAcquisitions**

 

On April 1, 2004, weacquired the stock of Comprehensive Medical Imaging, Inc., or CMI, a subsidiaryof Cardinal Health, Inc., from Cardinal Health, Inc., which owned and operated21 fixed-site centers located in California, Arizona, Texas, Kansas,Pennsylvania and Virginia. The aggregate purchase price for these centers wasapproximately $48.6 million. We refer to this acquisition as the CMI acquisition.

 

On August 1, 2003,we acquired 22 mobile facilities primarily operating in the Mid-Atlantic statesfrom CDL Medical Technologies, Inc. The aggregate purchase price for thesefacilities was approximately $49.9 million. We refer to this acquisitionas the CDL acquisition.

 

On April 2, 2003, weacquired 13 fixed-site centers located in Southern California from CMI.The aggregate purchase price for these centers was approximately$46.5 million. We refer to this acquisition as the Central Valleyacquisition.

 

These acquisitionssignificantly expanded our presence in the Los Angeles, Phoenix and NorthernCalifornia markets and the Mid-Atlantic states. The aggregate cost of these acquisitions totaled $145.0 million, none ofwhich was assumed debt.  We funded theconsideration through (1) our credit facility and (2) $25 million in a privateplacement of 9.875% senior subordinated notes due November 2011.

 

In August 2003, weacquired a joint venture interest in a CT fixed-site center located inHammonton, New Jersey, which was financed with internally generatedfunds.  In December 2003, we sold a fixed-site center located inHobart, Indiana.  In February 2004, we acquired the remaining jointventure interest in a fixed-site center in Henderson, Nevada.

 

23

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**Results of Operations**

 

Set forth below ishistorical financial data for us and our predecessor, InSight, for the periodsindicated. The results of operations for the year ended June 30, 2002 havebeen derived by combining our results of operations for the year endedJune 30, 2002 with the results of operations of InSight from July 1,2001 to October 17, 2001, the date we acquired InSight. These combinedresults of operations have been prepared for comparative purposes only and donot purport to be indicative of what results of operations would have been ifwe had owned InSight for the entire year ended June 30, 2002.  Our operations after the Acquisition aresubstantially consistent with the operations of InSight prior to theAcquisition.  In addition, we have no operations other than our investmentin InSight.  As such, InSight is considered our predecessor in accordancewith Regulation S-X.

 
| ** **                                         | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                         | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                         | ** ** | **(Amounts in thousands)**    | ** ** |
| REVENUES:                                          |       |                          |       |   |   |   |   |
| Contract  services                                 |       | $                             | 129,193    |   | $ | 111,921 |   | $ | 105,179 |   |
| Patient  services                                  |       | 161,691                       |       | 125,831 |   | 113,906 |   |
| Total  revenues                                    |       | 290,884                       |       | 237,752 |   | 219,085 |   |
|                                               |       |                          |       |   |   |   |   |
| COSTS  OF OPERATIONS:                              |       |                          |       |   |   |   |   |
| Costs  of services                                 |       | 168,700                       |       | 125,685 |   | 113,065 |   |
| Provision  for doubtful accounts                   |       | 4,998                         |       | 4,154 |   | 3,895 |   |
| Equipment  leases                                  |       | 990                           |       | 860 |   | 8,026 |   |
| Depreciation  and amortization                     |       | 58,733                        |       | 49,345 |   | 36,285 |   |
| Total  costs of operations                         |       | 233,421                       |       | 180,044 |   | 161,271 |   |
|                                               |       |                          |       |   |   |   |   |
| Gross  profit                                      |       | 57,463                        |       | 57,708 |   | 57,814 |   |
|                                               |       |                          |       |   |   |   |   |
| CORPORATE  OPERATING EXPENSES                      |       | (16,217                       | )          | (13,750 | ) | (10,889 | ) |
|                                               |       |                          |       |   |   |   |   |
| ACQUISITION  RELATED COMPENSATION CHARGE           |       | —                        |       | — |   | (15,616 | ) |
|                                               |       |                          |       |   |   |   |   |
| GAIN  ON SALE OF CENTER                            |       | 2,129                         |       | — |   | — |   |
|                                               |       |                          |       |   |   |   |   |
| EQUITY  IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS |       | 2,181                         |       | 1,744 |   | 819 |   |
|                                               |       |                          |       |   |   |   |   |
| INTEREST  EXPENSE, net                             |       | (40,682                       | )          | (37,514 | ) | (38,867 | ) |
|                                               |       |                          |       |   |   |   |   |
| Income  (loss) before income taxes                 |       | 4,874                         |       | 8,188 |   | (6,739 | ) |
|                                               |       |                          |       |   |   |   |   |
| PROVISION  (BENEFIT) FOR INCOME TAXES              |       | 1,950                         |       | 3,266 |   | (2,100 | ) |
|                                               |       |                          |       |   |   |   |   |
| Net  income (loss)                                 |       | $                             | 2,924      |   | $ | 4,922 |   | $ | (4,639 | ) |

 

The following table setsforth historical revenues by segment for the periods indicated (amounts inthousands):

 
| ** **       | ** ** | **Years Ended June 30,** | ** ** |
|------------------|------------|-------------------------------|------------|
| ** **       | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2002** | ** ** |
|             |       |                          |       |   |   |   |   |
| Fixed  division  |       | $                             | 176,763    |   | $ | 139,816 |   | $ | 127,122 |   |
| Mobile  division |       | 114,121                       |       | 97,936 |   | 91,963 |   |
| Total            |       | $                             | 290,884    |   | $ | 237,752 |   | $ | 219,085 |   |

 

24

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The following table setsforth certain condensed historical financial data expressed as a percentage ofrevenues for each of the periods indicated:

 
| ** **                                         | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                         | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                               |       |                          |       |   |   |   |   |
| Revenues                                           |       | 100.0                         | %          | 100.0 | % | 100.0 | % |
|                                               |       |                          |       |   |   |   |   |
| Costs  of operations                               |       |                          |       |   |   |   |   |
| Costs  of services                                 |       | 58.0                          |       | 52.9 |   | 51.6 |   |
| Provision  for doubtful accounts                   |       | 1.7                           |       | 1.7 |   | 1.8 |   |
| Equipment  leases                                  |       | 0.3                           |       | 0.3 |   | 3.7 |   |
| Depreciation  and amortization                     |       | 20.2                          |       | 20.7 |   | 16.6 |   |
| Totals  costs of operations                        |       | 80.2                          |       | 75.6 |   | 73.7 |   |
|                                               |       |                          |       |   |   |   |   |
| Gross  profit                                      |       | 19.8                          |       | 24.4 |   | 26.3 |   |
|                                               |       |                          |       |   |   |   |   |
| Corporate  operating expenses                      |       | (5.6                          | )          | (5.8 | ) | (5.0 | ) |
| Acquisition  related compensation charge           |       | —                        |       | — |   | (7.1 | ) |
| Gain  on sale of center                            |       | 0.7                           |       | — |   | — |   |
| Equity  in earnings of unconsolidated partnerships |       | 0.8                           |       | 0.7 |   | 0.4 |   |
| Interest  expense, net                             |       | (14.0                         | )          | (15.8 | ) | (17.7 | ) |
|                                               |       |                          |       |   |   |   |   |
| Income  (loss) before income taxes                 |       | 1.7                           |       | 3.5 |   | (3.1 | ) |
|                                               |       |                          |       |   |   |   |   |
| Provision  (benefit) for income taxes              |       | 0.7                           |       | 1.4 |   | (1.0 | ) |
|                                               |       |                          |       |   |   |   |   |
| Net  income (loss)                                 |       | 1.0                           | %          | 2.1 | % | (2.1 | )% |

 

The following table sets forth our earnings before interest, taxes,depreciation and amortization excluding the acquisition related compensationcharge, or Adjusted EBITDA, for the years ended June 30, 2004, 2003 and2002.  Adjusted EBITDA has been includedbecause we believe that it is a useful tool for us and our investors to measureour ability to meet debt service, capital expenditure and working capitalrequirements.  Adjusted EBITDA should notbe considered an alternative to, or more meaningful than, income from companyoperations or other traditional indicators of operating performance and cashflow from operating activities determined in accordance with accountingprinciples generally accepted in the United States. While Adjusted EBITDA isused as a measure of operations and the ability to meet debt servicerequirements, it is not necessarily comparable to other similarly titledcaptions of other companies due to differences in methods of calculations.  We present the discussion of Adjusted EBITDAbecause convenants in the indenture governing our senior subordinated notes andthe credit agreement relating to our credit facility contain ratios based onthis measure.  Our calculation of AdjustedEBITDA is as follows:

 
| ** **                               | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|
| ** **                               | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                     |       | **(Amounts in thousands)**    |       |
|                                     |       |                          |       |   |   |   |   |
| Net  income (loss), as reported          |       | $                             | 2,924      |   | $ | 4,922 |   | $ | (4,639 | ) |
|                                     |       |                          |       |   |   |   |   |
| Provision  (benefit) for income taxes    |       | 1,950                         |       | 3,266 |   | (2,100 | ) |
|                                     |       |                          |       |   |   |   |   |
| Interest  expense, net                   |       | 40,682                        |       | 37,514 |   | 38,867 |   |
|                                     |       |                          |       |   |   |   |   |
| Depreciation  and amortization           |       | 58,733                        |       | 49,345 |   | 36,285 |   |
|                                     |       |                          |       |   |   |   |   |
| Acquisition  related compensation charge |       | —                        |       | — |   | 15,616 |   |
| Adjusted  EBITDA                         |       | $                             | 104,289    |   | $ | 95,047 |   | $ | 84,029 |   |

 

**Resultsof Operations for Years Ended June 30, 2004 and 2003**

 

*Revenues:* Revenues increased approximately 22.3%from approximately $237.8 million for the year ended June 30, 2003,to approximately $290.9 million for the year ended June 30, 2004.This increase was due to an increase in revenues from our fixed division(approximately $36.9 million) and an increase in revenues from our mobiledivision (approximately $16.2 million). Revenues for our fixed divisionand mobile division represented approximately 61% and 39%, respectively, of ourtotal revenues for the year ended June 30, 2004.

 

Revenues from our fixeddivision increased approximately 26.4% from approximately $139.8 millionfor the year ended June 30, 2003, to approximately $176.8 million forthe year ended June 30, 2004.  Theincrease was due to (1) the Central Valley acquisition (approximately$20.0 million); (2) the CMI acquisition (approximately $10.3 million);(3) revenues from the fixed-site centers we opened in 2004 and 2003(approximately $3.6 million); and (4) revenues from our existingfixed-site centers (approximately $4.3 million), partially offset by adecrease in revenues from the sale of a fixed-site center in Hobart, Indiana(approximately $1.2 million). The increase in our revenues from ourexisting fixed-site centers was the result of a 4% increase in utilization,partially offset by a 1% decrease in reimbursement from third-party payors.

 

25

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Revenues from ourmobile division increased approximately 16.5% from approximately$97.9 million for the year ended June 30, 2003, to approximately$114.1 million for the year ended June 30, 2004. The increase was dueto the CDL acquisition (approximately $21.0 million), partially offset by(1) reduced revenues associated with our short-term rental activities(approximately $1.1 million) and (2) reduced revenues from ourexisting mobile facilities (approximately $3.7 million).  The decrease in revenues associated with ourshort-term rental activities is the result of fewer upgrades or installationsof MRI equipment at hospitals which utilize our mobile facilities on a short-termor interim basis.  The decrease inrevenues from our existing mobile facilties was the result of lower MRI andother revenues (approximately $5.9 million), partially offset by higher PETrevenues (approximately $2.2 million). The increase in PET revenues is primarily due to an increase in thenumber of PET facilities in service.  Thedecrease in MRI revenues was due to a decrease in the number of MRI facilitiesin service and the loss of high volume customer contracts, partially offset byan increase in procedure volume at replacement accounts, which initially hadlower procedure volumes.  The loss ofhigh volume customers is primarily the result of customers reaching sufficientpatient volumes to finance the cost of acquiring their own system.  This has increased in recent years asoriginal equipment manufacturers have offered attractive financing to highvolume customers.  We experienced lossesof high volume customers across our network and not just in any one region.

 

Approximately 56% of ourtotal revenues for the year ended June 30, 2004 were generated frompatient services revenues. Patient services revenues for the fixed division andmobile division represented approximately 99% and 1%, respectively, of totalpatient services revenues for the year ended June 30, 2004.  Approximately 44% of our total revenues forthe year ended June 30, 2004, were generated from contract servicesrevenues. Contract services revenues for the fixed division and mobile divisionrepresented approximately 13% and 87%, respectively, of total contract servicesrevenues for the year ended June 30, 2004.

 

*Costs of Operations:*Costsof operations increased approximately 29.6% from approximately $180.0 millionfor the year ended June 30, 2003, to approximately $233.4 million for theyear ended June 30, 2004. This increase was due primarily to (1) theCentral Valley, CDL and CMI acquisitions (approximately $15.2 million, $13.9million and $7.7 million, respectively); (2) costs at the fixed-site centers weopened in 2004 and 2003 (approximately $3.3 million); and (3) increased costsat our existing fixed-site centers and mobile facilities (approximately$14.3  million), partially offset byreduced costs from the sale of a fixed-site center in Hobart, Indiana(approximately $1.0 million).  Theincrease in costs of operations is due primarily to higher salaries andbenefits (approximately $7.8 million), equipment maintenance costs(approximately $2.6 million), insurance (approximately $1.0 million) anddepreciation expense (approximately $2.7 million), partially offset by reducedequipment lease costs (approximately $0.3 million) and provision for doubtfulaccounts (approximately $0.1 million).

 

Costs of operations at our fixed division increasedapproximately 29.1% from approximately $99.8 million for the year endedJune 30, 2003, to approximately $128.8 million for the year endedJune 30, 2004. The increase was due to (1) the Central Valley and CMIacquisitions (approximately $15.2 million and $7.7 million, respectively); (2)costs at the fixed-site centers we opened in 2004 and 2003 (approximately $3.3million); and (3) increased costs at our existing fixed-site centers(approximately $3.8 million), partially offset by reduced costs from the saleof the fixed-site center discussed above (approximately $1.0 million).  The increase in costs of operations at ourexisting fixed-site centers was due primarily to higher salaries and benefits(approximately $3.8 million), particularly technologists and additional seniorregional management, equipment maintenance costs (approximately $0.9 million),insurance (approximately $0.6 million) and depreciation expense (approximately$0.3 million), partially offset by reduced provision for doubtful accounts(approximately $0.3 million).

 

Costs of operations atour mobile division increased approximately 30.4% from approximately $66.8million for the year ended June 30, 2003, to approximately $87.1 millionfor the year ended June 30, 2004. The increase was due to (1) the CDLacquisition (approximately $13.9 million) and (2) increased costs at ourexisting mobile facilities (approximately $6.4 million).  The increase in costs at our existing mobilefacilities was due to higher salaries and benefits (approximately $2.9million), particularly technologists and additional mobile sales personnel,equipment maintenance costs (approximately $1.0 million), an increase invehicle costs due to the reduction of our short-term rental activities(approximately $2.2 million), insurance (approximately $0.3 million) anddepreciation expense (approximately $1.9 million), partially offset by reducedequipment lease costs (approximately $1.0 million) and other costs(approximately $0.9 million).

 

*CorporateOperating Expenses:*Corporate operating expenses increased approximately 17.9% from approximately$13.8 million for the year ended June 30, 2003, to approximately$16.2 million for the year ended June 30, 2004. The increase was dueprimarily to higher salaries and benefits (approximately $0.2 million),additional costs to make

 

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IRIS conform with HIPAA requirements (approximately$0.1 million), additional occupancy costs (approximately $0.1 million), costand expenses incurred related to a withdrawn initial public offering(approximately $1.7 million), partially offset by reduced consulting costsrelated to our acquisition and development activities (approximately $0.3million).

 

*Gain on Sale of Center:* In December 2003, we sold a fixed-sitecenter located in Hobart, Indiana for approximately $5.4 million. Werealized a gain of approximately $2.1 million on the sale.

 

*Interest Expense, net:* Interest expense, net increasedapproximately 8.5% from approximately $37.5 million for the year endedJune 30, 2003, to approximately $40.7 million for the year ended June 30,2004. The increase was due primarily to additional debt related to the CentralValley, CDL and CMI acquisitions, partially offset by principal payments onnotes payable and capital lease obligations.

 

*Provision for Income Taxes:* Provision for income taxes decreasedfrom $3.3 million for year ended June 30, 2003, to approximately$2.0 million for the year ended June 30, 2004. We have recorded a taxprovision at an effective rate of 40% for the year ended June 30, 2004 and2003, respectively.

 

*Adjusted EBITDA*:  Adjusted EBITDA increased approximately 9.7% fromapproximately $95.0 million for the year ended June 30, 2003, toapproximately $104.3 million for the year ended June 30, 2004.  Thisincrease was due to (1) the Central Valley, CDL and CMI acquisitions (approximately$7.1 million, $10.2 million and $3.8 million, respectively), and (2) Adjusted EBITDA at the fixed-site centers we opened in2004 and 2003 (approximately $0.7), partially offset by a reduction of EBITDAat existing facilities (approximately $11.9 million) and a reduction of Adjusted EBITDA at the fixed-site center we sold in 2004(approximately $0.5 million).  Adjusted EBITDA for the fixed division increasedapproximately 24.2% from approximately $59.1 million for the year endedJune 30, 2003, to approximately $73.4 million for the year endedJune 30, 2004.  This increase was due primarily to (1) the CentralValley and CMI acquisitions (approximately $7.1 million and $3.8 million,respectively), (2) an increase in Adjusted EBITDA at our existing fixed facilities(approximately $3.3 million) and (3) Adjusted EBITDA at our fixed-site centers we opened in2004 and 2003 (approximately $0.7 million), partially offset by a reduction of Adjusted EBITDA at the fixed-site center sold in 2004(approximately $0.5 million).  Adjusted EBITDA for the mobile division increasedapproximately 1.5% from approximately $55.5 million for the year endedJune 30, 2003, to approximately $56.3 million for the year endedJune 30, 2004.  This increase was due to (1) the CDL acquisition (approximately$10.2 million), partially offset by a reduction of adjusted EBITDA at our existing mobile facilities(approximately $9.4 million).

 

**Results of Operations for Years EndedJune 30, 2003 and 2002**

 

*Revenues:*Revenues increased approximately 8.5% fromapproximately $219.1 million for the year ended June 30, 2002, toapproximately $237.8 million for the year ended June 30, 2003. Theincrease was due primarily to an increase in revenues from our fixed division(approximately $12.7 million) and an increase in revenues from our mobiledivision (approximately $6.0 million). Revenues from our fixed divisionand mobile division represented approximately 59% and 41%, respectively, of ourtotal revenues for the year ended June 30, 2003.

 

Revenues from our fixeddivision increased approximately 10.0% from approximately $127.1 millionfor the year ended June 30, 2002, to approximately $139.8 million forthe year ended June 30, 2003. The increase was due

 

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primarily to (1) theCentral Valley acquisition (approximately $6.5 million);  (2) revenues from the fixed-site centerswe opened in 2003 (approximately $3.6 million); and (3) higher utilizationfrom our existing fixed-site centers (approximately 6%), partially offset by anominal decrease in reimbursement rate from third-party payors(approximately 1%).

 

Revenues from our mobile division increasedapproximately 6.5% from approximately $91.9 million for the year endedJune 30, 2002, to approximately $97.9 million for the year endedJune 30, 2003. The increase was due to higher utilization at our mobilefacilities and an increase in the number of MRI and PET mobile facilities inoperation during the year ended June 30, 2003 (approximately six mobile facilities).

 

Approximately 53% of our total revenues for the yearended June 30, 2003 were generated from patient services revenues. Patientservices revenues from our fixed division and mobile division representedapproximately 98% and 2%, respectively, of total patient services revenues forthe year ended June 30, 2003. Approximately 47% of our total revenues for the year ended June 30,2003 were generated from contract services revenues. Contract services revenuesfor our fixed division and mobile division represented approximately 14% and86%, respectively, of total contract services revenues for the year endedJune 30, 2003.

 

*Costs of Operations:*Costs of operations increasedapproximately 11.6% from approximately $161.3 million for the year endedJune 30, 2002, to approximately $180.0 million for the year endedJune 30, 2003. The increase was due primarily to (1) the CentralValley acquisition (approximately $4.7 million), and (2) increasedcosts at our existing fixed-site centers and mobile facilities (approximately$14.0 million). The increased costs at our existing fixed-site centers andmobile facilities were due primarily to higher salaries and benefits(approximately $3.4 million), occupancy (approximately $1.0 million), equipmentmaintenance costs (approximately $1.3 million) and depreciation expense(approximately $9.9 million), partially offset by reduced equipment lease costs(approximately $7.3 million).  Theincrease in depreciation and the reduction of equipment lease costs are dueprimarily to the buyout of operating leases and the conversion of operatingleases to capital leases and to our capital expenditures during the year endedJune 30, 2003.

 

Costs of operations at our fixed division increasedapproximately 11.0% from approximately $89.9 million for the year endedJune 30, 2002, to approximately $99.8 million for the year endedJune 30, 2003. The increase was due primarily to the Central Valleyacquisition (approximately $4.7 million) and higher salaries and benefits(approximately $1.9 million), occupancy (approximately $0.8 million) anddepreciation expense (approximately $1.6 million).

 

Costs of operations at our mobile division increasedapproximately 5.2% from approximately $63.5 million for the year endedJune 30, 2002, to approximately $66.8 million for the year endedJune 30, 2003. The increase was due primarily to equipment costs relatedto the additional mobile facilities (approximately $1.0 million) and highersalaries and benefits (approximately $1.5 million), which included additional mobilesales personnel.

 

*Corporate Operating Expenses:*Corporate operating expenses increasedapproximately 26.6% from approximately $10.9 million for the year endedJune 30, 2002, to approximately $13.8 million for the year endedJune 30, 2003. The increase was due primarily to higher salaries andbenefits (approximately $2.0 million), which includes one-time severancepayments for certain terminated employees, consulting costs associated with ouracquisition and development activities (approximately $0.3 million), andadditional information technology systems costs to make IRIS conform with HIPAArequirements (approximately $0.2 million).

 

*Acquisition Related CompensationCharge:*Holdersof options and warrants, which prior to our acquisition of InSight wereexercisable for InSight common stock, received the difference between $18.00and the exercise price of each share of common stock the holder could haveacquired pursuant to the terms of the options and warrants, and the options andwarrants were terminated. This resulted in a charge of approximately$15.6 million, which is reflected in the statement of operations ofInSight for the period from July 1, 2001 to October 17, 2001.

 

*Interest Expense, net:*Interest expense, net decreasedapproximately 3.6% from approximately $38.9 million for the year endedJune 30, 2002, to approximately $37.5 million for the year endedJune 30, 2003. The decrease was due primarily to (1) the eliminationof the write-off of debt issuance costs as a result of the refinancing of asenior subordinated bridge financing in the year ended June 30, 2002(approximately $7.4 million); (2) a reduction in our effectiveinterest rate on our variable rate debt; and (3) principal payments on ourcredit facility, partially offset by

 

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additional debt relatedto the conversion of operating leases to capital leases and additional debtrelated to the Central Valley acquisition.

 

*Provision For Income Taxes:*Provision for income taxes changed from abenefit of approximately $2.1 million for the year ended June 30,2002, to a provision of approximately $3.3 million for the year endedJune 30, 2003. For the year ended June 30, 2003, the provision is dueto our recording a tax provision at an effective rate of 40%. For the yearended June 30, 2002, the benefit was due to InSight recording a benefit torecognize the utilization of certain operating loss carrybacks.

 

*Adjusted EBITDA:*  Adjusted EBITDA increased approximately 13.1%from approximately $84.0 million for the year ended June 30, 2002, toapproximately $95.0 million for the year ended June 30, 2003.  Thisincrease was due to: (1) Adjusted EBITDA at our existing facilities(approximately $1.6 million), (2) the buyout of operating leases and the conversionof operating leases to capital leases in 2002 (approximately $7.2 million) and(3) the Central Valley acquisition (approximately $2.2 million).  AdjustedEBITDA for the fixed division increased approximately 10.3% from approximately$53.6 million for the year ended June 30, 2002, to approximately $59.1million for the year ended June 30, 2003.  Adjusted EBITDA for themobile division increased approximately 25.0% from approximately $44.4 millionfor the year ended June 30, 2002, to approximately $55.5 million for theyear ended June 30, 2003.

 

**Liquidity and Capital Resources**

 

We have historically funded our operations and capitalexpenditure requirements from net cash provided by operating activities,capital and operating leases and our credit facility.  We will fund future working capital andcapital expenditure requirements from net cash provided by operatingactivities, capital and operating leases, and, to the extent necessary, ourrevolving credit facility.

 

*Liquidity:* Webelieve, based on currently available information, that future cash flows fromoperations will be adequate to meet our anticipated interest expense, federaland state cash tax expense, capital expenditures, working capital, scheduledprincipal payments and other debt repayments while meeting all covenantrequirements under our credit facility for the next 12 months.

 

Cash and cash equivalents as of June 30, 2004 were approximately$30.4 million. Our primary source of liquidity is cash provided byoperating activities.  Our ability togenerate cash flows from operating activities is based upon several factorsincluding the following:

 

•                  the volume ofpatients at our fixed-site centers;

•                  the demand forour services in the mobile division;

•                  our ability tocontrol expenses; and

•                  our ability tocollect our trade accounts receivables from third-party payors, hospitals,physician groups, other healthcare providers and patients.

 

Net cash provided byoperating activities was approximately $60.1 million and resulted primarilyfrom net income before depreciation and amortization (approximately$61.7 million), an increase in accounts payable and accrued expenses(approximately $6.0 million) and a decrease in other current assets(approximately $3.1 million), partially offset by an increase in tradeaccounts receivables, net (approximately $8.5 million).  The increases in trade accounts receivable,accounts payable and accrued expenses are due primarily to the acquisitionsthat we completed in 2003 and 2004.  Thedecrease in other current assets was due to the reduction in amounts due to usfrom our unconsolidated partnerships.

 

Net cash used in investing activities wasapproximately $142.3 million for the year ended June 30, 2004. Cash usedin investing activities resulted primarily from our Central Valley, CDL and CMIacquisitions (approximately $101.3 million) and our purchase or upgrade ofdiagnostic imaging equipment at our existing fixed-site centers

 

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(approximately $46.7 million), partially offsetby proceeds from the sale of a fixed-site center in Hobart, Indiana discussedabove (approximately $5.4 million).

 

Net cash provided by financing activities wasapproximately $93.0 million for the year ended June 30, 2004. Cashprovided by financing activities resulted primarily from borrowings of notespayable (approximately $101.1 million), partially offset by principalpayments of notes payable and capital lease obligations (approximately$8.2 million).

 

Our short-term and long-term liquidity needs willarise primarily from:

 

•                  principal and interestpayments relating to our credit facility;

 

•                  interest payments relatingto our 9.875% senior subordinated notes;

 

•                  capital expenditures;

 

•                  working capital requirementsto support business growth; and

 

•                  potential acquisitions.

 

There are no scheduled principal repayments on our senior subordinatednotes until 2011.

 

*Capital Expenditures:* Asof June 30, 2004, we have committed to purchase or lease at an approximateaggregate cost of $6.4 million, seven diagnostic imaging systems throughJanuary 2005. We expect to use either internally generated funds or leasesto finance the purchase of such equipment. We may purchase, lease or upgradeother diagnostic imaging systems as opportunities arise to place new equipmentinto service when new contract services agreements are signed, existingagreements are renewed, acquisitions are completed, or new fixed-site centersand mobile facilities are developed in accordance with our business strategy.

 

In addition, in connectionwith the implementation of the electronic transactions, security and privacystandards mandated by HIPAA, we have spent approximately $1.1 million asof June 30, 2004, to make necessary software upgrades to IRIS to make itconform with the privacy and electronic standards.  We expect to spend an additional$0.4 million to conform with the security standards by April 2005.

 

*Credit Facility and SeniorSubordinated Notes**:** *As of June 30, 2004, through InSight, wehave a credit facility with Bank of America, N.A. and a syndication of otherlenders consisting of:  (1) a termloan with a principal balance of approximately $220 million; (2) anadditional $50 million term loan and (3) a $50 million revolvingcredit facility.  Borrowings under the CreditFacility bear interest at LIBOR plus 3.5% to 3.75%.  We are required to pay an annual unusedfacility fee of between 0.5% and 2.5%, payable quarterly, on unborrowedamounts.  We used the credit facility tocomplete the Central Valley, CDL and CMI acquisitions.  As of August 31, 2004, there were noborrowings under the revolving credit facility.

 

In addition to the indebtedness under our creditfacility, through InSight, we have outstanding $250 million of 9.875% senior subordinated notes. Thenotes mature in November 2011, with interest payable semi-annually and areredeemable at our option, in whole or in part, on or after November 1,2006.  At any time prior toNovember 1, 2004, we may redeem up to 35% of the notes at a redemptionprice 109.875% of the principal amount of the notes if we are involved in aninitial public offering of our capital stock.

 

The credit facilitycontains various restrictive covenants which prohibit us from prepaying otherindebtedness, including the notes, and require us to maintain specifiedfinancial ratios and satisfy financial condition tests.  As of June 30, 2004, we were in compliancewith these covenants.  In addition, thecredit facility prohibits us from declaring or paying any dividends andprohibits us from making any payments with respect to the notes if we fail toperform our obligations under, or we fail to meet the conditions of, the creditfacility or if payment creates a default under the credit facility.

 

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*Contractual Commitments:* As defined by or SEC reportingregulations, our contractual obligations as of June 30, 2004 are as follows(amounts in thousands):

 
| ** **                     | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------|------------|------------|------------|----------------------------|------------|
| ** **                     | ** ** | **Total**  | ** ** | **Less than  1 Year**      | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **After  5 Years** | ** ** |
| Long-term debt  obligations    |       | $          | 520,961    |                       | $          | 2,716 |   | $ | 5,994 |   | $ | 262,251 |   | $ | 250,000 |   |
| Capital lease  obligations     |       | 21,697     |       | 6,399                      |       | 12,043 |   | 3,230 |   | 25 |   |
| Operating lease  obligations   |       | 43,903     |       | 8,566                      |       | 15,426 |   | 9,873 |   | 10,038 |   |
| Purchase  commitments          |       | 6,354      |       | 6,354                      |       | — |   | — |   | — |   |
|                           |       |       |       |                       |       |   |   |   |   |   |   |
| Total  contractual obligations |       | $          | 592,915    |                       | $          | 24,035 |   | $ | 33,463 |   | $ | 275,354 |   | $ | 260,063 |   |

 

**Critical Accounting Policies andEstimates**

 

Management’s discussion and analysis of financial condition andresults of operations, as well as disclosures included elsewhere in this reportare based upon our consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates. The preparation of these consolidated financial statements requiresmanagement to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues, expenses and related disclosure ofcontingencies. We believe the critical accounting policies that most impact theconsolidated financial statements are described below. A summary of oursignificant accounting policies can be found in the notes to our consolidatedfinancial statements which are included elsewhere in this report.

 

*Revenue Recognition:* Revenues from patient services andfrom contract services are recognized when services are provided. Patientservices revenues are presented net of (1) related contractualadjustments, which represent the difference between our charge for a procedureand what we will ultimately receive from private health insurance programs,Medicare, Medicaid and other federal healthcare programs, and (2) paymentsdue to radiologists. Contract services revenues are recognized over theapplicable contract period. Revenues collected in advance are recorded asunearned revenue.

 

*Trade Accounts Receivables:* We review our trade accountsreceivables and our estimates of the allowance for doubtful accounts andcontractual adjustments each period. The amount of the allowance includesmanagement’s estimateof the amounts expected to be written off on specific accounts and forwrite-offs on other unidentified accounts. In estimating the write-offs andadjustments on specific accounts, management relies on a combination ofin-house analysis and a review of contractual payment rates from private healthinsurance programs or under the federal Medicare program. In estimating theallowance for unidentified write-offs and adjustments, management relies onhistorical experience. Estimates of uncollectable amounts are revised eachperiod, and changes are recorded in the period they become known. The amountswe will ultimately realize could differ materially from the amounts assumed inarriving at the allowance for doubtful accounts and contractual adjustments.

 

*Goodwill and Other IntangibleAssets:* Weevaluate the carrying value of goodwill and identified intangibles not subjectto amortization in the second quarter of each year. As part of the evaluation,we compare the carrying value of each intangible asset with its fair value todetermine whether there has been impairment. We assess the ongoingrecoverability of our intangible assets subject to amortization by determiningwhether the intangible asset balance can be recovered over the remainingamortization period through projected undiscounted future cash flows. Ifprojected future cash flows indicate that the unamortized intangible assetbalances will not be recovered, an adjustment is made to reduce the netintangible asset to an amount consistent with projected future cash flowsdiscounted at our incremental borrowing rate. Cash flow projections, althoughsubject to a degree of uncertainty, are based on trends of historicalperformance and management’s estimate of future performance, giving considerationto existing and anticipated competitive and economic conditions.

 

**New Pronouncements**

 

In January 2003, the FASBissued FIN No. 46, “Consolidation of Variable Interest Entities” (FIN 46) whichis an interpretation of Accounting Research Bulletin No. 51, and “ConsolidatedFinancial Statements.”  FIN 46 requires avariable interest entity (VIE) to be consolidated by a company that isconsidered to be the primary beneficiary of that VIE.  In December 2003, the FASB issued FIN No. 46(revised December 2003), “Consolidation of Variable

 

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Interest Entities” (FIN46-R) to address certain FIN 46 implementation issues.  The effective dates and impact of FIN 46 andFIN 46-R for our consolidated financial statements are as follows:

 

(1)          Special purpose entities(SPEs) created prior to February 1, 2003: We must apply the provisions of FIN 46. We have completed our assessment and determined that we have no SPEs.

 

(2)          Non-SPEs created priorto February 1, 2003:  We did not enterinto any significant joint venture or partnership agreements prior to February1, 2003 which are not included in the consolidated financial statements for theyears ended June 30, 2004 and 2003.

 

(3)          All entities, regardlessof whether a SPE, that were created subsequent to January 31, 2003:  We are required to apply the provisions ofFIN 46.  We did not enter into any SPE,joint venture or partnership agreements subsequent to January 31, 2003 thatwould have a material impact on the consolidated financial statements for theyears ended June 30, 2004 and 2003.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of StatementNo. 133 on Derivative Instruments and Hedging Activities.”  SFAS 149 is effective for contracts enteredinto or modified after September 30, 2003 and for hedging relationshipsdesignated after September 30, 2003. SFAS 149 amends and clarifies financial accounting and reporting forderivative instruments, including certain derivative instruments embedded inother contracts and for hedging activities. SFAS 149 amends SFAS 133 for decisions made as part of the DerivativesImplementation Group process that effectively required amendments to SFAS 133,in connection with other FASB projects dealing with financial instruments andin connection with implementation issues raised in relation to the applicationof the definition of a derivative.  Weadopted SFAS 149 on July 1, 2003, which did not have a material impact on ourfinancial condition and results of operations.

 

In May 2003, the FASBissued SFAS No. 150, “Certain Financial Instruments with Characteristics ofBoth Liabilities and Equity.”  SFAS 150establishes standards for how a company clarifies and measures certainfinancial instruments with characteristics of both liabilities and equity.  It requires a company to classify suchinstruments as liabilities, whereas they previously may have been classified asequity.  SFAS 150 is effective for allfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective July 1, 2003.  Weadopted SFAS 150 on July 1, 2003, which did not have a material impact on ourfinancial condition and results of operations.

 

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**ITEM 7A.          QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We provide our services in the United States andreceive payment for our services exclusively in United States dollars.Accordingly, our business is unlikely to be affected by factors such as changesin foreign market conditions or foreign currency exchange rates.

 

Our market risk exposure relates primarily to interestrates, where we will periodically use interest rate swaps to hedge variableinterest rates on long-term debt under our credit facility. We do not engage inactivities using complex or highly leveraged instruments.

 

**Interest Rate Risk**

 

 In order to modify and manage the interestcharacteristics of our outstanding debt and limit the effects of interest rateson our operations, we may use a variety of financial instruments, includinginterest rate hedges, caps, floors and other interest rate exchange contracts.The use of these types of instruments to hedge our exposure to changes ininterest rates carries additional risks such as counter-party credit risk andlegal enforceability of hedging contracts. We do not enter into anytransactions for speculative or trading purposes.

 

Our future earnings and cash flows and some of ourfair values relating to financial instruments are dependent upon prevailingmarket rates of interest, such as LIBOR. Based on interest rates andoutstanding balances as of June 30, 2004, a 1% change in interest rates on our$270 million of floating rate debt would affect annual future earnings and cashflows by approximately $2.7 million.  Theweighted average interest rate on our floating debt as of June 30, 2004 was4.78%.

 

Through InSight, we also have outstanding $250 millionin senior subordinated notes which mature in November 2011 and bear interest at9.875%, payable semi-annually.  The fairvalue of our senior subordinated notes as of June 30, 2004 was approximately$270 million.

 

These amounts are determinedby considering the impact of hypothetical interest rates on our borrowing cost.These analyses do not consider the effects of the reduced level of overalleconomic activity that could exist in that environment. Further, in the eventof a change of this magnitude, we would consider taking actions to furthermitigate our exposure to any such change. Due to the uncertainty of thespecific actions that would be taken and their possible effects, however, thissensitivity analysis assumes no changes in our capital structure.

 

**Inflation****Risk**

 

We do not believe that inflation has had a materialadverse impact on our business or operating results during the periodspresented. We cannot assure you, however, that our business will not beaffected by inflation in the future.

 

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**ITEM 8.             FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

**INSIGHT HEALTH SERVICES HOLDINGSCORP. AND SUBSIDIARIES**

Index to ConsolidatedFinancial Statements

for the Years Ended June30, 2004, 2003 and 2002 and the Period from July 1, 2001 to October 17, 2001

 
| REPORT  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                 |   |
|------------------------------------------------------------------------------------------|--------|
|                                                                                     |   |
| CONSOLIDATED BALANCE SHEETS                                                              |   |
|                                                                                     |   |
| CONSOLIDATED  STATEMENTS OF OPERATIONS                                                   |   |
|                                                                                     |   |
| CONSOLIDATED  STATEMENTS OF STOCKHOLDERS’ EQUITY                                    |   |
|                                                                                     |   |
| CONSOLIDATED  STATEMENTS OF CASH FLOWS                                                   |   |
|                                                                                     |   |
| NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS                                              |   |
|                                                                                     |   |
| REPORT OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE |   |
|                                                                                     |   |
| SCHEDULE II - VALUATION AND QUALIFYING  ACCOUNTS                                         |   |

 

In accordance with****SEC Rule 3-10 of Regulation S-X, theconsolidated financial statements of InSight Health Services Holdings Corp.(Company) are included herein and separate financial statements ofInSight Health Services Corp. (InSight), the Company’s wholly owned subsidiary,and InSight’s subsidiary guarantors are not included.  Condensed financial data for InSight and itssubsidiary guarantors is included in Note 20 to the Consolidated FinancialStatements.

 

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**Report ofIndependent Registered Public Accounting Firm**

 

To the Board of Directors and Stockholders of InSightHealth Services Holdings Corp.:

 

In our opinion, the accompanying consolidated balancesheets as of June 30, 2004 and 2003 and the related consolidatedstatements of operations, of stockholders’ equity and of cash flows present fairly, in allmaterial respects, the financial position of InSight Health Services HoldingsCorp. and its subsidiaries (the “Company”) at June 30, 2004 and 2003 and the results oftheir operations and their cash flows for each of the three years in the periodthen ended in conformity with accounting principles generally accepted in theUnited States of America. Also, in our opinion, the accompanying consolidatedstatements of operations, of stockholders’ equity and of cash flows present fairly, in allmaterial respects, the results of operations and cash flows for InSight HealthServices Corp. (Predecessor) for the period from July 1, 2001 throughOctober 17, 2001 in conformity with accounting principles generally acceptedin the United States of America. In addition, in our opinion, the financialstatement schedule listed in the accompanying index presents fairly, in allmaterial respects, the information set forth therein when read in conjunctionwith the related consolidated financial statements.  These financial statements and the financialstatement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements and financial statement schedule based on ouraudits. We conducted our audits of these statements in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 
| /s/ PRICEWATERHOUSECOOPERS LLP |   |
|--------------------------------|--------|
|                           |
| Orange County, California      |
|                           |
| September 23, 2004        |

 

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**ASOF JUNE 30, 2004 AND 2003**

(Amounts inthousands, except share data)

 
| ** **                                                                                                                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                                                                                           |       |     |       |     |       |
| CURRENT ASSETS:                                                                                                                  |       |     |       |     |       |
| Cash and cash  equivalents                                                                                                       |       | $        | 30,412     |     | $          | 19,554 |   |
| Trade accounts  receivables, net                                                                                                 |       | 55,010   |       | 46,096   |       |
| Other current  assets                                                                                                            |       | 6,207    |       | 10,149   |       |
| Total current  assets                                                                                                            |       | 91,629   |       | 75,799   |       |
|                                                                                                                             |       |     |       |     |       |
| PROPERTY AND  EQUIPMENT, net                                                                                                     |       | 242,336  |       | 219,121  |       |
| INVESTMENTS IN  PARTNERSHIPS                                                                                                     |       | 2,901    |       | 2,734    |       |
| OTHER ASSETS                                                                                                                     |       | 19,302   |       | 19,371   |       |
| OTHER INTANGIBLE  ASSETS, net                                                                                                    |       | 38,518   |       | 36,470   |       |
| GOODWILL                                                                                                                         |       | 280,945  |       | 223,822  |       |
|                                                                                                                             |       | $        | 675,631    |     | $          | 577,317 |   |
|                                                                                                                             |       |     |       |     |       |
| LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                  |       |     |       |     |       |
| CURRENT  LIABILITIES:                                                                                                            |       |     |       |     |       |
| Current portion  of notes payable                                                                                                |       | $        | 2,716      |     | $          | 2,009 |   |
| Current portion  of capital lease obligations                                                                                    |       | 5,060    |       | 5,696    |       |
| Accounts payable  and other accrued expenses                                                                                     |       | 35,737   |       | 35,514   |       |
| Total current  liabilities                                                                                                       |       | 43,513   |       | 43,219   |       |
|                                                                                                                             |       |     |       |     |       |
| LONG-TERM  LIABILITIES:                                                                                                          |       |     |       |     |       |
| Notes payable,  less current portion                                                                                             |       | 518,245  |       | 420,239  |       |
| Capital lease  obligations, less current portion                                                                                 |       | 13,802   |       | 18,175   |       |
| Other long-term  liabilities                                                                                                     |       | 5,130    |       | 4,070    |       |
| Total long-term  liabilities                                                                                                     |       | 537,177  |       | 442,484  |       |
|                                                                                                                             |       |     |       |     |       |
| COMMITMENTS AND  CONTINGENCIES (Note 11)                                                                                         |       |     |       |     |       |
|                                                                                                                             |       |     |       |     |       |
| STOCKHOLDERS’  EQUITY:                                                                                                      |       |     |       |     |       |
| Common stock,  $.001 par value, 10,000,000 shares authorized, 5,468,814 shares issued and  outstanding at June 30, 2004 and 2003 |       | 5        |       | 5        |       |
| Additional  paid-in capital                                                                                                      |       | 87,081   |       | 87,081   |       |
| Retained  earnings                                                                                                               |       | 7,855    |       | 4,931    |       |
| Accumulated  other comprehensive loss                                                                                            |       | —   |       | (403     | )          |
| Total  stockholders’  equity                                                                                           |       | 94,941   |       | 91,614   |       |
|                                                                                                                             |       | $        | 675,631    |     | $          | 577,317 |   |

 

The accompanyingnotes are an integral part of these consolidated balance sheets.

 

36

----

 

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FORTHE YEARS ENDED JUNE 30, 2004, 2003 AND 2002 AND THE PERIOD FROM JULY 1 TOOCTOBER 17, 2001**

(Amounts inthousands)

 
| ** **                                         | ** ** | ** **               | ** ** | **Predecessor** | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|-----------------|------------|
| ** **                                         | ** ** | ** **               | ** ** | ** **      | ** ** | ** ** | ** ** | **Period from  July 1 to  October 17,** | ** ** |
| ** **                                         | ** ** | **Company**              | ** ** | ** **      |
| ** **                                         | ** ** | **Years Ended June 30,** | ** ** | ** **      |
| ** **                                         | ** ** | **2004**                 | ** ** | **2003**        | ** ** | **2002** | ** ** | **2001** | ** ** |
| REVENUES:                                          |       |                     |       |            |       |   |   |   |   |
| Contract  services                                 |       | $                        | 129,193    |            | $          | 111,921 |   | $ | 75,377 |   | $ | 29,802 |   |
| Patient services                                   |       | 161,691                  |       | 125,831         |       | 80,030 |   | 33,876 |   |
| Total revenues                                     |       | 290,884                  |       | 237,752         |       | 155,407 |   | 63,678 |   |
|                                               |       |                     |       |            |       |   |   |   |   |
| COSTS OF  OPERATIONS:                              |       |                     |       |            |       |   |   |   |   |
| Costs of  services                                 |       | 168,700                  |       | 125,685         |       | 80,868 |   | 32,197 |   |
| Provision for  doubtful accounts                   |       | 4,998                    |       | 4,154           |       | 2,785 |   | 1,110 |   |
| Equipment leases                                   |       | 990                      |       | 860             |       | 5,469 |   | 2,557 |   |
| Depreciation and  amortization                     |       | 58,733                   |       | 49,345          |       | 26,462 |   | 9,823 |   |
| Total costs of  operations                         |       | 233,421                  |       | 180,044         |       | 115,584 |   | 45,687 |   |
|                                               |       |                     |       |            |       |   |   |   |   |
| Gross profit                                       |       | 57,463                   |       | 57,708          |       | 39,823 |   | 17,991 |   |
|                                               |       |                     |       |            |       |   |   |   |   |
| CORPORATE  OPERATING EXPENSES                      |       | (16,217                  | )          | (13,750         | )          | (7,705 | ) | (3,184 | ) |
|                                               |       |                     |       |            |       |   |   |   |   |
| ACQUISITION  RELATED COMPENSATION CHARGE           |       | —                   |       | —          |       | — |   | (15,616 | ) |
|                                               |       |                     |       |            |       |   |   |   |   |
| GAIN ON SALE OF  CENTER                            |       | 2,129                    |       | —          |       | — |   | — |   |
|                                               |       |                     |       |            |       |   |   |   |   |
| EQUITY IN  EARNINGS OF UNCONSOLIDATED PARTNERSHIPS |       | 2,181                    |       | 1,744           |       | 437 |   | 382 |   |
|                                               |       |                     |       |            |       |   |   |   |   |
| INTEREST  EXPENSE, net                             |       | (40,682                  | )          | (37,514         | )          | (32,546 | ) | (6,321 | ) |
|                                               |       |                     |       |            |       |   |   |   |   |
| Income (loss)  before income taxes                 |       | 4,874                    |       | 8,188           |       | 9 |   | (6,748 | ) |
|                                               |       |                     |       |            |       |   |   |   |   |
| PROVISION  (BENEFIT) FOR INCOME TAXES              |       | 1,950                    |       | 3,266           |       | — |   | (2,100 | ) |
|                                               |       |                     |       |            |       |   |   |   |   |
| Net income  (loss)                                 |       | $                        | 2,924      |            | $          | 4,922 |   | $ | 9 |   | $ | (4,648 | ) |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

37

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

**FORTHE YEARS ENDED JUNE 30, 2004, 2003 AND 2002**

(Amounts inthousands, except share data)

 
| ** **                                                          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** **   | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|------------------|------------|-------------|------------|-------------------|------------|-----------------|------------|--------------|------------|------------|------------|
| ** **                                                          | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**    | ** ** | **Other**       | ** ** | ** **   | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Comprehensive** | ** ** | **Retained**    | ** ** | ** **   | ** ** |
| **Company**                                                         | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Gain (Loss)** | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
| BALANCE AT JUNE  30, 2001                                           |       | —           |       | $           | —     |              | $          | —          |       | $            | —     |       | $          | — |   | $ | — |   |
|                                                                |       |             |       |        |       |              |       |            |       |         |       |       |       |
| Sale of common  stock, net of equity issuance costs                 |       | 5,461,402        |       | 5           |       | 85,758            |       | —          |       | —       |       | 85,763     |       |
|                                                                |       |             |       |        |       |              |       |            |       |         |       |       |       |
| Issuance of  common stock                                           |       | 7,362            |       | —      |       | 133               |       | —          |       | —       |       | 133        |       |
|                                                                |       |             |       |        |       |              |       |            |       |         |       |       |       |
| Issuance of  stock options                                          |       | —           |       | —      |       | 1,695             |       | —          |       | —       |       | 1,695      |       |
|                                                                |       |             |       |        |       |              |       |            |       |         |       |       |       |
| Net income                                                          |       | —           |       | —      |       | —            |       | —          |       | 9            |       | 9          |       |
|                                                                |       |             |       |        |       |              |       |            |       |         |       |       |       |
| Other  comprehensive loss:                                          |       |             |       |        |       |              |       |            |       |         |       |       |       |
| Unrealized loss  attributable to change in fair value of derivative |       | —           |       | —      |       | —            |       | (224            | )          | —       |       | (224       | )          |
| Comprehensive  loss                                                 |       |             |       |        |       |              |       |            |       |         |       | (215       | )          |
| BALANCE AT JUNE  30, 2002                                           |       | 5,468,764        |       | 5           |       | 87,586            |       | (224            | )          | 9            |       | 87,376     |       |
|                                                                |       |             |       |        |       |              |       |            |       |         |       |       |       |
| Stock options  exercised                                            |       | 50               |       | —      |       | 1                 |       | —          |       | —       |       | 1          |       |
|                                                                |       |             |       |        |       |              |       |            |       |         |       |       |       |
| Repurchase of  stock options                                        |       | —           |       | —      |       | (506              | )          | —          |       | —       |       | (506       | )          |
|                                                                |       |             |       |        |       |              |       |            |       |         |       |       |       |
| Net income                                                          |       | —           |       | —      |       | —            |       | —          |       | 4,922        |       | 4,922      |       |
|                                                                |       |             |       |        |       |              |       |            |       |         |       |       |       |
| Other  comprehensive loss:                                          |       |             |       |        |       |              |       |            |       |         |       |       |       |
| Unrealized loss  attributable to change in fair value of derivative |       | —           |       | —      |       | —            |       | (179            | )          | —       |       | (179       | )          |
| Comprehensive  income                                               |       |             |       |        |       |              |       |            |       |         |       | 4,743      |       |
| BALANCE AT JUNE  30, 2003                                           |       | 5,468,814        |       |        | 5          |              |       | 87,081          |       |         | (403       | )          |       | 4,931 |   |   | 91,614 |   |
|                                                                |       |             |       |        |       |              |       |            |       |         |       |       |       |
| Net income                                                          |       | —           |       | —      |       | —            |       | —          |       | 2,924        |       | 2,924      |       |
|                                                                |       |             |       |        |       |              |       |            |       |         |       |       |       |
| Other  comprehensive gain:                                          |       |             |       |        |       |              |       |            |       |         |       |       |       |
| Unrealized gain  attributable to change in fair value of derivative |       | —           |       | —      |       | —            |       | 403             |       | —       |       | 403        |       |
| Comprehensive income                                                |       |             |       |        |       |              |       |            |       |         |       | 3,327      |       |
| BALANCE AT JUNE  30, 2004                                           |       | 5,468,814        |       | $           | 5          |              | $          | 87,081          |       | $            | —     |       | $          | 7,855 |   | $ | 94,941 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

38

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**FOR  THE PERIOD FROM JULY 1 TO OCTOBER 17, 2001**

(Amounts inthousands, except share data)

 
| ** **                                                      | ** ** | ** **          | ** ** | ** **   | ** ** | **Accumulated** | ** ** | ** **       | ** ** | ** **   | ** ** |
|-----------------------------------------------------------------|------------|---------------------|------------|--------------|------------|-----------------|------------|------------------|------------|--------------|------------|
| ** **                                                      | ** ** | **Preferred Stock** | ** ** | ** **   | ** ** | **Additional**  | ** ** | **Other**        | ** ** | **Retained** | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | **Series B**        | ** ** | **Series C** | ** ** | **Series D**    | ** ** | **Common Stock** | ** ** | **Paid-In**  | ** ** | **Comprehensive** | ** ** | **Earnings** | ** ** | ** ** | ** ** |
| **Predecessor**                                                 |       | **Shares**          |       | **Amount**   |       | **Shares**      |       | **Amount**       |       | **Shares**   |       | **Amount** |   | **Shares** |   | **Amount** |   | **Capital** |   | **(Loss)** |   | **(Deficit)** |   | **Total** |   |
| ** **                                                      |       | ** **          |       | ** **   |       | ** **      |       | ** **       |       | ** **   |       | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   |
| BALANCE AT JUNE 30, 2001                                        |       | 25,000              |       | $            | 23,923     |            | 27,953     |             | $          | 13,173       |       | — |   | $ | — |   | 3,011,656 |   | $ | 3 |   | $ | 23,926 |   | $ | — |   | $ | 4,446 |   | $ | 65,471 |   |
|                                                            |       |                |       |         |       |            |       |             |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock options and warrants exercised                            |       | —              |       | —       |       | —          |       | —           |       | —       |       | — |   | 13,911 |   | — |   | 145 |   | — |   | — |   | 145 |   |
|                                                            |       |                |       |         |       |            |       |             |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion of Series B and Series C to Series D Preferred Stock |       | (25,000             | )          | (23,923      | )          | (27,953         | )          | (13,173          | )          | 632,266      |       | 37,096 |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                            |       |                |       |         |       |            |       |             |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion of Series D Preferred Stock to Common Stock          |       | —              |       | —       |       | —          |       | —           |       | (632,266     | )          | (37,096 | ) | 6,323,660 |   | 6 |   | 37,090 |   | — |   | — |   | — |   |
|                                                            |       |                |       |         |       |            |       |             |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquisition related compensation charge                         |       | —              |       | —       |       | —          |       | —           |       | —       |       | — |   | — |   |   |   | 15,616 |   | — |   | — |   | 15,616 |   |
|                                                            |       |                |       |         |       |            |       |             |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive loss                                        |       | —              |       | —       |       | —          |       | —           |       | —       |       | — |   | — |   | — |   | — |   | (682 | ) | — |   | (682 | ) |
|                                                            |       |                |       |         |       |            |       |             |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                        |       | —              |       | —       |       | —          |       | —           |       | —       |       | — |   | — |   | — |   | — |   | — |   | (4,648 | ) | (4,648 | ) |
| BALANCE AT OCTOBER 17, 2001                                     |       | —              |       | $            | —     |            | —     |             | $          | —       |       | — |   | $ | — |   | 9,349,227 |   | $ | 9 |   | $ | 76,777 |   | $ | (682 | ) | $ | (202 | ) | $ | 75,902 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

39

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FORTHE YEARS ENDED JUNE 30, 2004, 2003 AND 2002 AND THE PERIOD FROM JULY 1 TOOCTOBER 17, 2001**

(Amounts inthousands)

 
| ** **                                                                                | ** ** | ** **               | ** ** | **Predecessor** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------|------------|
| ** **                                                                                | ** ** | ** **               | ** ** | ** **      | ** ** | ** ** | ** ** | **Period from** | ** ** |
| ** **                                                                                | ** ** | **Company**              | ** ** | **July 1 to**   | ** ** |
| ** **                                                                                | ** ** | **Years Ended June 30,** | ** ** | **October 17,** | ** ** |
| ** **                                                                                | ** ** | **2004**                 | ** ** | **2003**        | ** ** | **2002** | ** ** | **2001** | ** ** |
| OPERATING  ACTIVITIES:                                                                    |       |                     |       |            |       |   |   |   |   |
| Net income  (loss)                                                                        |       | $                        | 2,924      |            | $          | 4,922 |   | $ | 9 |   | $ | (4,648 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                     |       |            |       |   |   |   |   |
| Write-off of  debt issuance costs                                                         |       | —                   |       | —          |       | 7,378 |   | — |   |
| Gain on sale of  center                                                                   |       | (2,129                   | )          | —          |       | — |   | — |   |
| Depreciation and  amortization                                                            |       | 58,733                   |       | 49,345          |       | 26,462 |   | 9,823 |   |
| Acquisition  related compensation charge                                                  |       | —                   |       | —          |       | — |   | 15,616 |   |
| Cash provided by  (used in) changes in operating assets and liabilites:                   |       |                     |       |            |       |   |   |   |   |
| Trade accounts  receivables, net                                                          |       | (8,455                   | )          | (2,237          | )          | 1,874 |   | (2,378 | ) |
| Other current  assets                                                                     |       | 3,084                    |       | 4,907           |       | 590 |   | (3,616 | ) |
| Accounts payable  and other accrued expenses                                              |       | 5,963                    |       | 4,819           |       | 3,288 |   | 23 |   |
| Net cash  provided by operating  activities                                          |       | 60,120                   |       | 61,756          |       | 39,601 |   | 14,820 |   |
|                                                                                      |       |                     |       |            |       |   |   |   |   |
| INVESTING  ACTIVITIES:                                                                    |       |                     |       |            |       |   |   |   |   |
| Purchase of  InSight common stock                                                         |       | —                   |       | —          |       | (187,722 | ) | — |   |
| Cash acquired in  the Acquisition                                                         |       | —                   |       | —          |       | 8,429 |   | — |   |
| Acquisition of  fixed-site centers and mobile facilities                                  |       | (101,334                 | )          | (46,292         | )          | — |   | — |   |
| Proceeds from  sale of center                                                             |       | 5,413                    |       | —          |       | — |   | — |   |
| Additions to  property and equipment                                                      |       | (46,734                  | )          | (56,967         | )          | (43,655 | ) | (20,852 | ) |
| Other                                                                                     |       | 405                      |       | 554             |       | 1,385 |   | (740 | ) |
| Net cash used in  investing activities                                                    |       | (142,250                 | )          | (102,705        | )          | (221,563 | ) | (21,592 | ) |
|                                                                                      |       |                     |       |            |       |   |   |   |   |
| FINANCING  ACTIVITIES:                                                                    |       |                     |       |            |       |   |   |   |   |
| Proceeds from  stock options and warrants exercised                                       |       | —                   |       | 1               |       | — |   | 145 |   |
| Purchase of  stock options                                                                |       | —                   |       | (506            | )          | — |   | — |   |
| Proceeds from sale  of common stock, net of equity issuance costs                         |       | —                   |       | —          |       | 85,763 |   | — |   |
| Issuance of  common stock                                                                 |       | —                   |       | —          |       | 133 |   | — |   |
| Payment of  deferred loan fees                                                            |       | —                   |       | —          |       | (29,499 | ) | — |   |
| Principal  payments of notes payable and capital lease obligations                        |       | (8,209                   | )          | (7,500          | )          | (416,510 | ) | (8,579 | ) |
| Proceeds from  issuance of debt                                                           |       | 101,125                  |       | 50,000          |       | 575,000 |   | — |   |
| Payments made in  connection with refinancing notes payable                               |       | —                   |       | —          |       | (15,109 | ) | — |   |
| Other                                                                                     |       | 72                       |       | 725             |       | (33 | ) | 381 |   |
| Net cash  provided by (used in) financing activities                                      |       | 92,988                   |       | 42,720          |       | 199,745 |   | (8,053 | ) |
|                                                                                      |       |                     |       |            |       |   |   |   |   |
| INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS:                                        |       | 10,858                   |       | 1,771           |       | 17,783 |   | (14,825 | ) |
| Cash, beginning  of period                                                                |       | 19,554                   |       | 17,783          |       | — |   | 23,254 |   |
| Cash, end of  period                                                                      |       | $                        | 30,412     |            | $          | 19,554 |   | $ | 17,783 |   | $ | 8,429 |   |
|                                                                                      |       |                     |       |            |       |   |   |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                        |       |                     |       |            |       |   |   |   |   |
| Interest paid                                                                             |       | $                        | 38,939     |            | $          | 36,286 |   | $ | 20,173 |   | $ | 6,799 |   |
| Income taxes  paid (refund received)                                                      |       | 377                      |       | (224            | )          | 4 |   | 943 |   |
| Equipment  additions under capital leases                                                 |       | —                   |       | 25,455          |       | — |   | — |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

40

----

 

**INSIGHT HEALTH SERVICES HOLDINGSCORP. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**JUNE 30, 2004**

 

**1.  ORGANIZATION**

 

The terms “Company”, “us”, “we” and “our” as used in these financialstatements refer to InSight Health Services Holdings Corp.  We were incorporated in June 2001 to acquireInSight Health Services Corp, which is referred to as “InSight” in thesefinancial statements.  On October 17,2001, we acquired InSight and InSight became our wholly owned subsidiary.  We refer to our acquisition of InSight as the“Acquisition” in these financial statements.******Our consolidated operations after theAcquisition are substantially consistent with the operations of InSight priorto the Acquisition.  In addition, we haveno operations other than our investment in InSight.  As such, prior to October 17, 2001, InSightis considered our predecessor in accordance with Regulation S-X.

 

In connection with the Acquisition each of InSight’s stockholdersreceived $18.00 in cash for each share of common stock they owned prior to theAcquisition.  Holders of options andwarrants, which prior to the Acquisition were exercisable for InSight commonstock, received the difference between $18.00 and the exercise price of eachshare of common stock the holder could have acquired pursuant to the terms ofthe options and warrants, and the options and warrants were terminated.  This resulted in a charge of approximately$15.6 million, which is reflected in the accompanying consolidated statementsof operations of InSight.  In addition,certain members of senior management rolled a portion of their InSight commonstock options into stock options of for our common stock.  InSight’s stockholders, option holders andwarrant holders received aggregate cash consideration of approximately $187.7million as a result of the Acquisition.

 

Concurrently with the Acquisition, InSight:  (i) repurchased by tender offer all of its 95/8% senior subordinated notes due 2008 in an aggregate principal amount of$100 million; (ii) repaid its then outstanding senior credit facilities andcertain other indebtedness; and (iii) paid fees and expenses relating to theAcquisition and related financing transactions.

 

These transactions were financed through:

 

•                  Borrowings of $150 million under $275 millionof new credit facilities;

 

•                  A $200 million senior subordinated bridgefinancing; and

 

•                  The investment by us, before equity issuancecosts, of approximately $98.1 million; management options and common stockrollover with a total net value of approximately $1.9 million.

 

**2.  BASIS OF PREPARATION**

 

Theaccompanying consolidated balance sheets as of June 30, 2004 and 2003, theconsolidated statements of operations, and the consolidated statements of cashflows for the years ended June 30, 2004, 2003 and 2002, reflect ourconsolidated financial position, results of operations and cash flows and alsoinclude the consolidated statements of operations and cash flows of InSightfrom the date of the Acquisition and include all material adjustments requiredunder purchase accounting.  InSight isconsidered our predecessor in accordance with Regulation S-X.  As such, the historical financial statementsof InSight prior to the Acquisition are included in the accompanyingconsolidated financial statements, including the consolidated statements ofoperations and the consolidated statements of cash flows for the period fromJuly 1, 2001 to October 17, 2001 (collectively Predecessor financialstatements).  We have not adjusted thePredecessor financial statements to reflect the Acquisition.  As such, our consolidated financialstatements after the Acquisition are not directly comparable to the Predecessorfinancial statements prior to the Acquisition.

 

41

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**3.      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

a.   NATURE OF BUSINESS

 

Through InSight and itssubsidiaries, we provide diagnostic imaging, treatment and related managementservices in 37 states throughout the United States.  We have two reportable segments:  the mobile division and fixed division.  Our services are provided through a networkof 91 mobile magnetic resonance imaging, or MRI, facilities, 19 mobile positronemission tomography, or PET, facilities, four mobile lithotripsy facilities,three mobile computed tomography, or CT, facilities, one mobile catheterizationlab (collectively, mobile facilities), 74 fixed-site MRI facilities, 40multi-modality fixed-site centers, two PET fixed-site centers, one LeksellStereotactic Gamma Knife fixed-site treatment center and one radiation oncologyfixed-site center (collectively, fixed-site centers).  We have a substantial presence in California,Arizona, New England, the Carolinas, Florida and the Mid-Atlantic states.

 

At our multi-modalityfixed-site centers, we typically offer other services in addition to MRI,including PET, CT, x-ray, mammography, ultrasound, nuclear medicine and bonedensitometry services.

 

b.   CONSOLIDATED FINANCIAL STATEMENTS

 

Our consolidatedfinancial statements include our accounts and those of our wholly ownedsubsidiaries.  Our investment interestsin partnerships or limited liability companies, or Partnerships, are accountedfor under the equity method of accounting when our ownership is 50 percent orless.  Our investment interests inPartnerships are consolidated for ownership of 50 percent or greater ownedentities when we exercise significant control over the operations and areprimarily responsible for the associated long-term debt (Note 15).

 

Significant intercompanybalances have been eliminated in consolidation.

 

c.   USE OF ESTIMATES

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make certain estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements, disclosures of contingent assets andliabilities at the date of the financial statements, and the reported amountsof revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

d.   REVENUE RECOGNITION

 

Revenues from contractservices and from patient services are recognized when services areprovided.  Patient services revenues arepresented net of (1) related contractual adjustments, which represent thedifference between our charge for a procedure and what we will ultimatelyreceive from private health insurance programs, Medicare, Medicaid and otherfederal healthcare programs, and (2) payments due to radiologists.  Contract services revenues are recognizedover the applicable contract period. Revenues collected in advance are recorded as unearned revenue.

 

e.   CASH EQUIVALENTS

 

Cash equivalents aregenerally composed of liquid investments with original maturities of threemonths or less, such as certificates of deposit and commercial paper.

 

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f.    LONG-LIVED ASSETS

 

*Propertyand Equipment*. Property and equipment are depreciated and amortized on thestraight-line method using the following estimated useful lives:

 
| Vehicles                                    |   | 3 to 8 years                               |
|---------------------------------------------|--------|--------------------------------------------|
| Buildings                                   |   | 7 to 20 years                              |
| Leasehold improvements                      |   | Lesser of the useful life or term of lease |
| Computer and office equipment               |   | 3 to 5 years                               |
| Diagnostic and related equipment            |   | 5 to 8 years                               |
| Equipment and vehicles under capital leases |   | Lesser of the useful life or term of lease |

 

We capitalizeexpenditures for improvements and major equipment upgrades.  Maintenance, repairs and minor replacementsare charged to operations as incurred. When assets are sold or otherwisedisposed of, the cost and related accumulated depreciation are removed from theaccounts and any resulting gain or loss is included in the results ofoperations.

 

*Long-livedAsset Impairment*.  Wereview long-lived assets, including identified intangible assets, forimpairment when events or changes in business conditions indicate that theirfull carrying value may not be recovered. We consider assets to be impaired and write them down to fair value ifexpected associated undiscounted cash flows are less than the carrying amounts.  Fair value is determined based on the presentvalue of the expected associated cash flows.

 

g.              DEFERRED FINANCINGCOSTS

 

Costs incurred inconnection with financing activities are deferred and amortized using theeffective interest method over the terms of the related debt agreements rangingfrom seven to ten years.  Amortization ofthese costs is charged to interest expense in the accompanying consolidatedstatements of operations.  Total costsdeferred and included in other assets in the accompanying consolidated balancesheets at June 30, 2004 and 2003 were approximately $19.0 million and $19.0million, respectively.

 

h.   STOCK-BASED COMPENSATION

 

As permitted under SFASNo. 123, “Accounting for Stock Based Compensation”, we account for the optionsand warrants issued to employees in accordance with APB Opinion No. 25.  SFAS 123 requires that we present pro-formadisclosures of net income as if we had recognized compensation expense equal tothe fair value of options granted, as determined at the date of grant.  Our net income or that of our Predecessorwould have reflected the following pro-forma amounts (amounts in thousands):

 

 
| ** **          | ** **  | ** **               | ** ** | **Predecessor** | ** ** |
|---------------------|-------------|--------------------------|------------|-----------------|------------|
| ** **          | ** **  | ** **               | ** ** | ** **      | ** ** | ** ** | ** ** | **Period from** | ** ** |
| ** **          | ** **  | **Company**              | ** ** | **July 1 to**   | ** ** |
| ** **          | ** **  | **Years Ended June 30,** | ** ** | **October 17,** | ** ** |
| ** **          | ** **  | **2004**                 | ** ** | **2003**        | ** ** | **2002** | ** ** | **2001** | ** ** |
| Net income  (loss): | As reported |                     | $          | 2,924           |       | $ | 4,922 |   | $ | 9 |   | $ | (4,648 | ) |
|                | Expense     |                     | (377       | )               | (652       | ) | (1,088 | ) | — |   |
|                | Pro-forma   |                     | 2,547      |            | 4,270      |   | (1,079 | ) | (4,648 | ) |
|                     |             |                          |            |                 |            |  |  |  |  |  |  |  |  |  |

 

The fair value of eachoption grant and warrant issued is estimated on the date of grant or issuanceusing the Black-Scholes pricing model with the following assumptions used forthe grants and issuances in the years ended June 30, 2004, 2003 and 2002, respectively:

 
| ** **                  | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------|------------|--------------------------|------------|
| **Assumptions**             | ** ** | **2004**                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| Risk-free  interest rate    |       | 3.58-4.18                | %          | 4.07-4.58 | % | 4.60 | % |
| Volatility                  |       | 0.00                     | %          | 0.00 | % | 0.00 | % |
| Expected dividend  yield    |       | 0.00                     | %          | 0.00 | % | 0.00 | % |
| Estimated  contractual life |       | 10.00 years              |       | 10.00 years |   | 9.30 years |   |

 

i.    GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill represents theexcess purchase price we paid over the fair value of the tangible andintangible assets and liabilities of InSight at October 17, 2001, the date ofthe Acquisition and the acquisitions completed in 2003 and 2004 (Note 4).  In accordance with Statement of FinancialAccounting Standards (“SFAS”) 142, “Goodwill and Other Intangible Assets”, thegoodwill and indefinite-lived intangibles balances are not being amortized, butinstead will be subject to an annual assessment of impairment by applying afair-value based test.  Net otherintangible assets are amortized on a straight-line basis over the estimatedlives of the assets ranging from three to thirty years.

 

A reconciliation ofgoodwill for the year ended June 30, 2004 is as follows (amounts in thousands):

 
| ** **                | ** ** | **Mobile** | ** ** | **Fixed-Site** | ** ** | **Consolidated** | ** ** |
|---------------------------|------------|------------|------------|----------------|------------|------------------|------------|
| Goodwill, June  30, 2003  |       | $          | 79,079     |           | $          | 144,743          |       | $ | 223,822 |   |
| Acquired in  acquisitions |       | 29,135     |       | 33,151         |       | 62,286           |       |
| Adjustments to  goodwill  |       | (2,150     | )          | (3,013         | )          | (5,163           | )          |
| Goodwill, June  30, 2004  |       | $          | 106,064    |           | $          | 174,881          |       | $ | 280,945 |   |

 

We evaluate the carryingvalue of goodwill and identified intangibles not subject to amortization in thesecond quarter of each year.  As part ofthe evaluation, we compare the carrying value of each intangible asset with itsfair value to determine whether there has been impairment.  We assess the ongoing recoverability of ourintangible assets subject to amortization by determining whether the intangibleasset balance can be

 

43

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recovered over theremaining amortization period through projected undiscounted future cash flows.If projected future cash flows indicate that the unamortized intangible assetbalances will not be recovered, an adjustment is made to reduce the netintangible asset to an amount consistent with projected future cash flowsdiscounted at our incremental borrowing rate. Cash flow projections, althoughsubject to a degree of uncertainty, are based on trends of historicalperformance and management’s estimate of future performance, givingconsideration to existing and anticipated competitive and economic conditions.  Adjustments to goodwill result from thereduction of valuation allowance related to utilization of tax attributesacquired in the Acquisition.  As of June30, 2004, we do not believe any impairment of goodwill or other intangibleassets has occurred.

 

j.     INCOME TAXES

 

We account for incometaxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimatedfuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases.  Deferred taxassets and liabilities are measured using the enacted tax rates in effect forthe year in which those temporary differences are expected to be recovered orsettled.  The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income in theperiod that includes the enactment date. A valuation allowance is recognized if, based on the weight of availableevidence, it is more likely than not that some portion or all of the deferredtax asset will not be realized.

 

k.   COMPREHENSIVE INCOME (LOSS)

 

Components ofcomprehensive income are changes in equity other than those resulting frominvestments by owners and distributions to owners. Net income (loss) is theprimary component of comprehensive income. Our only component of comprehensiveincome other than net income (loss) is the change in unrealized gain or loss onderivatives qualifying for hedge accounting, net of tax. The aggregate amountof such changes to equity that have not yet been recognized in net income arereported in the equity portion of the accompanying consolidated balance sheetsas accumulated other comprehensive income (loss).

 

l.    FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The fair value offinancial instruments is estimated using available market information and othervaluation methodologies. The fair value of our financial instruments isestimated to approximate the related book value, unless otherwise indicated.

 

m.   NEW PRONOUNCEMENTS

 

In January 2003, the FASBissued FIN No. 46 “Consolidation of Variable Interest Entities” (FIN 46) whichis an interpretation of Accounting Research Bulletin No. 51, and “ConsolidatedFinancial Statements. “  FIN 46 requiresa variable interest entity (VIE) to be consolidated by a company that isconsidered to be the primary beneficiary of that VIE.  In December 2003, the FASB issued FIN No. 46(revised December 2003), “Consolidation of Variable Interest Entities” (FIN-46-R)to address certain FIN 46 implementation issues.  The effective dates and impact of FIN 46 andFIN 46-R for the company’s consolidated financial statements are as follows:

 

(1)          Special purpose entities(SPEs) created prior to February 1, 2003: We must apply the provisions of FIN 46. We have completed our assessment and determined that we have no SPEs.

 

(2)          Non-SPEs created priorto February 1, 2003:  We did not enterinto any significant joint venture or partnership agreements prior to February1, 2003 which are not included in the consolidated financial statements for theyears ended June 30, 2004 and 2003.

 

(3)          All entities, regardlessof whether a SPE, that were created subsequent to January 31, 2003:  We are required to apply the provisions ofFIN 46.  We did not enter into any SPE, jointventure or partnership agreements subsequent to January 31, 2003 that wouldhave a material impact on the consolidated financial statements for the yearsended June 30, 2004 and 2003.

 

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In April 2003, the FASBissued SFAS No. 149, “Amendment of Statement No. 133 on Derivative Instrumentsand Hedging Activities.”  SFAS 149 iseffective for contracts entered into or modified after September 30, 2003 andfor hedging relationships designated after September 30, 2003.  SFAS 149 amends instruments embedded in othercontracts and for hedging activities. SFAS 149 amends SFAS 133 for decisions made as part of the DerivativesImplementation Group process that effectively required amendments to SFAS 133,in connection with other FASB projects dealing with financial instruments andin connection with implementation issues raised in relation to the applicationof the definition of a derivative.  Weadopted SFAS 149 on July 1, 2003, which did not have a material impact on ourfinancial condition and results of operations.

 

In May 2003, the FASBissued SFAS No. 150, “Certain Financial Instruments with Characteristics ofBoth Liabilities and Equity.”  SFAS 150establishes standards for how a company clarifies and measures certainfinancial instruments with characteristics of both liabilities and equity.  It required a company to classify suchinstruments as liabilities, whereas they previously may have been classified asequity.  SFAS 150 is effective for allfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective July 1, 2003.  Weadopted SFAS 150 on July 1, 2003, which did not have a material impact on ourfinancial condition and results of operations.

 

**4.             ACQUISITIONS**

 

Weaccounted for the Acquisition as a purchase. Our purchase accounting adjustments have been recorded in theaccompanying consolidated financial statements as of and for any periodssubsequent to October 17, 2001.  Theexcess purchase price we paid over our estimate of the fair market value of thetangible and other intangible assets and liabilities of InSight as of the dateof the Acquisition was approximately $234.2 million and is reflected asgoodwill and other intangible assets, net in the accompanying consolidatedbalance sheets as of June 30, 2004 and 2003. In accordance with SFAS 141, the new intangible asset balance has beenallocated between identifiable intangible assets and remaining goodwill.  Goodwill will not be amortized but is subjectto an ongoing assessment for impairment. A summary of the assets acquired and liabilities assumed in theAcquisition follows (amounts in thousands):

 
| Cash purchase price      |   | $        | 187,722 |   |
|--------------------------|--------|----------|---------|--------|
| Estimated fair  values   |   |     |    |
| Assets acquired:         |   |     |    |
| Tangible                 |   | 357,877  |    |
| Other Intangible  Assets |   | 37,870   |    |
| Liabilities  assumed     |   | (385,770 | )       |
| Goodwill                 |   | $        | 197,699 |   |

 

In April 2003, we acquired thirteen (13)fixed-site centers located in Southern California.  The acquisitionconsisted of certain tangible and intangible assets, including diagnosticimaging equipment, customer contracts and other agreements.  The aggregatepurchase price was approximately $46.5 million, which included approximately$39.3 million paid to the seller and approximately $7.2 million for the paymentof debt and transaction costs.  The excess purchase price paid by us overour estimate of the fair value of the tangible and other intangible assets asof the date of acquisition was approximately $25.4 million and is reflected asgoodwill in the accompanying consolidated balance sheets as of June 30, 2004and 2003.

 

In August 2003, we acquired twenty-two (22)mobile facilities operating primarily in the Mid-Atlantic states.  Theacquisition consisted of certain tangible and intangible assets, includingdiagnostic imaging equipment, customer contracts and other agreements. The aggregate purchase price was approximately $49.9 million, which includedapproximately $28.1 million paid to the seller and approximately $21.8 millionfor the payment of debt and transaction costs.  The excess purchase pricepaid by us over our estimate of the fair value of the tangible and otherintangible assets as of the date of the acquisition was approximately $29.1million and is reflected as goodwill in the accompanying consolidated balancesheet as of June 30, 2004.

 

45

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In April 2004, weacquired twenty-one (21) fixed-site centers located in California, Arizona,Kansas, Texas, Pennsylvania and Virginia. The acquisition consisted of certain tangible and intangible assets,including diagnostic imaging equipment, real property, customer contracts andother agreements.  The aggregate purchaseprice was approximately $48.6 million, which included approximately $35.9million paid to the seller, approximately $10.6 million for the payment of debtand approximately $2.1 million of transactions costs.  The excess purchase price paid by us over ourestimate of the fair value of the tangible and other intangible assets as ofthe date of the acquisition was approximately $30.2 million and is reflected asgoodwill in the accompanying consolidated balance sheet as of June 30, 2004.

 

In accordance with SFAS 141, the intangible asset balance has beenallocated between identifiable intangible assets and remaining goodwill for allacquisitions.  The purchase priceallocations of the April 2003 and August 2003 acquisitions are based uponevaluations and other studies of the fair value of the net assets acquired.  The purchase price allocation of the April2004 acquisition is based upon a preliminary evaluation and other studies ofthe fair value of the net assets acquired. The financial information related to our August 2003 mobilefacilities acquisition was audited and restated by a registered publicaccounting firm and is included in a Current Report on Form 8-K/A that we filedon July 2, 2004.  Goodwill will not beamortized but is subject to an ongoing assessment for impairment.  Goodwill resulting from the April 2003,August 2003, and April 2004 acquisitions is considered deductible for incometax purposes.  A summary of the assetsacquired and liabilities assumed follows (amounts in thousands):

 
| ** **               | ** ** | **April 2004  Acquisition** | ** ** | **August 2003  Acquisition** | ** ** | **April 2003  Acquisition** | ** ** |
|--------------------------|------------|-----------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Cash purchase  price     |       | $                           | 48,626     |                         | $          | 49,872                      |       | $ | 46,488 |   |
| Estimated fair  values   |       |                        |       |                         |       |                        |       |
| Assets acquired:         |       |                        |       |                         |       |                        |       |
| Tangible                 |       | 15,228                      |       | 18,337                       |       | 17,977                      |       |
| Other Intangible  Assets |       | 3,200                       |       | 2,400                        |       | 3,200                       |       |
| Liabilities  assumed     |       | —                      |       | —                       |       | (82                         | )          |
| Goodwill                 |       | $                           | 30,198     |                         | $          | 29,135                      |       | $ | 25,393 |   |

 

Our unaudited pro-formacombined results of operations, assuming our three acquisitions had occurred asof July 1, 2002, are presented below. The pro-forma combined results of operations for the years ended June30, 2004 and 2003, include adjustments to interest expense (approximately $1.8million and $1.6 million, respectively), amortization of identified intangibleassets (approximately $0.1 million and $0.1 million, respectively) and theconsolidation of fixed-site centers ($1.1 million for the year ended June 30, 2003).  These combined results have been prepared forcomparison purposes only and do not purport to be indicative of what operatingresults would have been, and may not be indicative of future operating results(amounts in thousands):

 
| ** **                                         | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|
| ** **                                         | ** ** | **2004**                 | ** ** | **2003** | ** ** |
|                                               |       |                     |       |   |   |
| Revenues                                           |       | $                        | 333,864    |   | $ | 332,796 |   |
| Costs of  operations                               |       | 257,665                  |       | 240,385 |   |
| Gross profit                                       |       | 76,199                   |       | 92,411 |   |
| Corporate  operating expenses                      |       | (32,436                  | )          | (37,019 | ) |
| Gain on sale of  center                            |       | 2,129                    |       | — |   |
| Equity in  earnings of unconsolidated partnerships |       | 2,181                    |       | 1,744 |   |
| Impairment and  restructuring charges              |       | (1,142                   | )          | (7,143 | ) |
| Interest  expense, net                             |       | (43,429                  | )          | (45,782 | ) |
| Income before  income taxes                        |       | 3,502                    |       | 4,211 |   |
| Provision for  income taxes                        |       | 1,400                    |       | 1,684 |   |
| Net income                                         |       | $                        | 2,102      |   | $ | 2,527 |   |

 

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**5.             TRADEACCOUNTS RECEIVABLES**

 

Trade accountsreceivables, net are comprised of the following (amounts in thousands):

 
| ** **                                    | ** **                        | **June 30,** |       |
|-----------------------------------------------|-----------------------------------|--------------|------------|
| ** **                                    | ** **                        | **2004**     | ** ** | **2003** |   |
| Trade accounts  receivables                   |                              | $            | 115,645    |   | $ | 93,914 |   |
| Less: Allowances  for contractual adjustments |                              | 37,209       |       | 28,369 |   |
|                                          | Allowances for  professional fees |         | 15,329     |   | 11,545 |   |
|                                          | Allowances for  doubtful accounts |         | 8,097      |   | 7,904 |   |
| Trade accounts  receivables, net              |                              | $            | 55,010     |   | $ | 46,096 |   |

 

The allowances for doubtfulaccounts and contractual adjustments includes management’s estimate of theamounts expected to be written off on specific accounts and for write-offs onother unidentified accounts included in accounts receivables.  In estimating the write-offs and adjustmentson specific accounts, management relies on a combination of in-house analysisand a review of contractual payment rates from private health insuranceprograms or under the federal Medicare program. In estimating the allowance for unidentified write-offs and adjustments,management relies on historical experience. The amounts we will ultimately realize could differ materially in thenear term from the amounts assumed in arriving at the allowances for doubtfulaccounts and contractual adjustments in the accompanying consolidated financialstatements at June 30, 2004.

 

We reserve a contractually agreed upon percentage at several of ourfixed-site centers, averaging 20 percent of the accounts receivables balancefrom patients and third-party payors for payments to radiologists representingprofessional fees for interpreting the results of the diagnostic imagingprocedures.  Payments to radiologists areonly due when amounts are received.  Atthat time, the balance is transferred from the allowance account to aprofessional fees payable account.

 

6.             **OTHER CURRENT ASSETS**

 

Other current assets arecomprised of the following (amounts in thousands):

 
| ** **                                        | ** ** | **June 30,** |       |
|---------------------------------------------------|------------|--------------|------------|
| ** **                                        | ** ** | **2004**     | ** ** | **2003** |   |
| Prepaid expenses                                  |       | $            | 5,249      |   | $ | 7,694 |   |
| Amounts due from  our unconsolidated partnerships |       | 958          |       | 2,455 |   |
|                                              |       | $            | 6,207      |   | $ | 10,149 |   |

 

**7.             PROPERTYAND EQUIPMENT**

 

Propertyand equipment, net are stated at cost and are comprised of the following(amounts in thousands):

 
| ** **                                       | ** ** | **June 30,** | ** ** |
|--------------------------------------------------|------------|--------------|------------|
| ** **                                       | ** ** | **2004**     | ** ** | **2003** | ** ** |
| Vehicles                                         |       | $            | 4,570      |   | $ | 3,605 |   |
| Land, building and  leasehold improvements       |       | 27,201       |       | 23,133 |   |
| Computer and  office equipment                   |       | 44,373       |       | 21,967 |   |
| Diagnostic and  related equipment                |       | 207,856      |       | 158,972 |   |
| Equipment and  vehicles under capital leases     |       | 77,460       |       | 79,426 |   |
|                                             |       | 361,460      |       | 287,103 |   |
| Less:  Accumulated depreciation and amortization |       | 119,124      |       | 67,982 |   |
| Property and  equipment, net                     |       | $            | 242,336    |   | $ | 219,121 |   |

 

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**8.             OTHERINTANGIBLE ASSETS**

 

The following reconciliation of other intangible assets is as follows(amounts in thousands):

 
| ** **                      | ** ** | **June 30, 2004**          | ** ** | **June 30, 2003**             | ** ** |
|---------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                      | ** ** | **Gross  Carrying  Value** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Value** | ** ** | **Accumulated  Amortization** | ** ** |
| Amortized  intangible assets:   |       |                       |       |                          |       |   |   |   |   |
| Managed care  contracts         |       | $                          | 24,410     |                          | $          | 1,798 |   | $ | 21,210 |   | $ | 874 |   |
| Wholesale  contracts            |       | 13,580                     |       | 6,354                         |       | 11,180 |   | 3,726 |   |
|                            |       | 37,990                     |       | 8,152                         |       | 32,390 |   | 4,600 |   |
|                            |       |                       |       |                          |       |   |   |   |   |
| Unamortized  intangible assets: |       |                       |       |                          |       |   |   |   |   |
| Trademark                       |       | 8,680                      |       | —                        |       | 8,680 |   | — |   |
| Other intangible  assets        |       | $                          | 46,670     |                          | $          | 8,152 |   | $ | 41,070 |   | $ | 4,600 |   |

 

Other intangible assets are amortized on a straight-line method usingthe following estimated useful lives:

 
| Managed care  contracts |   | 30 years  |   |
|-------------------------|--------|-----------|--------|
| Wholesale  contracts    |   | 5-7 years |   |

 

Amortization of intangible assets was approximately $3.6 million, $3.0million, $1.6 million and $0.1 million, for the years ended June 30, 2004, 2003and 2002 and the period from July 1, 2001 to October 17, 2001.

 

Estimated amortization expense for the years ending June 30, are asfollows (amounts in thousands):

 
| 2005 |   | $     | 3,686  |   |
|------|--------|-------|--------|--------|
| 2006 |   | 3,686 |   |
| 2007 |   | 2,196 |   |
| 2008 |   | 1,451 |   |
| 2009 |   | 1,095 |   |

 

**9.**             **ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES**

 

Accounts payable and other accrued expenses are comprised of thefollowing (amounts in thousands):

 
| ** **                         | ** ** | **June 30,** | ** ** |
|------------------------------------|------------|--------------|------------|
| ** **                         | ** ** | **2004**     | ** ** | **2003** | ** ** |
| Accounts payable                   |       | $            | 2,968      |   | $ | 3,090 |   |
| Accrued  equipment related costs   |       | 8,144        |       | 6,807 |   |
| Accrued payroll  and related costs |       | 8,905        |       | 8,047 |   |
| Accrued interest  expense          |       | 4,266        |       | 4,719 |   |
| Accrued  professional fees         |       | 2,539        |       | 1,753 |   |
| Accrued income  taxes              |       | 468          |       | 4,311 |   |
| Other accrued  expenses            |       | 8,447        |       | 6,787 |   |
|                               |       | $            | 35,737     |   | $ | 35,514 |   |

 

48

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**10.**          **NOTESPAYABLE**

 

Notes payable are comprised of the following (amounts in thousands):

 
| ** **                                                                                                                                                                                                                                            | ** ** | **June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|
| ** **                                                                                                                                                                                                                                            | ** ** | **2004**     | ** ** | **2003** | ** ** |
|                                                                                                                                                                                                                                                  |       |         |       |   |   |
| Notes payable to  bank (Credit Facility), bearing interest at LIBOR plus 3.5% (4.78% at June  30, 2004), principal and interest payable quarterly, maturing in October  2008.  The notes are collateralized by  substantially all of our assets. |       | $            | 270,047    |   | $ | 197,248 |   |
|                                                                                                                                                                                                                                                  |       |         |       |   |   |
| Unsecured senior  subordinated notes payable, bearing interest at 9.875%, interest payable  semi-annually, principal due in November 2011.  At June 30, 2004, the fair value of the  notes was approximately $270 million.                       |       | 250,000      |       | 225,000 |   |
|                                                                                                                                                                                                                                                  |       |         |       |   |   |
| Other notes  payable                                                                                                                                                                                                                                  |       | 914          |       | — |   |
|                                                                                                                                                                                                                                                  |       |         |       |   |   |
| Total notes  payable                                                                                                                                                                                                                                  |       | 520,961      |       | 422,248 |   |
| Less:  Current portion                                                                                                                                                                                                                           |       | 2,716        |       | 2,009 |   |
| Long-term notes  payable                                                                                                                                                                                                                              |       | $            | 518,245    |   | $ | 420,239 |   |

 

Through InSight, we havea credit facility, or Credit Facility, with Bank of America, N.A. and asyndication of other lenders consisting of (1) a $220 million term loan, (2) anadditional $50 million term loan, and (3) a $50 million revolving creditfacility.  As of June 30, 2004, therewere no borrowings under the revolving credit facility.  Borrowings under the Credit Facility bearinterest at LIBOR plus 3.5% to 3.75%.  Weare required to pay an annual unused facility fee of between 0.5% and 2.5%,payable quarterly, on unborrowed amounts. We expect to use the revolving credit facility to fund our futureworking capital needs.

 

Through InSight, we also have outstanding $225 million in unsecuredsenior subordinated notes, or Notes. Additionally, in March 2004, we issued $25 million in a privateplacement of unsecured senior subordinated notes, or New Notes.  The Notes and New Notes mature in November2011 and bear interest at 9.875% payable semi-annually.  The Notes and New Notes are redeemable at ouroption, in whole or in part, on or after November 2006.  At any time prior to November 1, 2004, we mayredeem up to 35% of the Notes and New Notes at a redemption price of 109.875%of the principal amount if we are involved in an initial public offering of ourcapital stock.  The New Notes have termsidentical to the Notes, but have not yet been registered with the SEC.

 

Scheduled maturities of equipment and other notes payable at June 30,2004, are as follows (amounts in thousands):

 

 
| 2005       |   | $       | 2,716   |   |
|------------|--------|---------|---------|--------|
| 2006       |   | 2,992   |    |
| 2007       |   | 3,002   |    |
| 2008       |   | 196,923 |    |
| 2009       |   | 65,328  |    |
| Thereafter |   | 250,000 |    |
|       |   | $       | 520,961 |   |

 

The credit agreement related to the Credit Facility and the indenturerelated to the Notes and the New Notes contain limitations on additionalborrowings, capital expenditures, dividend payments and certain financialcovenants.  As of June 30, 2004, we werein compliance with these convenants.

 

During 1998, InSightentered into an interest rate swap agreement with a bank to hedge against theeffects of increases in the interest rates associated with floating rate debton its bank financing.  The initial andJune 30, 2004 notional amount of the swap agreement was $40.0 million and $10.0million, respectively.  The swapagreement expires in September 2004 (Note 16).

 

49

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**11.**          **LEASE OBLIGATIONS, COMMITMENTSAND CONTINGENCIES**

 

We leasediagnostic equipment, certain other equipment and our office, imaging andtreatment facilities under various capital and operating leases.  Future minimum scheduled rental paymentsrequired under these noncancelable leases at June 30, 2004 are as follows(amounts in thousands):

 
| ** **                                  | ** ** | **Capital** | ** ** | **Operating** | ** ** |
|---------------------------------------------|------------|-------------|------------|---------------|------------|
| 2005                                        |       | $           | 6,399      |          | $          | 8,566 |   |
| 2006                                        |       | 6,340       |       | 7,882         |       |
| 2007                                        |       | 5,703       |       | 7,544         |       |
| 2008                                        |       | 2,929       |       | 5,883         |       |
| 2009                                        |       | 301         |       | 3,990         |       |
| Thereafter                                  |       | 25          |       | 10,038        |       |
| Total minimum  lease payments               |       | 21,697      |       | $             | 43,903     |   |
| Less:  Amounts representing interest   |       | 2,835       |       |          |       |
| Present value of  capital lease obligations |       | 18,862      |       |          |       |
| Less:  Current portion                 |       | 5,060       |       |          |       |
| Long-term  capital lease obligations        |       | $           | 13,802     |          |       |   |

 

Accumulated depreciationon assets under capital lease was $8.4 million and $4.7 million at June 30,2004 and 2003, respectively.

 

Rental expense fordiagnostic equipment and other equipment for the years ended June 30, 2004,2003 and 2002 and the period from July 1, 2001 to October 17, 2001 was $1.0million, $0.9 million, $5.5 million and $2.6 million, respectively.

 

We occupy facilities under lease agreements expiring through October2017.  Some of these lease agreements mayinclude provisions for an increase in lease payments based on the ConsumerPrice Index or scheduled increases based on a guaranteed minimum percentage ordollar amount.  Rental expense for thesefacilities for the years ended June 30, 2004, 2003 and 2002 and the period fromJuly 1, 2001 to October 17, 2001 was $7.9 million, $6.5 million, $3.9 millionand $1.5 million, respectively.

 

We are engaged from time to time in the defense of lawsuits arising outof the ordinary course and conduct of our business, including claims formalpractice, and have insurance policies covering such potential insurablelosses where such coverage is cost-effective. Management believes that the outcome of any such lawsuits will not havea material adverse impact on our business, financial condition and results ofoperations.

 

**12.**          **CAPITAL STOCK**

 

WARRANTS:       We do not have a formal warrant plan.  All warrants, which had been granted byInSight in connection with previous financing transactions, had been issuedwith an exercise price of at least the fair market value of its common stock onthe issuance date.   All holders ofwarrants, which at the time of the Acquisition were exercisable for InSightcommon stock, received the difference between $18.00 and the exercise price ofeach share of common stock the holder could have acquired pursuant to the termsof the warrants, and the warrants were terminated.  A summary of the status of the InSightwarrants at October 17, 2001 follows:

 
| ** **                     | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|--------------------------------|------------|------------|------------|---------------------------------------|------------|
| Predecessor                    |       |       |       |                                  |       |
| Outstanding,  June 30, 2001    |       | 642,183    |       | $                                     | 9.17       |   |
| Exercised                      |       | (7,183     | )          | 5.64                                  |       |
| Cancelled at the  Acquisition  |       | (635,000   | )          | 9.21                                  |       |
| Outstanding,  October 17, 2001 |       | —     |       | $                                     | —     |   |

 

50

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STOCK OPTIONS:               We reserved 626,000 shares forthe granting of nonstatutory stock options to key employees.  Options are issued with an exercise price ofat least the fair market value, as determined by the board of directors, of ourcommon stock on the grant date.  A portionof the options vest cumulatively over various periods up to eight years fromthe grant date, and a portion are performance based and vest cumulatively uponthe achievement of certain performance targets. The options are exercisable in whole or in installments, and expire tenyears from the grant date.

 

We have one stock option plan, which provided for the granting ofnonstatutory stock options to four key employees, all of which are fullyvested.  Holders of options for 175,990shares of InSight common stock rolled over their options and received optionsfor our common stock with the same terms under our stock option plan.  In 2003, we purchased vested stock optionscovering 56,000 shares of our common stock at a price equal to the differencebetween $19.07 and the exercise price per share.

 

In addition, InSight had five stock option plans.  All holders of options, which at the time ofthe Acquisition were exercisable for InSight common stock, received thedifference between $18.00 and the exercise price of each share of common stockthe holder could have acquired pursuant to the terms of the options, and theoptions were terminated.  As a result ofthe cancellation of the InSight options and warrants, InSight recorded anacquisition related compensation charge of $15.6 million.

 

As of June 30, 2004, the Company had 142,950 shares available forissuance.  A summary of the status of ourand InSight’s stock option plans at June 30, 2004, 2003 and 2002 and changesduring the periods is presented below:

 

 
| ** **                      | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|---------------------------------|------------|------------|------------|---------------------------------------|------------|
| Predecessor                     |       |       |       |                                  |       |
| Outstanding,  June 30, 2001     |       | 1,555,698  |       | $                                     | 7.88       |   |
| Granted                         |       | 5,000      |       | 16.51                                 |       |
| Exercised                       |       | (6,728     | )          | 15.64                                 |       |
| Cancelled at the  Acquisition   |       | (1,377,980 | )          | 7.81                                  |       |
| Rolled over to  Company options |       | (175,990   | )          | 8.37                                  |       |
| Outstanding,  October 17, 2001  |       | —     |       | $                                     | —     |   |
|                            |       |       |       |                                  |       |
| Company                         |       |       |       |                                  |       |
| Outstanding,  June 30, 2001     |       | —     |       | $                                     | —     |   |
| Granted                         |       | 777,990    |       | 15.82                                 |       |
| Forfeited                       |       | (5,000     | )          | 18.00                                 |       |
| Outstanding,  June 30, 2002     |       | 772,990    |       | 15.81                                 |       |
| Granted                         |       | 25,500     |       | 19.01                                 |       |
| Exercised                       |       | (50        | )          | 18.00                                 |       |
| Repurchased                     |       | (56,000    | )          | 8.97                                  |       |
| Forfeited                       |       | (109,625   | )          | 18.00                                 |       |
| Outstanding,  June 30, 2003     |       | 632,815    |       | 16.16                                 |       |
| Granted                         |       | 30,000     |       | 19.07                                 |       |
| Forfeited                       |       | (59,825    | )          | 18.27                                 |       |
| Outstanding,  June 30, 2004     |       | 602,990    |       | $                                     | 16.10      |   |
|                            |       |       |       |                                  |       |
| Exercisable at:                 |       |       |       |                                  |       |
| June 30, 2002                   |       | 175,990    |       | $                                     | 8.37       |   |
| June 30, 2003                   |       | 148,465    |       | $                                     | 9.99       |   |
| June 30, 2004                   |       | 168,790    |       | $                                     | 10.96      |   |

 

51

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Of the 602,990 options outstanding at June 30, 2004, thecharacteristics are as follows:

 
| **Exercise Price  Range** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Options  Exercisable** | ** ** | **Total Options  Outstanding** | ** ** | **Remaining Contractual  Life** | ** ** |
|---------------------------|------------|--------------------------------------|------------|--------------------------|------------|--------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | ** **                           | ** ** | ** **               |
| $                         | 8.37       |                                 | $          | 8.37                     |       | 123,490                        |       | 123,490                         |       | 7.33 years |   |
| 18.00 - 19.07             |       | 18.09                                |       | 45,300                   |       | 479,500                        |       | 7.68 years                      |       |
|                      |       |                                 |       | 168,790                  |       | 602,990                        |       |                            |       |
|                           |            |                                      |            |                          |            |                                |            |                                 |            |  |  |

 

**13.          INCOMETAXES**

 

We follow SFAS No. 109, “Accounting for Income Taxes”, which requiresthe recognition of deferred tax liabilities and assets for the expected futuretax consequences of events that have been included in the financial statementsor tax returns.  Under this method,deferred income taxes are recognized for the tax consequences in future yearsof the difference between the tax bases of assets and liabilities and theirfinancial reporting amounts at each year-end, based on the enacted tax laws andstatutory tax rates applicable to the periods in which the differences areexpected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferredtax assets to the amount expected to be realized.  The provision for income taxes for the yearsended June 30, 2004, 2003 and 2002, and the period from July 1, 2001 to October17, 2001 represents the tax payable for the period and the change during theperiod in deferred tax assets and liabilities:

 
| ** **                                                           | ** ** | ** **               | ** ** | **Predecessor** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------|------------|-----------------|------------|
| ** **                                                           | ** ** | ** **               | ** ** | ** **      | ** ** | ** ** | ** ** | **Period from  July 1 to  October 17,** | ** ** |
| ** **                                                           | ** ** | **Company**              | ** ** | ** **      |
| ** **                                                           | ** ** | **Years Ended June 30,** | ** ** | ** **      |
| ** **                                                           | ** ** | **2004**                 | ** ** | **2003**        | ** ** | **2002** | ** ** | **2001** | ** ** |
| Federal  statutory tax rate                                          |       | 34.0                     | %          | 34.0            | %          | 34.0 | % | 34.0 | % |
| State income  taxes, net of federal benefit                          |       | 4.0                      |       | 4.0             |       | 6.0 |   | 6.0 |   |
| Permanent items,  including goodwill and non-deductible merger costs |       | 2.0                      |       | 1.0             |       | 1.0 |   | 115.0 |   |
| Changes in  valuation allowance                                      |       | —                   |       | 1.0             |       | (1.0 | ) | (186.0 | ) |
| Net effective  tax rate                                              |       | 40.0                     | %          | 40.0            | %          | 40.0 | % | (31.0 | )% |

 

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The provision(benefit) for income taxes includes income taxes currently payable and thosedeferred because of temporary differences between the financial statements andtax bases of assets and liabilities. The provision (benefit) for income taxes for the years endedJune 30, 2004, 2003, 2002 and the period from July 1, 2001 toOctober 17, 2001.

 
|                                                |   |        |   | **Predecessor**                                          |   |
|-----------------------------------------------------|--------|-------------|--------|----------------------------------------------------------|--------|
|                                                |   |        |   | **Period  from  July 1 to  October 17,  2001** |   |
|                                                |   | **Company** |   |                                                     |
| **Years  Ended June 30,**                      |
|                                                |   | **2004**    |   | **2003**                                                 |   | **2002** |   |   |
| Current  provision:                                 |   |        |   |                                                     |   |   |   |   |   |
| Federal                                             |   | $           | 1,640  |                                                     | $      | 2,491 |   | $ | — |   | $ | (2,100 | ) |
| State                                               |   | 310         |   | 775                                                      |   | — |   | — |   |
|                                                |   | 1,950       |   | 3,266                                                    |   | — |   | (2,100 | ) |
| Deferred  taxes arising from temporary differences: |   |        |   |                                                     |   |   |   |   |   |
| State  income taxes                                 |   | (90         | )      | (176                                                     | )      | — |   | — |   |
| Accrued  expenses (not currently deductible)        |   | (46         | )      | 163                                                      |   | (138 | ) | (116 | ) |
| Reserves                                            |   | 4,660       |   | 1,127                                                    |   | (313 | ) | (535 | ) |
| Depreciation  and amortization                      |   | 10,956      |   | 7,718                                                    |   | 3,168 |   | 2,474 |   |
| Creation/utilization  of net operating losses       |   | (6,690      | )      | (9,491                                                   | )      | (2,761 | ) | (14,145 | ) |
| Section 481  adjustment                        |   | 1,161       |   | (2,343                                                   | )      | — |   | — |   |
| Changes  in valuation allowance reducing goodwill   |   | (9,328      | )      | —                                                   |   | — |   | (10 | ) |
| Changes  in valuation allowance                     |   | —      |   | 1,728                                                    |   | 50 |   | 12,336 |   |
| Non-goodwill  intangible amortization               |   | (1,263      | )      | 1,200                                                    |   | — |   | — |   |
| Alternative  minimum tax credit carryforwards       |   | —      |   | —                                                   |   | — |   | — |   |
| Other                                               |   | 640         |   | 74                                                       |   | (6 | ) | (4 | ) |
|                                                |   | —      |   | —                                                   |   | — |   | — |   |
| Total  provision (benefit) for income taxes         |   | $           | 1,950  |                                                     | $      | 3,266 |   | $ | — |   | $ | (2,100 | ) |

 

The components ofour net deferred tax asset (including current and non-current portions) as ofJune 30, 2004 and 2003, respectively, which arise due to timingdifferences between financial and tax reporting and net operating loss (NOL)carryforwards are as follows (amounts in thousands):

 

|                                         |   | **June 30,** |   |
|----------------------------------------------|--------|-------------------|--------|
|                                         |   | **2004**          |   | **2003** |   |
| Reserves                                     |   | $                 | 816    |   | $ | 5,477 |   |
| Accrued  expenses (not currently deductible) |   | 1,351             |   | 1,307 |   |
| Depreciation  and amortization               |   | (35,564           | )      | (24,608 | ) |
| NOL  carryforwards                           |   | 42,841            |   | 36,152 |   |
| Valuation  allowance                         |   | (1,736            | )      | (11,067 | ) |
| Non-goodwill  intangible amortization        |   | (8,573            | )      | (9,836 | ) |
| State  taxes                                 |   | 266               |   | 176 |   |
| Section 481  adjustment                 |   | 1,161             |   | 2,322 |   |
| Other                                        |   | (562              | )      | 77 |   |
|                                         |   | $                 | — |   | $ | — |   |

 

As ofJune 30, 2004, we had NOL carryforwards of approximately $136.4 million,expiring on various dates through 2019. The NOLs and related deferred tax components have been reduced toreflect limitations from prior changes in ownership.  A valuation allowance is provided against the net deferred taxasset when it is more likely than not that the net deferred tax asset will notbe realized.  We establishedapproximately $8.2 million of valuation allowance in the purchase accounting inconnection with the Acquisition.  As aresult, as the underlying tax attributes are utilized, the reduction invaluation allowance will be recorded as a reduction of goodwill.

 

**14.****                               RETIREMENTSAVINGS PLANS**

 

InSight has a 401(k)profit sharing plan (Plan), which is available to all eligible employees,pursuant to which InSight may match a percentage of employee contributions tothe Plan.  InSight contributions ofapproximately $1.0 million,

 

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$0.8 million, $0.4million, and $0.2 million were made for the years ended June 30, 2004,2003 and 2002 and the period from July 1, 2001 to October 17, 2001.

 

**15.****                               INVESTMENTSIN AND TRANSACTIONS WITH PARTNERSHIPS**

 

We have direct ownershipin four Partnerships at June 30, 2004, three of which operate fixed-sitecenters and one of which operates a mobile PET facility.  We own between 25 percent and 50 percent ofthese Partnerships, serve as the managing general partner and provide certainmanagement services under agreements expiring in 2010.  These Partnerships are accounted for underthe equity method since we do not exercise control over the operations of thesePartnerships and do not have primary responsibility for the Partnerships’long-term debt.

 

Set forth below iscertain financial data of these Partnerships (amounts in thousands):

 
|                             |   | **June 30,** |   |
|----------------------------------|--------|-------------------|--------|
|                             |   | **2004**          |   | **2003** |   |
| Combined  Financial Position:    |   |              |   |   |   |
| Current  assets:                 |   |              |   |   |   |
| Cash                             |   | $                 | 3,144  |   | $ | 4,028 |   |
| Trade  accounts receivables, net |   | 2,606             |   | 2,294 |   |
| Other                            |   | 460               |   | 457 |   |
| Property  and equipment, net     |   | 4,116             |   | 6,807 |   |
| Intangible  assets, net          |   | 557               |   | 783 |   |
| Total  assets                    |   | 10,883            |   | 14,369 |   |
| Current  liabilities             |   | (2,465            | )      | (3,497 | ) |
| Due  to the Company              |   | (805              | )      | (2,397 | ) |
| Long-term  liabilities           |   | (1,117            | )      | (2,324 | ) |
| Net  assets                      |   | $                 | 6,496  |   | $ | 6,151 |   |

 

Set forth below are thecombined operating results of the Partnerships and our equity in earnings ofthe Partnerships (amounts in thousands):

 
|                                               |   |                           |   |     |   |     |   | **Predecessor**                                          |   |
|----------------------------------------------------|--------|--------------------------------|--------|----------|--------|----------|--------|----------------------------------------------------------|--------|
|                                               |   |                           |   |     |   |     |   | **Period  from  July 1 to  October 17,  2001** |   |
|                                               |   | **Company**                    |   |     |
|                                               |   | **Years  Ended June 30,** |   |     |
|                                               |   | **2004**                       |   | **2003** |   | **2002** |   |                                                     |
| Operating  Results:                                |   |                           |   |     |   |     |   |                                                     |   |
| Revenues                                           |   | $                              | 19,455 |     | $      | 19,291   |   | $                                                        | 10,604 |   | $ | 6,073 |   |
| Expenses                                           |   | 14,314                         |   | 15,646   |   | 10,382   |   | 4,987                                                    |   |
| Net  income                                        |   | $                              | 5,141  |     | $      | 3,645    |   | $                                                        | 222    |   | $ | 1,086 |   |
|                                               |   |                           |   |     |   |     |   |                                                     |   |
| Equity  in earnings of unconsolidated partnerships |   | $                              | 2,181  |     | $      | 1,744    |   | $                                                        | 437    |   | $ | 382 |   |

 

We have direct ownershipin 50 percent of an additional Partnership, which operates a fixed-sitecenter.  Since we control the operationsand are primarily responsible for the associated long-term debt, thePartnership has been included in our consolidated financial statements.  Total assets and revenues as of and for theyear ended June 30, 2004 for our 50 percent controlled entity which isconsolidated were approximately $3.0 million and $7.4 million, respectively.

 

**16.****                               HEDGINGACTIVITIES**

 

We account for hedgingactivities under SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities” as amended by SFAS No. 137 and SFAS No. 138 (collectivelySFAS 133).  SFAS 133 requires thatentities recognize all derivatives as either assets or liabilities in thestatement of financial condition and measure those instruments at fair value.  Under SFAS 133 an entity may designate aderivative as a hedge of exposure to

 

54

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either changes in:  (i) the fair value of a recognized asset orliability or firm commitment; (ii) cash flows of a recognized or forecastedtransaction; or (iii) foreign currencies of a net investment in foreignoperations, firm commitments, available-for-sale securities or a forecastedtransaction.  Additionally, anyineffective portion of the hedging transaction is recorded currently in netincome with the remainder deferred in accumulated other comprehensive income(loss).

 

We have establishedpolicies and procedures to permit limited types and amounts of off-balancesheet hedges to help manage interest rate risk.  InSight had entered into an interest rate swap to pay a fixedrate of interest to a counterparty and received a floating rate of interest andhad designated the interest rate swap as a cash flow hedge of its floating ratedebt.  Such swaps have the effect ofconverting variable rate borrowings into fixed rate borrowings.

 

Subsequent to theAcquisition, we re-designated the acquired swap as a cash flow hedge andestablished a new hedging relationship with the Credit Facility.  At June 30, 2004, the notional amountof this swap was $10.0 million.  Thefair value of the swap at the time of the Acquisition was approximately $1.8million and represents hedge ineffectiveness that will be recognized in netincome over the remaining life of the swap. Approximately $0.4 million of hedge ineffectiveness was recognized as areduction to interest expense for the year ended June 30, 2004.  The swap agreement expires inSeptember 2004.

 

**17.****                               RELATEDPARTY TRANSACTIONS**

 

#### **Upon the completion of theAcquisition, we entered into a management agreement with J.W. Childs AdvisorsII, L.P., the general partner of J.W. Childs Equity Partners II, L.P., andHalifax Genpar, L.P., the general partner of Halifax Capital Partners,L.P.  Under the agreement, InSight paidJ.W. Childs Advisors II, L.P. and Halifax Genpar, L.P. a transaction fee of$4,500,000 and $1,125,000 respectively, for services rendered in connectionwith the Acquisition, which was recorded as a reduction of additional paid-incapital during the year ended June 30, 2002.  Additionally, J.W. Childs Advisors II, L.P. and Halifax Genpar,L.P. will provide business, management and financial advisory services toInSight and the Company in consideration of (i) an annual fee of $240,000 to bepaid to J.W. Childs Advisors II, L.P. and (ii) an annual fee of $60,000 to bepaid to Halifax Genpar, L.P.**

 

55

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#### **18.**                               SEGMENT INFORMATION

#### ** **

We have two reportablesegments:  the mobile division and fixeddivision, which are business units defined primarily by the type of serviceprovided.  The mobile division operatesprimarily mobile facilities while the fixed division operates primarilyfixed-site centers, although each division generates both contract services andpatient services revenues.  We do not allocatecorporate and billing related costs, depreciation related to our billing systemand amortization related to other intangible assets to the two segments.  We also do not allocate income taxes to thetwo segments.  We manage cash flows andassets on a consolidated basis, and not by segment.

 

The following tablessummarize our operating results by segment (amounts in thousands):

 

Company

 

Yearended June 30, 2004:

 
|                                               |   | **Mobile** |    | **Fixed** |   | **Other** |   | **Consolidated** |   |
|----------------------------------------------------|--------|------------|---------|-----------|--------|-----------|--------|------------------|--------|
| Contract  services revenues                        |   | $          | 112,219 |      | $      | 16,974    |   | $                | — |   | $ | 129,193 |   |
| Patient  services revenues                         |   | 1,902      |    | 159,789   |   | —    |   | 161,691          |   |
| Total  revenues                                    |   | 114,121    |    | 176,763   |   | —    |   | 290,884          |   |
| Depreciation  and amortization                     |   | 29,340     |    | 21,157    |   | 8,236     |   | 58,733           |   |
| Total  costs of operations                         |   | 87,128     |    | 128,814   |   | 17,479    |   | 233,421          |   |
| Corporate  operating expenses                      |   | —     |    | —    |   | (16,217   | )      | (16,217          | )      |
| Gain  on sale of center                            |   | —     |    | 2,129     |   | —    |   | 2,129            |   |
| Equity  in earnings of unconsolidated partnerships |   | —     |    | 2,181     |   | —    |   | 2,181            |   |
| Interest  expense, net                             |   | (11,562    | )       | (6,841    | )      | (22,279   | )      | (40,682          | )      |
| Income  (loss) before income taxes                 |   | 15,431     |    | 45,418    |   | (55,975   | )      | 4,874            |   |
|                                               |   |       |    |      |   |      |   |             |   |
| Additions  to property and equipment               |   | 20,577     |    | 21,707    |   | 4,450     |   | 46,734           |   |
|                                                    |        |            |         |           |        |           |        |                  |        |  |  |  |  |

 

Yearended June 30, 2003:

 
|                                               |   | **Mobile** |   | **Fixed** |   | **Other** |   | **Consolidated** |   |
|----------------------------------------------------|--------|------------|--------|-----------|--------|-----------|--------|------------------|--------|
| Contract  services revenues                        |   | $          | 95,912 |      | $      | 16,009    |   | $                | — |   | $ | 111,921 |   |
| Patient  services revenues                         |   | 2,024      |   | 123,807   |   | —    |   | 125,831          |   |
| Total  revenues                                    |   | 97,936     |   | 139,816   |   | —    |   | 237,752          |   |
| Depreciation  and amortization                     |   | 24,322     |   | 17,408    |   | 7,615     |   | 49,345           |   |
| Total  costs of operations                         |   | 66,823     |   | 99,795    |   | 13,426    |   | 180,044          |   |
| Corporate  operating expenses                      |   | —     |   | —    |   | (13,750   | )      | (13,750          | )      |
| Equity  in earnings of unconsolidated partnerships |   | 84         |   | 1,660     |   | —    |   | 1,744            |   |
| Interest  expense, net                             |   | (11,190    | )      | (8,259    | )      | (18,065   | )      | (37,514          | )      |
| Income  (loss) before income taxes                 |   | 20,007     |   | 33,422    |   | (45,241   | )      | 8,188            |   |
|                                               |   |       |   |      |   |      |   |             |   |
| Additions  to property and equipment               |   | 29,598     |   | 22,581    |   | 4,788     |   | 56,967           |   |
|                                                    |        |            |        |           |        |           |        |                  |        |  |  |  |  |

 

Yearended June 30, 2002:

 
|                                                      |   | **Mobile** |   | **Fixed** |   | **Other** |   | **Consolidated** |   |
|-----------------------------------------------------------|--------|------------|--------|-----------|--------|-----------|--------|------------------|--------|
| Contract  services revenues                               |   | $          | 64,166 |      | $      | 11,211    |   | $                | — |   | $ | 75,377 |   |
| Patient  services revenues                                |   | 1,464      |   | 78,566    |   | —    |   | 80,030           |   |
| Total  revenues                                           |   | 65,630     |   | 89,777    |   | —    |   | 155,407          |   |
| Depreciation  and amortization                            |   | 11,388     |   | 11,096    |   | 3,978     |   | 26,462           |   |
| Total  costs of operations                                |   | 45,683     |   | 64,316    |   | 5,585     |   | 115,584          |   |
| Corporate  operating expenses                             |   | —     |   | —    |   | (7,705    | )      | (7,705           | )      |
| Equity  in earnings (loss) of unconsolidated partnerships |   | (109       | )      | 546       |   | —    |   | 437              |   |
| Interest  expense, net                                    |   | (5,964     | )      | (6,361    | )      | (20,221   | )      | (32,546          | )      |
| Income  (loss) before income taxes                        |   | 13,874     |   | 19,646    |   | (33,511   | )      | 9                |   |
|                                                      |   |       |   |      |   |      |   |             |   |
| Additions  to property and equipment                      |   | 21,270     |   | 19,130    |   | 3,255     |   | 43,655           |   |
|                                                           |        |            |        |           |        |           |        |                  |        |  |  |  |  |

 

56

----

 

Predecessor

 

Periodfrom July 1, 2001 through October 17, 2001:

 
|                                               |   | **Mobile** |   | **Fixed** |   | **Other** |   | **Consolidated** |   |
|----------------------------------------------------|--------|------------|--------|-----------|--------|-----------|--------|------------------|--------|
| Contract  services revenues                        |   | $          | 25,595 |      | $      | 4,207     |   | $                | — |   | $ | 29,802 |   |
| Patient  services revenues                         |   | 738        |   | 33,138    |   | —    |   | 33,876           |   |
| Total  revenues                                    |   | 26,333     |   | 37,345    |   | —    |   | 63,678           |   |
| Depreciation  and amortization                     |   | 4,621      |   | 4,187     |   | 1,015     |   | 9,823            |   |
| Total  costs of operations                         |   | 17,828     |   | 25,600    |   | 2,259     |   | 45,687           |   |
| Corporate  operating expenses                      |   | —     |   | —    |   | (3,184    | )      | (3,184           | )      |
| Acquisition  related compensation charge           |   | —     |   | —    |   | (15,616   | )      | (15,616          | )      |
| Equity  in earnings of unconsolidated partnerships |   | 41         |   | 341       |   | —    |   | 382              |   |
| Interest  expense, net                             |   | (2,543     | )      | (2,538    | )      | (1,240    | )      | (6,321           | )      |
| Income  (loss) before income taxes                 |   | 6,003      |   | 9,548     |   | (22,299   | )      | (6,748           | )      |
|                                               |   |       |   |      |   |      |   |             |   |
| Additions  to property and equipment               |   | 10,160     |   | 9,137     |   | 1,555     |   | 20,852           |   |
|                                                    |        |            |        |           |        |           |        |                  |        |  |  |  |  |

 

**19.****                               RESULTSOF QUARTERLY OPERATIONS (unaudited)**

 
|               |   | **First  Quarter**          |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   | **Total** |   |
|--------------------|--------|-----------------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|-----------|--------|
|               |   | **(amounts  in thousands)** |   |
| 2004:              |   |                        |   |                |   |               |   |                |   |      |   |
| Revenues           |   | $                           | 68,772 |                | $      | 69,946             |   | $                   | 70,736 |      | $      | 81,430 |   | $ | 290,884 |   |
| Gross  profit      |   | 15,550                      |   | 13,178              |   | 13,556             |   | 15,179              |   | 57,463    |   |
| Net  income (loss) |   | 1,610                       |   | 1,344               |   | 281                |   | (311                | )      | 2,924     |   |
|               |   |                        |   |                |   |               |   |                |   |      |   |
| 2003:              |   |                        |   |                |   |               |   |                |   |      |   |
| Revenues           |   | $                           | 58,656 |                | $      | 58,265             |   | $                   | 56,134 |      | $      | 64,697 |   | $ | 237,752 |   |
| Gross  profit      |   | 15,499                      |   | 14,510              |   | 12,508             |   | 15,191              |   | 57,708    |   |
| Net  income        |   | 1,956                       |   | 1,444               |   | 256                |   | 1,266               |   | 4,922     |   |

 

**20.****                               SUPPLEMENTALCONDENSED CONSOLIDATED FINANCIAL INFORMATION**

 

We and all ofInSight’s wholly owned subsidiaries, or guarantor subsidiaries, guaranteeInSight’s payment obligations under the Notes and the New Notes (Note 10).  These guarantees are full, unconditional andjoint and several.  The followingcondensed consolidating financial information has been prepared and presentedpursuant to SEC Regulation S-X Rule 3-10 “Financial statements of guarantorsand issuers of guaranteed securities registered or being registered.”  We account for our investment in InSight andits subsidiaries under the equity method of accounting.  Dividends from InSight to us are restrictedunder the Credit Facility.  Thisinformation is not intended to present the financial position, results ofoperations and cash flows of the individual companies or groups of companies inaccordance with accounting principles generally accepted in the United States.

 

57

----

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET**

**JUNE 30, 2004**

**(Amounts in thousands)**

**(Company)**

 
|                                                               |   | **PARENT****COMPANY  ONLY** |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |    | **ELIMINATIONS** |   | **CONSOLIDATED** |   |
|--------------------------------------------------------------------|--------|-----------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|---------|------------------|--------|------------------|--------|
| ASSETS                                                             |   |                        |   |        |   |                        |   |                            |    |             |   |             |   |
| Current assets:                                                    |   |                        |   |        |   |                        |   |                            |    |             |   |             |   |
| Cash and cash equivalents                                          |   | $                           | — |        | $      | —                      |   | $                               | 25,820  |             | $      | 4,592            |   | $ | — |   | $ | 30,412 |   |
| Trade accounts receivables, net                                    |   | —                      |   | —      |   | 47,048                      |   | 7,962                           |    | —           |   | 55,010           |   |
| Other current assets                                               |   | —                      |   | —      |   | 6,058                       |   | 149                             |    | —           |   | 6,207            |   |
| Intercompany accounts receivable                                   |   | 87,086                      |   | 520,047     |   | 19,865                      |   | —                          |    | (626,998         | )      | —           |   |
| Total current assets                                               |   | 87,086                      |   | 520,047     |   | 98,791                      |   | 12,703                          |    | (626,998         | )      | 91,629           |   |
| Property and equipment, net                                        |   | —                      |   | —      |   | 219,584                     |   | 22,752                          |    | —           |   | 242,336          |   |
| Investments in partnerships                                        |   | —                      |   | —      |   | 2,901                       |   | —                          |    | —           |   | 2,901            |   |
| Investments in consolidated subsidiaries                           |   | 7,855                       |   | 7,855       |   | 10,864                      |   | —                          |    | (26,574          | )      | —           |   |
| Other assets                                                       |   | —                      |   | —      |   | 19,218                      |   | 84                              |    | —           |   | 19,302           |   |
| Goodwill and other intangible assets, net                          |   | —                      |   | —      |   | 314,960                     |   | 4,503                           |    | —           |   | 319,463          |   |
|                                                               |   | $                           | 94,941 |        | $      | 527,902                     |   | $                               | 666,318 |             | $      | 40,042           |   | $ | (653,572 | ) | $ | 675,631 |   |
|                                                               |   |                        |   |        |   |                        |   |                            |    |             |   |             |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                          |   |                        |   |        |   |                        |   |                            |    |             |   |             |   |
| Current liabilities:                                               |   |                        |   |        |   |                        |   |                            |    |             |   |             |   |
| Current portion of notes payable and capital lease  obligations    |   | $                           | — |        | $      | 2,514                       |   | $                               | 4,540   |             | $      | 722              |   | $ | — |   | $ | 7,776 |   |
| Accounts payable and other accrued expenses                        |   | —                      |   | —      |   | 34,304                      |   | 1,433                           |    | —           |   | 35,737           |   |
| Intercompany accounts payable                                      |   | —                      |   | —      |   | 607,133                     |   | 19,865                          |    | (626,998         | )      | —           |   |
| Total current liabilities                                          |   | —                      |   | 2,514       |   | 645,977                     |   | 22,020                          |    | (626,998         | )      | 43,513           |   |
| Notes payable and capital lease obligations, less  current portion |   | —                      |   | 517,289     |   | 12,622                      |   | 2,136                           |    | —           |   | 532,047          |   |
| Other long-term liabilities                                        |   | —                      |   | 244         |   | (136                        | )      | 5,022                           |    | —           |   | 5,130            |   |
| Stockholders’ equity                                          |   | 94,941                      |   | 7,855       |   | 7,855                       |   | 10,864                          |    | (26,574          | )      | 94,941           |   |
|                                                               |   | $                           | 94,941 |        | $      | 527,902                     |   | $                               | 666,318 |             | $      | 40,042           |   | $ | (653,572 | ) | $ | 675,631 |   |

 

58

----

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET**

**JUNE 30, 2003**

**(Amounts in thousands)**

**(Company)**

 
|                                                               |   | **PARENT  COMPANY  ONLY** |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |    | **ELIMINATIONS** |   | **CONSOLIDATED** |   |
|--------------------------------------------------------------------|--------|---------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|---------|------------------|--------|------------------|--------|
| ASSETS                                                             |   |                      |   |        |   |                        |   |                            |    |             |   |             |   |
| Current  assets:                                                   |   |                      |   |        |   |                        |   |                            |    |             |   |             |   |
| Cash  and cash equivalents                                         |   | $                         | — |        | $      | —                      |   | $                               | 15,965  |             | $      | 3,589            |   | $ | — |   | $ | 19,554 |   |
| Trade  accounts receivables, net                                   |   | —                    |   | —      |   | 37,431                      |   | 8,665                           |    | —           |   | 46,096           |   |
| Other  current assets                                              |   | —                    |   | —      |   | 9,697                       |   | 452                             |    | —           |   | 10,149           |   |
| Intercompany  accounts receivable                                  |   | 86,683                    |   | 422,248     |   | 21,661                      |   | —                          |    | (530,592         | )      | —           |   |
| Total  current assets                                              |   | 86,683                    |   | 422,248     |   | 84,754                      |   | 12,706                          |    | (530,592         | )      | 75,799           |   |
| Property  and equipment, net                                       |   | —                    |   | —      |   | 196,792                     |   | 22,329                          |    | —           |   | 219,121          |   |
| Investments  in partnerships                                       |   | —                    |   | —      |   | 2,734                       |   | —                          |    | —           |   | 2,734            |   |
| Investments  in consolidated subsidiaries                          |   | 4,931                     |   | 4,931       |   | 10,572                      |   | —                          |    | (20,434          | )      | —           |   |
| Other  assets                                                      |   | —                    |   | —      |   | 19,201                      |   | 170                             |    | —           |   | 19,371           |   |
| Goodwill  and other intangible assets, net                         |   | —                    |   | —      |   | 255,789                     |   | 4,503                           |    | —           |   | 260,292          |   |
|                                                               |   | $                         | 91,614 |        | $      | 427,179                     |   | $                               | 569,842 |             | $      | 39,708           |   | $ | (551,026 | ) | $ | 577,317 |   |
|                                                               |   |                      |   |        |   |                        |   |                            |    |             |   |             |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                         |   |                      |   |        |   |                        |   |                            |    |             |   |             |   |
| Current  liabilities:                                              |   |                      |   |        |   |                        |   |                            |    |             |   |             |   |
| Current  portion of notes payable and capital lease obligations    |   | $                         | — |        | $      | 2,009                       |   | $                               | 5,218   |             | $      | 478              |   | $ | — |   | $ | 7,705 |   |
| Accounts  payable and other accrued expenses                       |   | —                    |   | —      |   | 34,449                      |   | 1,065                           |    | —           |   | 35,514           |   |
| Intercompany  accounts payable                                     |   | —                    |   | —      |   | 508,932                     |   | 21,660                          |    | (530,592         | )      | —           |   |
| Total  current liabilities                                         |   | —                    |   | 2,009       |   | 548,599                     |   | 23,203                          |    | (530,592         | )      | 43,219           |   |
| Notes  payable and capital lease obligations, less current portion |   | —                    |   | 420,239     |   | 16,230                      |   | 1,945                           |    | —           |   | 438,414          |   |
| Other  long-term liabilities                                       |   | —                    |   | —      |   | 82                          |   | 3,988                           |    | —           |   | 4,070            |   |
| Stockholders’  equity                                         |   | 91,614                    |   | 4,931       |   | 4,931                       |   | 10,572                          |    | (20,434          | )      | 91,614           |   |
|                                                               |   | $                         | 91,614 |        | $      | 427,179                     |   | $                               | 569,842 |             | $      | 39,708           |   | $ | (551,026 | ) | $ | 577,317 |   |

 

59

----

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME**

**FOR THE YEAR ENDED JUNE 30, 2004**

**(Amounts in thousands)**

**(Company)**

 
|                                                                |   | **PARENT  COMPANY  ONLY** |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |    | **ELIMINATION** |   | **CONSOLIDATED** |   |
|---------------------------------------------------------------------|--------|---------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|---------|-----------------|--------|------------------|--------|
|                                                                |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Revenues:                                                           |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Contract  services                                                  |   | $                         | — |        | $      | —                      |   | $                               | 120,508 |            | $      | 8,685            |   | $ |  — |   | $ | 129,193 |   |
| Patient  services                                                   |   | —                    |   | —      |   | 121,919                     |   | 39,772                          |    | —          |   | 161,691          |   |
| Total  revenues                                                     |   | —                    |   | —      |   | 242,427                     |   | 48,457                          |    | —          |   | 290,884          |   |
|                                                                |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Costs  of operations                                                |   | —                    |   | —      |   | 191,303                     |   | 42,118                          |    | —          |   | 233,421          |   |
| Gross  profit                                                       |   | —                    |   | —      |   | 51,124                      |   | 6,339                           |    | —          |   | 57,463           |   |
|                                                                |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Corporate  operating expenses                                       |   | —                    |   | —      |   | (16,217                     | )      | —                          |    | —          |   | (16,217          | )      |
|                                                                |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Gain  on sale of center                                             |   | —                    |   | —      |   | 2,129                       |   | —                          |    | —          |   | 2,129            |   |
|                                                                |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Equity  in earnings of unconsolidated partnerships                  |   | —                    |   | —      |   | 2,181                       |   | —                          |    | —          |   | 2,181            |   |
|                                                                |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Interest  expense, net                                              |   | —                    |   | —      |   | (39,235                     | )      | (1,447                          | )       | —          |   | (40,682          | )      |
| Income  (loss) before income taxes                                  |   | —                    |   | —      |   | (18                         | )      | 4,892                           |    | —          |   | 4,874            |   |
|                                                                |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Provision  for income taxes                                         |   | —                    |   | —      |   | 1,950                       |   | —                          |    | —          |   | 1,950            |   |
| Income  (loss) before equity in income of consolidated subsidiaries |   | —                    |   | —      |   | (1,968                      | )      | 4,892                           |    | —          |   | 2,924            |   |
|                                                                |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Equity  in income of consolidated subsidiaries                      |   | 3,944                     |   | 3,944       |   | 4,892                       |   | —                          |    | (12,780         | )      | —           |   |
| Net  income                                                         |   | $                         | 3,944  |        | $      | 3,944                       |   | $                               | 2,924   |            | $      | 4,892            |   | $ | (12,780 | ) | $ | 2,924 |   |

 

60

----

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME**

**FOR THE YEAR ENDED JUNE 30, 2003**

**(Amounts in thousands)**

**(Company)**

 
|                                                         |   | **PARENT  COMPANY  ONLY** |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |    | **ELIMINATION** |   | **CONSOLIDATED** |   |
|--------------------------------------------------------------|--------|---------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|---------|-----------------|--------|------------------|--------|
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Revenues                                                     |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Contract  services                                           |   | $                         | — |        | $      | —                      |   | $                               | 103,446 |            | $      | 8,475            |   | $ | — |   | $ | 111,921 |   |
| Patient  services                                            |   | —                    |   | —      |   | 90,509                      |   | 35,322                          |    | —          |   | 125,831          |   |
| Total  revenues                                              |   | —                    |   | —      |   | 193,955                     |   | 43,797                          |    | —          |   | 237,752          |   |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Costs  of operations                                         |   | —                    |   | —      |   | 142,668                     |   | 37,376                          |    | —          |   | 180,044          |   |
| Gross  profit                                                |   | —                    |   | —      |   | 51,287                      |   | 6,421                           |    | —          |   | 57,708           |   |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Corporate  operating expenses                                |   | —                    |   | —      |   | (13,750                     | )      | —                          |    | —          |   | (13,750          | )      |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Equity  in earnings of unconsolidated partnerships           |   | —                    |   | —      |   | 1,744                       |   | —                          |    | —          |   | 1,744            |   |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Interest  expense, net                                       |   | —                    |   | —      |   | (35,601                     | )      | (1,913                          | )       | —          |   | (37,514          | )      |
| Income  before income taxes                                  |   | —                    |   | —      |   | 3,680                       |   | 4,508                           |    | —          |   | 8,188            |   |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Provision  for income taxes                                  |   | —                    |   | —      |   | 3,266                       |   | —                          |    | —          |   | 3,266            |   |
| Income  before equity in income of consolidated subsidiaries |   | —                    |   | —      |   | 414                         |   | 4,508                           |    | —          |   | 4,922            |   |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Equity  in income of consolidated subsidiaries               |   | 4,922                     |   | 4,922       |   | 4,508                       |   | —                          |    | (14,352         | )      | —           |   |
| Net  income                                                  |   | $                         | 4,922  |        | $      | 4,922                       |   | $                               | 4,922   |            | $      | 4,508            |   | $ | (14,352 | ) | $ | 4,922 |   |

 

61

----

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME**

**FOR THE YEAR ENDED JUNE 30, 2002**

**(Amounts in thousands)**

**(Company)**

 
|                                                                       |   | **PARENT  COMPANY  ONLY** |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |   | **ELIMINATION** |   | **CONSOLIDATED** |   |
|----------------------------------------------------------------------------|--------|---------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|--------|-----------------|--------|------------------|--------|
|                                                                       |   |                      |   |        |   |                        |   |                            |   |            |   |             |   |
| Revenues                                                                   |   |                      |   |        |   |                        |   |                            |   |            |   |             |   |
| Contract  services                                                         |   | $                         | — |        | $      | —                      |   | $                               | 68,285 |            | $      | 7,092            |   | $ | — |   | $ | 75,377 |   |
| Patient  services                                                          |   | —                    |   | —      |   | 60,157                      |   | 19,873                          |   | —          |   | 80,030           |   |
| Total  revenues                                                            |   | —                    |   | —      |   | 128,442                     |   | 26,965                          |   | —          |   | 155,407          |   |
|                                                                       |   |                      |   |        |   |                        |   |                            |   |            |   |             |   |
| Costs  of operations                                                       |   | —                    |   | —      |   | 93,515                      |   | 22,069                          |   | —          |   | 115,584          |   |
| Gross  profit                                                              |   | —                    |   | —      |   | 34,927                      |   | 4,896                           |   | —          |   | 39,823           |   |
|                                                                       |   |                      |   |        |   |                        |   |                            |   |            |   |             |   |
| Corporate  operating expenses                                              |   | —                    |   | —      |   | (7,705                      | )      | —                          |   | —          |   | (7,705           | )      |
|                                                                       |   |                      |   |        |   |                        |   |                            |   |            |   |             |   |
| Equity  in earnings of unconsolidated partnerships                         |   | —                    |   | —      |   | 437                         |   | —                          |   | —          |   | 437              |   |
|                                                                       |   |                      |   |        |   |                        |   |                            |   |            |   |             |   |
| Interest  expense, net                                                     |   | —                    |   | —      |   | (31,152                     | )      | (1,394                          | )      | —          |   | (32,546          | )      |
| Income  (loss) before income taxes                                         |   | —                    |   | —      |   | (3,493                      | )      | 3,502                           |   | —          |   | 9                |   |
|                                                                       |   |                      |   |        |   |                        |   |                            |   |            |   |             |   |
| Provision  for income taxes                                                |   | —                    |   | —      |   | —                      |   | —                          |   | —          |   | —           |   |
| Income  (loss) before equity in income (loss) of consolidated subsidiaries |   | —                    |   | —      |   | (3,493                      | )      | 3,502                           |   | —          |   | 9                |   |
|                                                                       |   |                      |   |        |   |                        |   |                            |   |            |   |             |   |
| Equity  in income of consolidated subsidiaries                             |   | 9                         |   | 9           |   | 3,502                       |   | —                          |   | (3,520          | )      | —           |   |
| Net  income                                                                |   | $                         | 9      |        | $      | 9                           |   | $                               | 9      |            | $      | 3,502            |   | $ | (3,520 | ) | $ | 9 |   |

 

62

----

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**FOR THE PERIOD FROM JULY 1, 2001 THROUGH  OCTOBER 17, 2001**

**(Amounts in thousands)**

**(Predecessor)**

 
|                                                                |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |   | **ELIMINATION** |   | **CONSOLIDATED** |   |
|---------------------------------------------------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|--------|-----------------|--------|------------------|--------|
|                                                                |   |        |   |                        |   |                            |   |            |   |             |   |
| Revenues                                                            |   |        |   |                        |   |                            |   |            |   |             |   |
| Contract  services                                                  |   | $           | — |                        | $      | 29,179                          |   | $               | 623    |             | $      | — |   | $ | 29,802 |   |
| Patient  services                                                   |   | —      |   | 21,173                      |   | 12,703                          |   | —          |   | 33,876           |   |
| Total  revenues                                                     |   | —      |   | 50,352                      |   | 13,326                          |   | —          |   | 63,678           |   |
|                                                                |   |        |   |                        |   |                            |   |            |   |             |   |
| Costs  of operations                                                |   | —      |   | 35,316                      |   | 10,371                          |   | —          |   | 45,687           |   |
| Gross  profit                                                       |   | —      |   | 15,036                      |   | 2,955                           |   | —          |   | 17,991           |   |
|                                                                |   |        |   |                        |   |                            |   |            |   |             |   |
| Corporate  operating expenses                                       |   | —      |   | (3,184                      | )      | —                          |   | —          |   | (3,184           | )      |
|                                                                |   |        |   |                        |   |                            |   |            |   |             |   |
| Acquisition  related compensation charge                            |   | —      |   | (15,616                     | )      | —                          |   | —          |   | (15,616          | )      |
|                                                                |   |        |   |                        |   |                            |   |            |   |             |   |
| Equity  in earnings of unconsolidated partnerships                  |   | —      |   | 382                         |   | —                          |   | —          |   | 382              |   |
|                                                                |   |        |   |                        |   |                            |   |            |   |             |   |
| Interest  expense, net                                              |   | —      |   | (5,647                      | )      | (674                            | )      | —          |   | (6,321           | )      |
| Income  (loss) before income taxes                                  |   | —      |   | (9,029                      | )      | 2,281                           |   | —          |   | (6,748           | )      |
|                                                                |   |        |   |                        |   |                            |   |            |   |             |   |
| Provision  (benefit) for income taxes                               |   | —      |   | (2,100                      | )      | —                          |   | —          |   | (2,100           | )      |
| Income  (loss) before equity in income of consolidated subsidiaries |   | —      |   | (6,929                      | )      | 2,281                           |   | —          |   | (4,648           | )      |
|                                                                |   |        |   |                        |   |                            |   |            |   |             |   |
| Equity  in income (loss) of consolidated subsidiaries               |   | (4,648      | )      | 2,281                       |   | —                          |   | 2,367           |   | —           |   |
| Net  income (loss)                                                  |   | $           | (4,648 | )                           | $      | (4,648                          | )      | $               | 2,281  |             | $      | 2,367 |   | $ | (4,648 | ) |

 

63

----

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**FOR THE YEAR ENDED JUNE 30, 2004**

**(Amounts in thousands)**

**(Company)**

 
|                                                                                          |   | **PARENT  COMPANY  ONLY** |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |   | **ELIMINATIONS** |   | **CONSOLIDATED** |   |
|-----------------------------------------------------------------------------------------------|--------|---------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                          |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| OPERATING  ACTIVITIES:                                                                        |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Net  income                                                                                   |   | $                         | 2,924  |        | $      | 2,924                       |   | $                               | 2,924  |             | $      | 4,891            |   | $ | (10,739 | ) | $ | 2,924 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Gain  on sale of center                                                                       |   | —                    |   | —      |   | (2,129                      | )      | —                          |   | —           |   | (2,129           | )      |
| Depreciation  and amortization                                                                |   | —                    |   | —      |   | 53,266                      |   | 5,467                           |   | —           |   | 58,733           |   |
| Equity  in income of consolidated subsidiaries                                                |   | (2,924                    | )      | (2,924      | )      | (4,891                      | )      | —                          |   | 10,739           |   | —           |   |
| Cash  provided by (used in) changes in operating assets and liabilities:                      |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Trade  accounts receivables, net                                                              |   | —                    |   | —      |   | (9,158                      | )      | 703                             |   | —           |   | (8,455           | )      |
| Intercompany  receivables, net                                                                |   | —                    |   | (97,056     | )      | 103,500                     |   | (6,444                          | )      | —           |   | —           |   |
| Other  current assets                                                                         |   | —                    |   | —      |   | 2,781                       |   | 303                             |   | —           |   | 3,084            |   |
| Accounts  payable and other accrued expenses                                                  |   | —                    |   | —      |   | 5,595                       |   | 368                             |   | —           |   | 5,963            |   |
| Net  cash provided by (used in) operating activities                                          |   | —                    |   | (97,056     | )      | 151,888                     |   | 5,288                           |   | —           |   | 60,120           |   |
|                                                                                          |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| INVESTING  ACTIVITIES:                                                                        |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Acquisitions  of fixed-site centers and mobile facilities                                     |   | —                    |   | —      |   | (101,334                    | )      | —                          |   | —           |   | (101,334         | )      |
| Proceeds  from sale of center                                                                 |   | —                    |   | —      |   | 5,413                       |   | —                          |   | —           |   | 5,413            |   |
| Additions  to property and equipment                                                          |   | —                    |   | —      |   | (40,979                     | )      | (5,755                          | )      | —           |   | (46,734          | )      |
| Other                                                                                         |   | —                    |   | —      |   | 405                         |   | —                          |   | —           |   | 405              |   |
| Net  cash used in investing activities                                                        |   | —                    |   | —      |   | (136,495                    | )      | (5,755                          | )      | —           |   | (142,250         | )      |
|                                                                                          |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| FINANCING  ACTIVITIES:                                                                        |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Principal  payments of notes payable and capital lease obligations                            |   | —                    |   | (2,201      | )      | (5,319                      | )      | (689                            | )      | —           |   | (8,209           | )      |
| Proceeds  from issuance of notes payable                                                      |   | —                    |   | 100,000     |   | —                      |   | 1,125                           |   | —           |   | 101,125          |   |
| Other                                                                                         |   | —                    |   | (743        | )      | (219                        | )      | 1,034                           |   | —           |   | 72               |   |
| Net  cash provided by (used in) financing activities                                          |   | —                    |   | 97,056      |   | (5,538                      | )      | 1,470                           |   | —           |   | 92,988           |   |
|                                                                                          |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| INCREASE  IN CASH AND CASH EQUIVALENTS                                                        |   | —                    |   | —      |   | 9,855                       |   | 1,003                           |   | —           |   | 10,858           |   |
| Cash,  beginning of year                                                                      |   | —                    |   | —      |   | 15,965                      |   | 3,589                           |   | —           |   | 19,554           |   |
| Cash,  end of year                                                                            |   | $                         | — |        | $      | —                      |   | $                               | 25,820 |             | $      | 4,592            |   | $ | — |   | $ | 30,412 |   |

 

64

----

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**FOR THE YEAR ENDED JUNE 30, 2003**

**(Amounts in thousands)**

**(Company)**

 
|                                                                                          |   | **PARENT  COMPANY  ONLY** |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |   | **ELIMINATIONS** |   | **CONSOLIDATED** |   |
|-----------------------------------------------------------------------------------------------|--------|---------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                          |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| OPERATING  ACTIVITIES:                                                                        |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Net  income                                                                                   |   | $                         | 4,922  |        | $      | 4,922                       |   | $                               | 4,922  |             | $      | 4,507            |   | $ | (14,351 | ) | $ | 4,922 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Depreciation  and amortization                                                                |   | —                    |   | —      |   | 43,681                      |   | 5,664                           |   | —           |   | 49,345           |   |
| Equity  in income of consolidated subsidiaries                                                |   | (4,922                    | )      | (4,922      | )      | (4,507                      | )      | —                          |   | 14,351           |   | —           |   |
| Cash  provided by (used in) changes in operating assets and liabilities:                      |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Trade  accounts receivables, net                                                              |   | —                    |   | —      |   | (2,241                      | )      | 4                               |   | —           |   | (2,237           | )      |
| Intercompany  receivables, net                                                                |   | 505                       |   | (48,373     | )      | 52,838                      |   | (4,970                          | )      | —           |   | —           |   |
| Other  current assets                                                                         |   | —                    |   | —      |   | 5,131                       |   | (224                            | )      | —           |   | 4,907            |   |
| Accounts  payable and other accrued expenses                                                  |   | —                    |   | —      |   | 4,862                       |   | (43                             | )      | —           |   | 4,819            |   |
| Net  cash provided by (used in) operating activities                                          |   | 505                       |   | (48,373     | )      | 104,686                     |   | 4,938                           |   | —           |   | 61,756           |   |
|                                                                                          |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| INVESTING  ACTIVITIES:                                                                        |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Acquisitions  of fixed-site centers                                                           |   | —                    |   | —      |   | (46,292                     | )      | —                          |   | —           |   | (46,292          | )      |
| Additions  to property and equipment                                                          |   | —                    |   | —      |   | (51,827                     | )      | (5,140                          | )      | —           |   | (56,967          | )      |
| Other                                                                                         |   | —                    |   | —      |   | 554                         |   | —                          |   | —           |   | 554              |   |
| Net  cash used in investing activities                                                        |   | —                    |   | —      |   | (97,565                     | )      | (5,140                          | )      | —           |   | (102,705         | )      |
|                                                                                          |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| FINANCING  ACTIVITIES:                                                                        |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Proceeds  from stock options exercised                                                        |   | 1                         |   | —      |   | —                      |   | —                          |   | —           |   | 1                |   |
| Purchase  of stock options                                                                    |   | (506                      | )      | —      |   | —                      |   | —                          |   | —           |   | (506             | )      |
| Principal  payments of notes payable and capital lease obligations                            |   | —                    |   | (1,627      | )      | (5,453                      | )      | (420                            | )      | —           |   | (7,500           | )      |
| Proceeds  from issuance of notes payable                                                      |   | —                    |   | 50,000      |   | —                      |   | —                          |   | —           |   | 50,000           |   |
| Other                                                                                         |   | —                    |   | —      |   | (154                        | )      | 879                             |   | —           |   | 725              |   |
| Net  cash provided by (used in) financing activities                                          |   | (505                      | )      | 48,373      |   | (5,607                      | )      | 459                             |   | —           |   | 42,720           |   |
|                                                                                          |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| INCREASE  IN CASH AND CASH EQUIVALENTS                                                        |   | —                    |   | —      |   | 1,514                       |   | 257                             |   | —           |   | 1,771            |   |
| Cash,  beginning of year                                                                      |   | —                    |   | —      |   | 14,451                      |   | 3,332                           |   | —           |   | 17,783           |   |
| Cash,  end of year                                                                            |   | $                         | — |        | $      | —                      |   | $                               | 15,965 |             | $      | 3,589            |   | $ | — |   | $ | 19,554 |   |

 

65

----

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**FOR THE YEAR ENDED JUNE 30, 2002**

**(Amounts in thousands)**

**(Company)**

 
|                                                                                          |   | **PARENT  COMPANY  ONLY** |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |   | **ELIMINATIONS** |   | **CONSOLIDATED** |   |
|-----------------------------------------------------------------------------------------------|--------|---------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                          |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| OPERATING  ACTIVITIES:                                                                        |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Net  income                                                                                   |   | $                         | 9      |        | $      | 9                           |   | $                               | 9      |             | $      | 3,502            |   | $ | (3,520 | ) | $ | 9 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Write-off  of debt issuance costs                                                             |   | —                    |   | —      |   | 7,378                       |   | —                          |   | —           |   | 7,378            |   |
| Depreciation  and amortization                                                                |   | —                    |   | —      |   | 23,066                      |   | 3,396                           |   | —           |   | 26,462           |   |
| Equity  in income of consolidated subsidiaries                                                |   | (9                        | )      | (9          | )      | (3,502                      | )      | —                          |   | 3,520            |   | —           |   |
| Cash  provided by (used in) changes in operating assets and liabilities:                      |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Trade  accounts receivables, net                                                              |   | —                    |   | —      |   | 1,615                       |   | 259                             |   | —           |   | 1,874            |   |
| Intercompany  receivables, net                                                                |   | 101,826                   |   | (203,212    | )      | 104,806                     |   | (3,420                          | )      | —           |   | —           |   |
| Other  current assets                                                                         |   | —                    |   | —      |   | 676                         |   | (86                             | )      | —           |   | 590              |   |
| Accounts  payable and other accrued expenses                                                  |   | —                    |   | —      |   | 3,244                       |   | 44                              |   | —           |   | 3,288            |   |
| Net  cash provided by (used in) operating activities                                          |   | 101,826                   |   | (203,212    | )      | 137,292                     |   | 3,695                           |   | —           |   | 39,601           |   |
|                                                                                          |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| INVESTING  ACTIVITIES:                                                                        |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Purchase  of InSight common stock                                                             |   | (187,722                  | )      | —      |   | —                      |   | —                          |   | —           |   | (187,722         | )      |
| Cash  acquired in the Acquisition                                                             |   | —                    |   | —      |   | 4,773                       |   | 3,656                           |   | —           |   | 8,429            |   |
| Additions  to property and equipment                                                          |   | —                    |   | —      |   | (39,493                     | )      | (4,162                          | )      | —           |   | (43,655          | )      |
| Other                                                                                         |   | —                    |   | —      |   | 1,385                       |   | —                          |   | —           |   | 1,385            |   |
| Net  cash used in investing activities                                                        |   | (187,722                  | )      | —      |   | (33,335                     | )      | (506                            | )      | —           |   | (221,563         | )      |
|                                                                                          |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| FINANCING  ACTIVITIES:                                                                        |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Proceeds  from sale of common stock, net of equity issuance costs                             |   | 85,763                    |   | —      |   | —                      |   | —                          |   | —           |   | 85,763           |   |
| Issuance  of common stock                                                                     |   | 133                       |   | —      |   | —                      |   | —                          |   | —           |   | 133              |   |
| Payment  of deferred loan fees                                                                |   | —                    |   | —      |   | (29,499                     | )      | —                          |   | —           |   | (29,499          | )      |
| Principal  payments of notes payable and capital lease obligations                            |   | —                    |   | (371,788    | )      | (44,559                     | )      | (163                            | )      | —           |   | (416,510         | )      |
| Proceeds  from issuance of debt                                                               |   | —                    |   | 575,000     |   | —                      |   | —                          |   | —           |   | 575,000          |   |
| Payments  made in connection with refinancing of notes payable                                |   | —                    |   | —      |   | (15,109                     | )      |                            |   |             |   | (15,109          | )      |
| Other                                                                                         |   | —                    |   | —      |   | (339                        | )      | 306                             |   | —           |   | (33              | )      |
| Net  cash provided by (used in) financing activities                                          |   | 85,896                    |   | 203,212     |   | (89,506                     | )      | 143                             |   | —           |   | 199,745          |   |
|                                                                                          |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| DECREASE  IN CASH AND CASH EQUIVALENTS                                                        |   | —                    |   | —      |   | 14,451                      |   | 3,332                           |   | —           |   | 17,783           |   |
|                                                                                          |   |                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Cash,  beginning of year                                                                      |   | —                    |   | —      |   | —                      |   | —                          |   | —           |   | —           |   |
| Cash,  end of year                                                                            |   | $                         | — |        | $      | —                      |   | $                               | 14,451 |             | $      | 3,332            |   | $ | — |   | $ | 17,783 |   |

 

66

----

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**FOR THE PERIOD FROM JULY 1, 2001 THROUGH  OCTOBER 17, 2001**

**(Amounts in thousands)**

**(Predecessor)**

 
|                                                                                      |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |   | **ELIMINATIONS** |   | **CONSOLIDATED** |   |
|-------------------------------------------------------------------------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                      |   |        |   |                        |   |                            |   |             |   |             |   |
| OPERATING  ACTIVITIES:                                                                    |   |        |   |                        |   |                            |   |             |   |             |   |
| Net  income (loss)                                                                        |   | $           | (4,648 | )                           | $      | (4,648                          | )      | $                | 2,281  |             | $      | 2,367 |   | $ | (4,648 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |   |        |   |                        |   |                            |   |             |   |             |   |
| Acquisition  related compensation charge                                                  |   | —      |   | 15,616                      |   | —                          |   | —           |   | 15,616           |   |
| Depreciation  and amortization                                                            |   | —      |   | 8,250                       |   | 1,573                           |   | —           |   | 9,823            |   |
| Equity  in income of consolidated subsidiaries                                            |   | 4,648       |   | (2,281                      | )      | —                          |   | (2,367           | )      | —           |   |
| Cash  provided by (used in) changes in operating assets and liabilities:                  |   |        |   |                        |   |                            |   |             |   |             |   |
| Trade  accounts receivables, net                                                          |   | —      |   | (1,932                      | )      | (446                            | )      | —           |   | (2,378           | )      |
| Intercompany  receivables, net                                                            |   | 5,058       |   | (5,090                      | )      | 32                              |   | —           |   | —           |   |
| Other  current assets                                                                     |   | —      |   | (3,515                      | )      | (101                            | )      | —           |   | (3,616           | )      |
| Accounts  payable and other accrued expenses                                              |   | —      |   | 53                          |   | (30                             | )      | —           |   | 23               |   |
| Net  cash provided by operating activities                                                |   | 5,058       |   | 6,453                       |   | 3,309                           |   | —           |   | 14,820           |   |
|                                                                                      |   |        |   |                        |   |                            |   |             |   |             |   |
| INVESTING  ACTIVITIES:                                                                    |   |        |   |                        |   |                            |   |             |   |             |   |
| Additions  to property and equipment                                                      |   | —      |   | (18,609                     | )      | (2,243                          | )      | —           |   | (20,852          | )      |
| Other                                                                                     |   | —      |   | (740                        | )      | —                          |   | —           |   | (740             | )      |
| Net  cash used in investing activities                                                    |   | —      |   | (19,349                     | )      | (2,243                          | )      | —           |   | (21,592          | )      |
|                                                                                      |   |        |   |                        |   |                            |   |             |   |             |   |
| FINANCING  ACTIVITIES:                                                                    |   |        |   |                        |   |                            |   |             |   |             |   |
| Proceeds  from stock options exercised                                                    |   | 145         |   | —                      |   | —                          |   | —           |   | 145              |   |
| Principal  payments of notes payable and capital lease obligations                        |   | (5,203      | )      | (2,358                      | )      | (1,018                          | )      | —           |   | (8,579           | )      |
| Other                                                                                     |   | —      |   | —                      |   | 381                             |   | —           |   | 381              |   |
| Net  cash used in financing activities                                                    |   | (5,058      | )      | (2,358                      | )      | (637                            | )      | —           |   | (8,053           | )      |
|                                                                                      |   |        |   |                        |   |                            |   |             |   |             |   |
| INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                         |   | —      |   | (15,254                     | )      | 429                             |   | —           |   | (14,825          | )      |
|                                                                                      |   |        |   |                        |   |                            |   |             |   |             |   |
| Cash,  beginning of period                                                                |   | —      |   | 20,027                      |   | 3,227                           |   | —           |   | 23,254           |   |
| Cash,  end of period                                                                      |   | $           | — |                        | $      | 4,773                           |   | $                | 3,656  |             | $      | — |   | $ | 8,429 |   |

 

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**ITEM 9.****                  CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

On August 7, 2002, we dismissed Arthur Andersen LLP, or Andersen,as our independent auditor and engaged PricewaterhouseCoopers LLP, or PWC, asour independent registered public accounting firm for performing the year endedJune 30, 2002 audit. The decision to dismiss Andersen and engage PWC was madeby the audit committee of InSight and approved by our board of directors.

 

Andersen’sreport on the financial statements of InSight for each of the years endedJune 30, 2000 and June 30, 2001 did not contain an adverse opinion ora disclaimer of opinion and was not qualified or modified as to uncertainty,audit scope or accounting principles.

 

Duringthe years ended June 30, 2002 and June 30, 2001 and throughAugust 7, 2002, there were no disagreements between us, InSight andAndersen on any matter of accounting principles or practices, financialstatement disclosure or auditing scope or procedures, which disagreements, ifnot resolved to the satisfaction of Andersen, would have caused it to makereference to the subject matter of the disagreements in connection with theirreport. During the same periods, there were no reportable events (as defined inItem 304(a)(1)(v) of Regulation S-K promulgated by the SEC). We requested thatAndersen provide the required letter agreeing to the above, but Andersenrefused to do so since the audit partner for us had left Andersen.

 

Duringthe years ended June 30, 2002 and 2001 and through August 7, 2002neither we, InSight nor anyone acting on our behalf consulted PWC with respectto the application of accounting principles to a specified transaction, eithercompleted or proposed, or the type of audit opinion that might be rendered onour consolidated financial statements or any other matter or reportable eventlisted in Items 304(a)(2)(i) and (ii) of Regulation S-K.

 

**ITEM 9A.****                                            CONTROLSAND PROCEDURES**

 

The Company carried out an evaluation, with the participation of itsmanagement, including its Chief Executive Officer and Chief Financial Officer,of the effectiveness of our disclosure controls and procedures (pursuant toRule 15d-15 under the Securities Exchange Act of 1934) as of the end of theperiod covered by this report.  Basedupon that evaluation, the Company’s Chief Executive Officer and Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures areeffective in timely alerting them to material information relating to theCompany (including its consolidated subsidiaries) required to be included inthe Company’s periodic SEC filings. There has been no change in the Company’s internal control overfinancial reporting during the quarter ended June 30, 2004 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

**ITEM 9B.****                                            OTHERINFORMATION**

 

## **None.**

 

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## **PARTIII**

## ** **

**ITEM 10.****                                              DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Thefollowing table sets forth the names, ages and positions of our directors andexecutive officers, including the executive officers of InSight who are deemedour executive officers (as defined under Rule 3b-7 of the SecuritiesExchange Act of 1934), as of August 31, 2004:

 
| Michael N. Cannizzaro     | 55     | Chairman of the Board, Director, President and Chief Executive  Officer              |
|---------------------------|--------|--------------------------------------------------------------------------------------|
|                      |   |                                                                                 |
| Patricia R. Blank         | 54     | Executive Vice President and Chief Information Officer of InSight                    |
|                      |   |                                                                                 |
| Michael A. Boylan         | 48     | Executive Vice President – Mobile Division and  Business Development of InSight |
|                      |   |                                                                                 |
| Brian G. Drazba           | 42     | Executive Vice President and Chief Financial Officer                                 |
|                      |   |                                                                                 |
| Marilyn U. MacNiven-Young | 53     | Executive Vice President, General Counsel and Secretary                              |
|                      |   |                                                                                 |
| Kenneth M. Doyle          | 39     | Director and Vice President                                                          |
|                      |   |                                                                                 |
| David W. Dupree           | 51     | Director                                                                             |
|                      |   |                                                                                 |
| Steven G. Segal           | 44     | Director                                                                             |
|                      |   |                                                                                 |
| Mark J. Tricolli          | 33     | Director and Vice President                                                          |
|                      |   |                                                                                 |
| Edward D. Yun             | 37     | Director and Vice President                                                          |

 

*Michael N. Cannizzaro* has been our President and Chief ExecutiveOfficer since August 9, 2004.  Hebecame a member of our board of directors on October 17, 2001 and waselected chairman of the board on May 30, 2002. He has been an OperatingPartner of J.W. Childs Associates, L.P. since October 29, 2001.  Prior to that, he was President and ChiefExecutive Officer of Beltone Electronics Corporation from 1998 to 2000. Priorto that, he was President of Caremark International’s Prescription Service Division from 1994 to1997; Vice President, Business Development of Caremark’s Nephrology Service Division fromApril 1994 to September 1994; and President of Leica North Americafrom 1993 to 1994. He held numerous positions in general management at BaxterHealthcare Corporation from 1976 to 1993, including the position of Presidentof four different divisions. He currently serves as a director of UniversalHospital Services, Inc. and previously served on National Nephrology Associates,Inc.’s board of directors from September 1999 to April 2004.

 

*Patricia R. Blank*has been InSight’sExecutive Vice President and Chief Information Officer since September 1,1999. Prior to joining InSight, Ms. Blank was the principal ofBlank & Company, a consulting firm specializing in healthcareconsulting. From 1995 to 1998, Ms. Blank served as Executive VicePresident and Chief Operating Officer of HealthHelp, Inc., a Houston,Texas-based radiology services organization managing radiology provider networksin multiple states. From 1988 to 1995, she was corporate director of radiologyof FHP, a California insurance company.

 

*Michael A. Boylan*has been InSight’sExecutive Vice President—Mobile Division and Business Development sinceApril 8, 2004. From February 7, 2002 to April 8, 2004, he wasExecutive Vice President and Chief Development Officer of InSight. He wasExecutive Vice President, Operations, Eastern Division of InSight fromJuly 1, 2000 to February 7, 2002. From April 1998 toJuly 1, 2000, he was Executive Vice President and Chief DevelopmentOfficer. From February 1996 to April 1998, he was Senior VicePresident—Operations of InSight. Mr. Boylan was

 

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an Executive Vice President of Maxum Health Corp., or MHC, fromMarch 1994 to February 1996. From 1992 to 1994, he served as aregional Vice President of MHC’s principal operating subsidiary, Maxum HealthServices Corp. From 1991 to 1992, he served as an Executive Director of certainof MHC’s operations. From 1986 to 1991, Mr. Boylan served in variouscapacities as an officer or employee, including President and Chief OperatingOfficer, with American Medical Imaging Corporation.

 

*Brian G. Drazba*has been our and InSight’sExecutive Vice President and Chief Financial Officer since May 22, 2003.He was our Senior Vice President—Finance and Controller from February 11,2002 and Senior Vice President—Finance and Controller of InSight fromJuly 1997 until May 22, 2003. From March 1996 to July 1997,he served as Vice President—Finance of InSight. From June 1995, he servedas Vice President—Finance of American Health Services Corp., or AHS, a whollyowned subsidiary of InSight. Mr. Drazba served as corporate controller forAHS from 1992 to 1995. From 1985 to 1992, Mr. Drazba was employed byArthur Andersen & Co.

 

*Marilyn U. MacNiven-Young*has been our Executive Vice President,General Counsel and Corporate Secretary since February 11, 2002 andExecutive Vice President, General Counsel and Corporate Secretary of InSightsince August 1998. From February 1996 through July 1998, she wasan independent consultant to InSight. From September 1994 throughJune 1995, she was Senior Vice President and General Counsel of AbbeyHealthcare Group, Inc., a home healthcare company. From 1991 through 1994,Ms. MacNiven-Young served as General Counsel of AHS.

 

*Kenneth M. Doyle*has been a member of our board of directors and Vice President sinceJune 13, 2001. Mr. Doyle is a Managing Director of The Halifax Group,L.L.C. Mr. Doyle joined The Halifax Group, L.L.C. in January 2000.Prior to joining The Halifax Group, L.L.C. Mr. Doyle was an IndustryLeader and Vice President at GE Equity, the private equity subsidiary of GECapital. Prior to joining GE Equity, Mr. Doyle spent four years ininvestment banking as a Senior Associate for the Telecommunications CorporateFinance Group at Merrill Lynch and as an Associate with Chase Manhattan Bank inthe Media and Telecommunications Group. Mr. Doyle also spent three yearswith Ernst & Young in the Entrepreneurial Services Group.Mr. Doyle currently serves on the board of directors of National PackagingSolutions Group, Inc., Soil Safe, Inc. and Meineke Car Care Centers, Inc.

 

*David W. Dupree*became a member of our board of directors on October 17, 2001.Mr. Dupree is a Managing Director of The Halifax Group, L.L.C. which hefounded in January 1999. Prior to joining The Halifax Group, L.L.C.,Mr. Dupree was a Managing Director and Partner with The Carlyle Group, aglobal investment firm located in Washington, D.C., where he was primarilyresponsible for investments in healthcare and related sectors. Prior to joiningThe Carlyle Group in 1992, Mr. Dupree was a Principal in Corporate Financewith Montgomery Securities and prior to that, he was Co-Head of Equity PrivatePlacements at Alex, Brown & Sons Incorporated. Mr. Dupreecurrently serves on the board of directors of Whole Foods Markets, Inc.,National Packaging Solutions Group, Inc., and Universal Hospital Services, Inc.and previously served on InSight’sboard of directors, as a designee of The Carlyle Group, from October 1997to December 1999.

 

*Steven G. Segal*became a member of our board of directors on October 17, 2001. Heis a Partner of J.W. Childs Associates, L.P. and has been at J.W. ChildsAssociates, L.P. since 1995. Prior to that time, he was an executive at ThomasH. Lee Company from 1987, most recently holding the position of ManagingDirector. He is also a director of Quality Stores Inc., Jillian’s Entertainment Corp., Big V Supermarkets,Inc., The NutraSweet Company, Universal Hospital Services, Inc. and isCo-Chairman of the Board of Empire Kosher Poultry, Inc. Mr. Segal alsoserved on the board of directors of National Nephrology Associates, Inc. fromDecember 1998 to April 2004.

 

*Mark J. Tricolli*has been a member of our board of directors and Vice President sinceJune 13, 2001. Mr. Tricolli is a Vice President of J.W. ChildsAssociates, L.P. and has been at J.W. Childs since July 2000. Prior tothat, Mr. Tricolli was an Associate in the Merchant Banking Division ofGoldman, Sachs & Co. from August 1999 to June 2000. Prior tothat, Mr. Tricolli was pursuing a degree in business school from 1997 to1999. During the summer of 1998, he worked at Donaldson, Lufkin &Jenrette. He is also a director of Equinox Holdings, Inc. and UniversalHospital Services, Inc.

 

*Edward D. Yun*became a member of our board of directors on June 13, 2001 andbecame a Vice President of the Company on February 11, 2002. He is aPartner of J.W. Childs Associates, L.P. and has been at J.W. Childs Associates,L.P. since 1996. From 1994 until 1996, he was an Associate at DLJ MerchantBanking, Inc. He is also a

 

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director of Jillian’s Entertainment Corp., Pan Am International FlightAcademy, Inc., Equinox Holdings, Inc., Chevys, Inc. and Universal HospitalServices, Inc. Mr. Yun served on the board of directors of NationalNephrology Associates, Inc. from December 1998 to April 2004 and onthe board of directors of The Hartz Mountain Corporation fromDecember 2000 to June 2004.

 

*Audit Committee*.  Our board of directors has not establishedcommittees.  Instead, the InSight boardof directors, which is identical to our board of directors, established anaudit committee to act with regard to audits and other matters for us.  InSight’s board of directors has determinedthat it presently has no “audit committee financial expert” (as that term isdefined in the rules promulgated by the SEC pursuant to the Sarbanes-Oxley Actof 2002) serving on the audit committee. InSight’s board of directors has determined that each of the members ofthe audit committee is financially literate and has accounting or relatedfinancial management expertise, as such terms are interpreted by InSight’sboard of directors.

 

*Code of Ethical Conduct. *We have adopted a code ofethical conduct that applies to all of our and our subsidiaries’ employees,including, our principal executive officer, principal financial officer andprincipal accounting officer.  A copy of the code of ethical conduct isposted on our website, www.insighthealth.com, under “About Us.” We intend tosatisfy the disclosure requirement under Item 5.05 of Form 8-K relating toamendments to or waivers from any provision of the code of ethical conductapplicable to our principal executive officer, principal financial officer,principal accounting officer or controller (or persons performing similarfunctions) by posting such information on our internet website, www.insighthealth.com,under “About Us”.

 

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**ITEM 11.****                                              EXECUTIVECOMPENSATION**

 

Thefollowing table sets forth information concerning the annual, long-term and allother compensation for services rendered in all capacities to us and oursubsidiaries for the years ended June 30, 2004, 2003 and 2002 of thepersons who served as (1) our chief executive officer during the yearended June 30, 2004 and (2) the other four most highly compensatedexecutive officers for the year ended June 30, 2004. We refer to thepersons described in clause (2) above as the Other Executive Officers andwe refer to our chief executive officer together with the Other ExecutiveOfficers together as the Named Executive Officers. 

 

**Summary Compensation Table**

 
|                                      |   | **Annual Compensation** |   | **Long Term  Compensation Awards  Stock Options  (Shares)** |    |          |   |
|-------------------------------------------|--------|-------------------------|--------|-------------------------------------------------------------|---------|---------------|--------|
| **Name and Principal Position**           |   | **Fiscal  Year  Ended** |   | **Salary**                                                  |    | **Bonus (1)** |   | **Other (2)** |   |   | **All Other  Comp (2)(3)** |   |
|                                      |   |                    |   |                                                        |    |          |   |   |   |   |   |   |   |
| Steven  T. Plochocki (4)                  |   | 2004                    |   | $                                                           | 420,000 |          | $      | 105,000 |   | $ | 9,000 |   | $ | — |   | $ | 30,344 |   |
| President  and Chief Executive            |   | 2003                    |   | 350,000                                                     |    | —        |   | 9,000 |   | — |   | 6,418 |   |
| Officer                                   |   | 2002                    |   | 300,000                                                     |    | 75,000        |   | 9,000 |   | 147,000 |   | 1,194,779 |   |
|                                      |   |                    |   |                                                        |    |          |   |   |   |   |   |   |   |
| Michael  S. Madler (4)(5)                 |   | 2004                    |   | $                                                           | 290,000 |          | $      | 69,600 |   | $ | 9,000 |   | $ | — |   | $ | 24,080 |   |
| Executive  Vice President -               |   | 2003                    |   | 278,200                                                     |    | —        |   | 9,000 |   | — |   | 3,179 |   |
| Fixed  Division                           |   | 2002                    |   | 221,100                                                     |    | 60,000        |   | 9,000 |   | 94,000 |   | 545,627 |   |
|                                      |   |                    |   |                                                        |    |          |   |   |   |   |   |   |   |
| Marilyn  U. MacNiven-Young                |   | 2004                    |   | $                                                           | 267,500 |          | $      | 52,400 |   | $ | 9,000 |   | $ | — |   | $ | 12,644 |   |
| Executive  Vice President,                |   | 2003                    |   | 262,000                                                     |    | —        |   | 9,000 |   | — |   | 4,333 |   |
| General  Counsel and Secretary            |   | 2002                    |   | 260,300                                                     |    | 30,000        |   | 9,000 |   | 30,000 |   | 530,431 |   |
|                                      |   |                    |   |                                                        |    |          |   |   |   |   |   |   |   |
| Michael  A. Boylan (6)                    |   | 2004                    |   | $                                                           | 249,700 |          | $      | 82,950 |   | $ | 9,000 |   | $ | — |   | $ | 25,692 |   |
| Executive  Vice President -               |   | 2003                    |   | 237,000                                                     |    | —        |   | 9,000 |   | — |   | 7,150 |   |
| Mobile Division  and Business Development |   | 2002                    |   | 225,000                                                     |    | 50,000        |   | 9,000 |   | 116,990 |   | 1,063,204 |   |
|                                      |   |                    |   |                                                        |    |          |   |   |   |   |   |   |   |
| Patricia  R. Blank                        |   | 2004                    |   | $                                                           | 224,700 |          | $      | 42,000 |   | $ | 9,000 |   | $ | — |   | $ | 30,367 |   |
| Executive  Vice President and             |   | 2003                    |   | 210,000                                                     |    | —        |   | 9,000 |   | — |   | 7,682 |   |
| Chief  Information Officer                |   | 2002                    |   | 198,000                                                     |    | 30,000        |   | 9,000 |   | 30,000 |   | 404,314 |   |

 

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(1)          Bonuseswhich are based on our performance are earned and accrued during the year andpaid subsequent to the end of each year. Discretionary bonuses are earned and paid in the year in which they areawarded by InSight’s compensation committee.

 

(2)          Amounts ofOther Annual Compensation include perquisites (auto allowances and commissionsfor contract awards and renewals) and amounts of All Other Compensation include(i) amounts contributed to InSight’s 401(k) profit sharing plan,(ii) specified premiums on executive insurance arrangements,(iii) specified premiums on executive health insurance arrangements and(iv) cash proceeds received from cancelled options for the Named ExecutiveOfficers in connection with our acquisition of InSight.

 

(3)          Amounts shown for theyear ended June 30, 2002 include cash proceeds received in connection withthe cancellation of options upon our acquisition of InSight on October 17,2001. The total cancelled option proceeds were $1,179,675, $539,289, $527,300,$1,055,856 and $385,200 for Mr. Plochocki, Mr. Madler, Ms. MacNiven-Young,Mr. Boylan and Ms. Blank, respectively.

 

(4)          Effective August 9, 2004, Messrs. Plochocki and Madler were nolonger employed by us. See “Item 13. Certain Relationships and RelatedTransactions—SeveranceArrangements.’’

 

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(5)          Effective April 8,2004, Mr. Madler’s title changed from Executive Vice President and ChiefOperating Officer to Executive Vice President— Fixed Division.

 

(6)          Effective April 8,2004, Mr. Boylan’s title changed from Executive Vice President and ChiefDevelopment Officer to Executive Vice President— Mobile Division and BusinessDevelopment.

 

*Compensation of Directors.* We reimburse our non-employee directors forall out-of-pocket expenses incurred in the performance of their duties asdirectors. We do not pay fees to directors for attendance at meetings or fortheir services as members of the board of directors or committees thereof.

 

*Option Grants.* For the year ended June 30, 2004, we did not grant optionspursuant to stock options agreements to the Named Executive Officers.

 

*OptionExercises and Year-End Values.* During the year endedJune 30, 2004, none of the Named Executive Officers exercised any stockoptions. The following table sets forth information with respect to theunexercised options to purchase common stock granted under our 2001 StockOption Plan and pursuant to stock option agreements, for the Named ExecutiveOfficers at June 30, 2004:

 
| **Name**                   | ** **      | **Number of  Shares  Acquired on  Exercise** | ** **        | **Value  Realized** |            | **Number of  Unexercised Options  Held at June 30, 2004** |              | **Value of  Unexercised  In-The-Money Options  at June 30, 2004 (1)** |   |
|----------------------------|-----------------|----------------------------------------------|-------------------|---------------------|-----------------|----------------------------------------------------------------|-------------------|----------------------------------------------------------------------------|--------|
|                       | **Exercisable** |                                         | **Unexercisable** |                | **Exercisable** |                                                           | **Unexercisable** |                                                                       |
|                       |            |                                         |              |                |            |                                                           |              |                                                                       |   |   |   |   |   |
| Steven  T. Plochocki (2)   |            | —                                       |              | —              |            | 62,000                                                         |              | 85,000                                                                     |   | $ | 278,250 |   | $ | — |   |
|                       |            |                                         |              |                |            |                                                           |              |                                                                       |   |   |   |   |   |
| Michael  S. Madler (2)     |            | —                                       |              | —              |            | 31,000                                                         |              | 63,000                                                                     |   | $ | 127,200 |   | $ | — |   |
|                       |            |                                         |              |                |            |                                                           |              |                                                                       |   |   |   |   |   |
| Marilyn  U. MacNiven-Young |            | —                                       |              | —              |            | 3,000                                                          |              | 27,000                                                                     |   | $ | — |   | $ | — |   |
|                       |            |                                         |              |                |            |                                                           |              |                                                                       |   |   |   |   |   |
| Michael  A. Boylan         |            | —                                       |              | —              |            | 53,990                                                         |              | 63,000                                                                     |   | $ | 249,047 |   | $ | — |   |
|                       |            |                                         |              |                |            |                                                           |              |                                                                       |   |   |   |   |   |
| Patricia  R. Blank         |            | —                                       |              | —              |            | 3,000                                                          |              | 27,000                                                                     |   | $ | — |   | $ | — |   |

 

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(1)          Based on the price at which the common stockwas valued on that date of $13.67 per share.

 

(2)          Effective August 9, 2004, Messrs.Plochocki and Madler were no longer employed by us.  All of Messrs. Plochocki’s and Madler’s unvested stock options were cancelled; however, their vested stockoptions under the 2001 Stock Option Plan remain outstanding in accordance withtheir terms.  See “Item 13.Certain Relationships and Related Transactions—Severance Arrangements.”

 

*Cancellation of Options in our Acquisition of InSight.* On the consummation of our acquisition ofInSight on October 17, 2001, each holder of an option to purchase sharesof common stock of InSight outstanding under any of InSight’s stock option plans, whether or not vested,received the difference between $18.00 and the exercise price of each share ofcommon stock the holder could have acquired pursuant to the terms of the stockoption agreements (less applicable tax withholding), and the options wereterminated; except that Messrs. Plochocki, Boylan and Madler rolled overcertain of their InSight stock options into fully vested options to purchaseour common stock under our 2001 Stock Option Plan.

 

*Indemnification Agreements.* InSight has entered into separateindemnification agreements with each of its directors and executive officersthat could require InSight, among other things, to indemnify them againstcertain liabilities that may arise by reason of their status or service as directorsand executive officers of InSight and its affiliates and to advance expensesincurred by them as a result of any proceedings against them as to which theycould be indemnified.

 

*Employment Agreements.* Upon the consummation of our acquisition ofInSight, the Named Executive Officers entered into new employmentagreements.  Effective as ofAugust 9, 2004, Messrs. Plochocki and Madler were no longer employed byus.  We entered into resignationagreements with each them that were consistent with the terms

 

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of their employment agreements. The material terms of the resignation agreements are set forth in “Item13. Certain Relationships and Related Transactions—Severance Arrangements.”

 

Theemployment agreement with Mr. Plochocki was for an initial term of threeyears, and thereafter a term of twelve months on a continuing basis subject tocertain termination rights. The employment agreement provided thatMr. Plochocki would receive an annual base salary as well as adiscretionary bonus of up to 75% of his annual base salary if InSight achievedits budgetary goals and a discretionary bonus of an additional 25% of hisannual base salary upon the achievement of other goals mutually agreed upon byMr. Plochocki and InSight’s board of directors. Mr. Plochocki’semployment agreement also provided for a life insurance policy of three timesthe amount of his annual base salary and entitled him to participate during theterm of his employment in InSight’s life insurance, medical, health andaccident and disability plan or program, pension plan or other similar benefitplan and our stock option plans. Mr. Plochocki also is subject to anoncompetition covenant and nonsolicitation provisions (relating to InSight’semployees and customers) during the term of his employment agreement andcontinuing for a period of 24 months after the termination of hisemployment. In addition, InSight will maintain at its expense until the earlierof 24 months after the date of termination or commencement ofMr. Plochocki’s benefits pursuant to full time employment with a newemployer under such employer’s standard benefits program, all life insurance,medical, health and accident and disability plans or programs in whichMr. Plochocki was entitled to participate immediately prior to the date oftermination.

 

The employment agreement with each of the Other Executive Officersprovides for a term of 12 months on a continuing basis, subject to certaintermination rights. The executive’s employment agreements provide for an annualsalary as well as a discretionary bonus of up to 75% of the executive’s annualbase salary if InSight achieves its budgetary goals and a discretionary bonusof an additional 25% of the executive’s annual base salary upon the achievementof other goals mutually agreed upon by each executive and InSight’s Presidentand Chief Executive Officer and approved by InSight’s board of directors. Eachexecutive is provided with a life insurance policy of three times the amount ofhis or her annual base salary and is entitled to participate in InSight’s lifeinsurance, medical, health and accident and disability plan or program, pensionplan or other similar benefit plan and our stock option plans. Each executivewill be subject to a noncompetition covenant and nonsolicitation provisions(relating to InSight’s employees and customers) during the term of his or herrespective employment agreement and continuing for a period of 12 monthsafter the termination of his or her respective employment. Each executive’semployment agreement will terminate and each of them will be entitled to allaccrued and unpaid compensation, as well as 12 months of compensation atthe annual salary rate then in effect (1) upon the executive’s permanentand total disability (as defined in the respective employment agreement);(2) upon InSight’s 30 days’ written notice to the executive of thetermination of the executive’s employment without cause (as defined in therespective employment agreement); (3) if the executive terminates his orher employment with InSight for good reason (as defined in the respectiveemployment agreement); and (4) if the executive’s employment is terminatedby InSight without cause or he or she terminates his or her employment for goodreason within 12 months of a change in control (as defined in therespective employment agreement). In addition, InSight will maintain at itsexpense until the earlier of 12 months after the date of termination orcommencement of the executive’s benefits pursuant to full time employment witha new employer under such employer’s standard benefits program, all lifeinsurance, medical, health and accident and disability plans or programs, inwhich the executive was entitled to participate immediately prior to the dateof termination. Each executive’s employment will immediately terminate upon hisor her death and the executors or administrators of his or her estate or his orher heirs or legatees (as the case may be) will be entitled to all accrued andunpaid compensation up to the date of his or her death. The executive’semployment will terminate and the executive will not be entitled to receive anymonetary compensation or benefit upon (1) the termination of his or herrespective employment by InSight for cause, or (2) his or her voluntarytermination of his or her respective employment with InSight without goodreason.

 

*CompensationCommittee Interlocks and Insider Participation*.  The InSight board of directors, which isidentical to our board of directors, established a compensation committee toact with regard to compensation and other matters for us.  During the year ended June 30, 2004,InSight’s compensation committee consisted of Messrs. Cannizzaro (chairman),Dupree, Segal and Plochocki.  Mr.Plochocki was our President and Chief Executive Officer.  Mr. Plochocki did not participate indecisions relating to his own compensation.

 

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**ITEM 12.**                      **SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The following table setsforth certain information regarding beneficial ownership of our common stock asof August 31, 2004, by:  (i) eachperson or entity known to us owning beneficially 5% or more of our commonstock; (ii) each member of our board of directors; (iii) each of the NamedExecutive Officers; and (iv) all directors and executive officers (as definedby Rule 3b-7), as a group.  AtAugust 31, 2004, our outstanding securities consisted of approximately5,468,814 shares of common stock and options to purchase 148,465 shares ofcommon stock which are immediately exercisable.  Beneficial ownership of the securities listed in the table hasbeen determined in accordance with the applicable rules and regulationpromulgated under the Securities Exchange Act of 1934.

 
| **Names and Addresses of Beneficial  Owners**                       |   | **Amount and  Nature  of Beneficial  Ownership of  Common Stock(1)** |   | **Percent of  Common Stock  Beneficially  Owned(1)** |    |
|---------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|------------------------------------------------------|---------|
|                                                                |   |                                                                 |   |                                                 |    |
| J.W.  Childs Equity Partners II, L.P. (2)                           |   |                                                                 |   |                                                 |    |
| 111  Huntington Avenue, Suite 2900                                  |   |                                                                 |   |                                                 |    |
| Boston,  MA 02199                                                   |   | 4,350,290                                                            |   | 79.5                                                 | %       |
|                                                                |   |                                                                 |   |                                                 |    |
| JWC-InSight  Co-invest LLC (3)                                      |   |                                                                 |   |                                                 |    |
| 111  Huntington Avenue, Suite 2900                                  |   |                                                                 |   |                                                 |    |
| Boston,  MA 02199                                                   |   | 338,532                                                              |   | 6.2                                                  | %       |
|                                                                |   |                                                                 |   |                                                 |    |
| Halifax  Capital Partners, L.P. (4)                                 |   |                                                                 |   |                                                 |    |
| 1133  Connecticut Avenue, N.W.                                      |   |                                                                 |   |                                                 |    |
| Washington,  D.C. 20036                                             |   | 1,111,112                                                            |   | 20.3                                                 | %       |
|                                                                |   |                                                                 |   |                                                 |    |
| Steven  G. Segal (5)                                                |   |                                                                 |   |                                                 |    |
| 111  Huntington Avenue, Suite 2900                                  |   |                                                                 |   |                                                 |    |
| Boston,  MA 02199                                                   |   | —                                                               |   | —                                               |    |
|                                                                |   |                                                                 |   |                                                 |    |
| Edward  D. Yun (6)                                                  |   |                                                                 |   |                                                 |    |
| 111  Huntington Avenue, Suite 2900                                  |   |                                                                 |   |                                                 |    |
| Boston,  MA 02199                                                   |   | —                                                               |   | —                                               |    |
|                                                                |   |                                                                 |   |                                                 |    |
| Michael  N. Cannizzaro (7)                                          |   |                                                                 |   |                                                 |    |
| 111  Huntington Avenue, Suite 2900                                  |   |                                                                 |   |                                                 |    |
| Boston,MA  02199                                                    |   | 20,000                                                               |   |                                                 | *  |
|                                                                |   |                                                                 |   |                                                 |    |
| Mark  J. Tricolli (8)                                               |   |                                                                 |   |                                                 |    |
| 111  Huntington Avenue, Suite 2900                                  |   |                                                                 |   |                                                 |    |
| Boston,  MA 02199                                                   |   | —                                                               |   | —                                               |    |
|                                                                |   |                                                                 |   |                                                 |    |
| David  W. Dupree (9)                                                |   |                                                                 |   |                                                 |    |
| 1133  Connecticut Avenue, N.W.                                      |   |                                                                 |   |                                                 |    |
| Washington,  D.C. 20036                                             |   | 4,092                                                                |   |                                                 | *  |
|                                                                |   |                                                                 |   |                                                 |    |
| Kenneth  M. Doyle (10)                                              |   |                                                                 |   |                                                 |    |
| 1133  Connecticut Avenue, N.W.                                      |   |                                                                 |   |                                                 |    |
| Washington,  D.C. 20036                                             |   | —                                                               |   | —                                               |    |
|                                                                |   |                                                                 |   |                                                 |    |
| Steven  T. Plochocki (11)(12)                                       |   |                                                                 |   |                                                 |    |
| 17  Flagstone                                                       |   |                                                                 |   |                                                 |    |
| Coto  de Caza, CA 92679                                             |   | 62,000                                                               |   | 1.1                                                  | %       |
|                                                                |   |                                                                 |   |                                                 |    |
| Michael  A. Boylan (13)                                             |   |                                                                 |   |                                                 |    |
| 110  Gibraltar Road                                                 |   |                                                                 |   |                                                 |    |
| Horsham,  PA 18901                                                  |   | 57,490                                                               |   | 1.0                                                  | %       |
|                                                                |   |                                                                 |   |                                                 |    |
| Michael  S. Madler (12)(14)                                         |   |                                                                 |   |                                                 |    |
| 9  Santa Isabel                                                     |   |                                                                 |   |                                                 |    |
| Rancho  Santa Margarita, CA 92688                                   |   | 31,000                                                               |   |                                                 | *  |
|                                                                |   |                                                                 |   |                                                 |    |
| Marilyn  U. MacNiven-Young (15)                                     |   |                                                                 |   |                                                 |    |
| 26250  Enterprise Court, Suite 100                                  |   |                                                                 |   |                                                 |    |
| Lake  Forest, CA 92630                                              |   | 4,500                                                                |   |                                                 | *  |
|                                                                |   |                                                                 |   |                                                 |    |
| Patricia  R. Blank (16)                                             |   |                                                                 |   |                                                 |    |
| 26250  Enterprise Court, Suite 100                                  |   |                                                                 |   |                                                 |    |
| Lake  Forest, CA 92630                                              |   | 4,500                                                                |   |                                                 | *  |
|                                                                |   |                                                                 |   |                                                 |    |
| All  directors and executive officers, as a group (10 persons) (17) |   | 94,782                                                               |   | 1.7                                                  | %       |

 

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(1)          For purposes of thistable, a person is deemed to have “beneficialownership” of any security that such person has the right to acquire within 60days after August 31, 2004.

 

(2)          Includes 4,011,758shares of our common stock owned directlyby J.W. Childs Equity Partners II, L.P. and 338,532 shares of our common stockowned directly by JWC-InSight Co-invest LLC, an affiliate of J.W. Childs EquityPartners II, L.P.  The general partnerof J.W. Childs Equity Partners II, L.P. is J.W. Childs Advisors II, L.P., aDelaware limited partnership.  Thegeneral partner of J.W. Childs Advisors II, L.P. is J.W. Childs Associates,L.P., a Delaware limited partnership. The general partner of J.W. Childs Associates, L.P. is J.W. ChildsAssociates, Inc., a Delaware corporation. J.W. Childs Advisors II, L.P., J.W. Childs Associates, L.P. and J.W.Childs Associates, Inc. may be deemed to beneficially own the 4,350,290 sharesof our common stock held by J.W. Childs Equity Partners II, L.P. andJWC-InSight Co-invest LLC.  John W.Childs, Arthur P. Byrne, Glenn A. Hopkins, Jerry D. Horn, Raymond B. Rudy, DanaL. Schmaltz, Adam L. Suttin, William E. Watts, James Rhee, Jeffrey Teschke,Stephanie Mansfield-Rourke and Allan Dowds, as well as Steven G. Segal, EdwardD. Yun, Michael N. Cannizzaro and Mark J. Tricolli (as indicated in footnotes5, 6, 7, and 8, respectively) share voting and investment control over, and thereforemay be deemed to beneficially own, the shares of common stock held by theseentities.

 

(3)          JWC-InSight Co-investLLC is a Delaware limited liabilitycompany and affiliate of J.W. Childs Equity Partners II, L.P.  J.W. Childs Associates Inc. is the managingmember of JWC-InSight Co-invest LLC.  Asthe managing member, J.W. Childs Associates Inc. owns the 338,532 shares of ourcommon stock to be held directly by JWC-InSight Co-invest LLC.  John W. Childs, Arthur P. Byrne, Glenn A.Hopkins, Jerry D. Horn, Raymond B. Rudy, Dana L. Schmaltz, Adam L. Suttin,William E. Watts, James Rhee, Jeffrey Teschke, Stephanie Mansfield-Rourke andAllan Dowds, as well as Steven G. Segal, Edward D. Yun, Michael N. Cannizzaroand Mark J. Tricolli (as indicated in footnotes 5, 6, 7, and 8, respectively)share voting and investment control over, and therefore may be deemed tobeneficially own, the shares of common stock held by this entity.

 

(4)          Includes 1,107,020shares of our common stock owned directlyby Halifax Capital Partners, L.P. and 4,092 shares of our common stock owneddirectly by Mr. Dupree, a Managing Director of The Halifax Group, L.L.C.  The general partner of Halifax CapitalPartners, L.P. is Halifax Genpar, L.P., a Delaware limited partnership.  The general partner of Halifax Genpar, L.P.is The Halifax Group, L.L.C. a Delaware limited liability company.  Halifax Genpar, L.P. and The Halifax Group,L.L.C. may be deemed to beneficially own the 1,111,112 shares of our commonstock held by Halifax Capital Partners, L.P. and its affiliate, Mr.Dupree.  Halifax Capital Partners, L.P.,Halifax Genpar, L.P. and The Halifax Group, L.L.C. disclaim beneficialownership of the 4,092 shares of our common stock owned directly by Mr.Dupree.  William L. Rogers, A. Judson Hill,Michael T. Marshall and Brent D. Williams, as well as Mr. Dupree and Kenneth M.Doyle (as indicated in footnotes 9 and 10, respectively) share voting andinvestment control over, and therefore may be deemed to beneficially own, theshares of common stock held by these entities.

 

(5)          As a Partner of J.W.Childs Associates, L.P., which managesJ.W. Childs Equity Partners II, L.P., and a member of JWC-InSight Co-investLLC, Mr. Segal may be deemed to beneficially own the 4,011,758 shares of ourcommon stock owned by J.W. Childs Equity Partners II, L.P. and the 338,532shares of our common stock held directly by JWC-InSight Co-invest LLC.  Mr. Segal disclaims beneficial ownership ofsuch shares.

 

(6)          As a Partner of J.W.Childs Associates, L.P., which manages J.W. Childs Equity Partners II, L.P. anda member of JWC-InSight Co-invest LLC, Mr. Yun may be deemed to beneficially own the 4,011,758 shares of our commonstock owned by J.W. Childs Equity Partners II, L.P., and the 338,532 shares ofour common stock held directly by JWC-InSight Co-invest LLC.  Mr. Yun disclaims beneficial ownership ofsuch shares.

 

(7)          As an Operating Partnerof J.W. Childs Associates, L.P., whichmanages J.W. Childs Equity Partners II, L.P. and a member of JWC-InSightCo-invest LLC, Mr. Cannizzaro may be deemed to beneficially own the 4,011,758shares of  our common stock owned byJ.W. Childs Equity Partners II, L.P. and the 338,532 shares of our common stockheld directly by JWC-InSight Co-invest LLC. Mr. Cannizzaro disclaims

 

76

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beneficialownership of such shares.  Includes anoption to purchase 20,000 shares of our common stock at an exercise price of$25.00 per share, which is fully vested and immediately exercisable.

 

(8)          As a Vice President at J.W. Childs Associates, L.P., whichmanages J.W. Childs Equity Partners II, L.P. and a member of JWC-InSightCo-invest LLC, Mr. Tricolli may be deemed to beneficially own the 4,011,758shares of our common stock owned by J.W. Childs Equity Partners II, L.P. andthe 338,532 shares of our common stock held directly by JWC-InSight Co-investLLC.  Mr. Tricolli disclaims beneficialownership of such shares.

 

(9)          As a Managing Director of The Halifax Group, L.L.C.,which manages Halifax Capital Partners, L.P., Mr. Dupree may be deemed to beneficiallyown the 1,107,020 shares of our common stock owned by Halifax Capital Partners,L.P. and its affiliates.  Mr. Dupreedisclaims beneficial ownership of such shares.

 

(10)    As a Managing Director of The Halifax Group, L.L.C.,which manages Halifax Capital Partners, L.P., Mr. Doyle may be deemed tobeneficially own the 1,111,112 shares of our common stock owned by HalifaxCapital Partners, L.P. and its affiliates. Mr. Doyle disclaims beneficial ownership of such shares.

 

(11)    Includes (i) an option to purchase 52,500 shares ofour common stock at an exercise price of $8.37 per share which option wasgranted upon the consummation of the Acquisition and is fully vested andimmediately exercisable and (ii) an option to purchase 9,500 shares of ourcommon stock at an exercise price of $18.00 per share, which is currentlyexercisable.

 

(12)    Effective August 9, 2004, Messrs.Plochocki and Madler were no longer employed by us. See “Item 13. CertainRelationships and Related Transactions—Severance Arrangements.’’

 

(13)    Includes (i) an option to purchase 46,990 shares ofour common stock at an exercise price of $8.37 per share which option wasgranted upon the consummation of the Acquisition and is fully vested andimmediately exercisable and (ii) an option to purchase 10,500 shares of ourcommon stock at an exercise price of $18.00 per share.  Does not include an option to purchase 59,500shares of our common stock at an exercise price of $18.00 per share, which isnot currently exercisable.

 

(14)    Includes (i) an option to purchase 24,000 shares ofour common stock at an exercise price of $8.37 per share which option wasgranted upon the consummation of the Acquisition and is fully vested andimmediately exercisable and (ii) an option to purchase 7,000 shares of ourcommon stock at an exercise price of $18.00 per share, which is currentlyexercisable.

 

(15)    Includes an option to purchase 4,500 shares of ourcommon stock at an exercise price of $18.00 per share.  Does not include an option to purchase 25,500shares of our common stock at an exercise price of $18.00 per share, which isnot currently exercisable.

 

(16)    Includes an option to purchase 4,500 shares of ourcommon stock at an exercise price of $18.00 per share.  Does not include an option to purchase 25,500shares of our common stock at an exercise price of $18.00 per share, which isnot currently exercisable.

 

(17)    Messrs. Plochocki and Madler are not included in thegroup because they were not executive officers as of August 31, 2004.

 

Except as otherwise noted, we believethat each of the stockholders listed in the table above has sole voting anddispositive power over all shares beneficially owned.  Each of our stockholders in the table aboveis party to a stockholders agreement which governs the transferability andvoting of shares of our common stock held by them.  See “Item 13.  CertainRelationships and Related Transactions—StockholdersAgreement.”

 

77

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EQUITY COMPENSATION PLAN INFORMATION.  The following table provides information asof June 30, 2004, with respect to compensation plans under which ourcommon stock is authorized for issuance. These compensation plans include: (i) the 2001 Stock Option Plan; and (ii) stock options granted pursuantto stock option agreements.  Ourstockholders approved the 2001 Stock Option Plan and the issuance of options topurchase up to 626,000 shares of our common stock, pursuant to individual stockoption agreements.

 
| **Plan  Category**                                  | ** ** | **Number of Shares to be  Issued Upon Exercise of**

**Outstanding Options** | ** ** | **Weighted Average  Exercise Price of  Outstanding Options** | ** ** | **Number of Shares  Remaining Available for  Future Issuance Under  Equity Compensation  Plans (Excluding Shares  Reflected in Column (a))** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **(a)**                                                                      | ** ** | **(b)**                                                      | ** ** | **(c)**                                                                                                                                      | ** ** |
|                                                |       |                                                                         |       |                                                         |       |                                                                                                                                         |       |
| Equity  compensation plans approved by stockholders |       | 602,990                                                                      |       | $                                                            | 16.10      |                                                                                                                                         | 142,950    |   |
|                                                     |            |                                                                              |            |                                                              |            |                                                                                                                                              |            |  |

 

**ITEM 13**.                      **CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

MANAGEMENTAGREEMENT.  Upon the completion of theAcquisition, we entered into a management agreement with J.W. Childs AdvisorsII, L.P., the general partner of J.W. Childs Equity Partners II, L.P. andHalifax Genpar, L.P., the general partner of Halifax Capital Partners,L.P.  Under the agreement, InSight paidJ.W. Childs Advisors II, L.P. and Halifax Genpar, L.P. a transaction fee of$4,500,000 and $1,125,000, respectively, for services rendered in connectionwith the Acquisition during the year ended June 30, 2002.  Additionally, J.W. Childs Advisors II, L.P.and Halifax Genpar, L.P. will provide business, management and financialadvisory services to us in consideration of (i) an annual fee of $240,000 to bepaid to J.W. Childs Advisors II, L.P. and (ii) an annual fee of $60,000 to bepaid to Halifax Genpar, L.P.  We willalso reimburse such entities for all travel and other out-of-pocket expensesincurred by such entities in connection with their performance of the advisoryservices under the agreement.  Themanagement agreement has an initial term of five years, which term willautomatically renew for one year periods thereafter and is subject to earliertermination by our board of directors. Furthermore, we and InSight have agreed to indemnify and hold harmlessJ.W. Childs Advisors II, L.P. and Halifax Genpar, L.P. and their affiliates,from and against any and all claims, losses, damages and expenses arising outof the Acquisition or the performance by J.W. Childs Advisors II, L.P. andHalifax Genpar, L.P. of their obligations under the management agreement.

 

STOCKHOLDERSAGREEMENT.  We, J.W. Childs EquityPartners II, L.P., JWC-InSight Co-invest LLC, Halifax Capital Partners, L.P.,Mr. Dupree, management of InSight and all other holders of our capital stock orstock options have entered into a stockholders agreement.  Under the stockholders agreement, we and eachof our stockholders have a right of first refusal to purchase any stockproposed to be sold by all other stockholders, except J.W. Childs EquityPartners II, L.P. and JWC-InSight Co-invest LLC.  Additionally, the stockholders agreementaffords: (i) stockholders, other than J.W. Childs Equity Partners II, L.P. andJWC-InSight Co-invest LLC, so-called “tag-along rights”, which give thesestockholders the right to participate with respect to proposed sales of ourcapital stock by J.W. Childs Equity Partners II, L.P. and JWC - InSightCo-invest LLC; (ii) J.W. Childs Equity Partners II, L.P. and JWC-InSightCo-invest LLC “drag-along rights”, which gives these stockholders the right torequire other stockholders to participate in proposed sales of a majority of ourcapital stock; and (iii) all stockholders certain registration rights withrespect to our capital stock. Furthermore, the stockholders agreement contains put and call featureson capital stock and stock options held by InSight management which are triggeredupon termination of such individual’s employment with InSight.  The stockholders agreement also obligates usand our stockholders to take all necessary action to appoint, as our directors,up to eight nominees designated by J.W. Childs Equity Partners II, L.P. (aswould constitute a majority of our entire board of directors) and two nomineesdesignated by Halifax Capital Partners, L.P.

 

SEVERANCEARRANGEMENTS.  Pursuant to the terms of aresignation agreement with us, Steven T. Plochocki, our former President andChief Executive Officer, will receive severance equal to 24 months salary athis level of compensation as of August 9, 2004, which was $420,000 peryear and benefits in accordance with the terms of his employment agreement.  All of Mr. Plochocki’s unvested stock optionswere cancelled.  Pursuant to the terms ofa resignation agreement with us, Michael S. Madler, our former Executive VicePresident—Fixed Division, will receive 

 

78

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severance equal to12 months salary at his level of compensation as of August 9, 2004, whichwas $290,000 per year and benefits in accordance with the terms of hisemployment agreement.  All of Mr.Madler’s unvested stock options were cancelled. Messrs. Plochocki’s and Madler’s vested stock options under the 2001Stock Option Plan remain outstanding in accordance with their terms.

 

**ITEM 14.       PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

***Independent Auditor Fees***

 

The following tablepresents information about fees that PricewaterhouseCoopers LLP (PwC) chargedus (1) to audit our annual consolidated financial statements for the yearsended June 30, 2004 and 2003, and (2) for other services rendered in thoseyears.

 
| ** **                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |
| Audit  fees (1)                      |       | $        | 638,000    |     | $          | 178,000 |   |
|                                 |       |     |       |     |       |
| Audit-related  fees (2)              |       | 203,000  |       | 343,000  |       |
|                                 |       |     |       |     |       |
| Tax  fees (3)                        |       | 70,000   |       | 77,000   |       |
|                                 |       |     |       |     |       |
| Subtotal                             |       | $        | 911,000    |     | $          | 598,000 |   |
|                                 |       |     |       |     |       |
| Other  fees                          |       | —   |       | —   |       |
|                                 |       |     |       |     |       |
| Total  audit and other services fees |       | $        | 911,000    |     | $          | 598,000 |   |

 

----

(1)          Audit fees – fees for auditing our annualconsolidated financial statements, reviewing the condensed consolidatedfinancial statements included in our quarterly reports on Form 10-Q, the $25million of 9.875% senior subordinated notes, the withdrawn initial public offeringand other SEC filings.

 

(2)          Audit-relatedfees – fees for due diligence and related services with regard to theacquisitions completed during 2004 and 2003 and for auditing our 401(k) definedcontribution plan.

 

(3)   Tax fees –fees for reviewing federal, state, and local income and franchise tax returns,tax research and other tax planning services.

 

Allaudit and non-audit services performed by our independent auditors must bespecifically pre-approved by InSight’s audit committee.  Consistent with this policy, for the yearended June 30, 2004 all audit and non-audit services initiated by PWC werepre-approved by InSight’s audit committee.

 

79

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**PART IV**

 

**ITEM 15.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES**

 

ITEM 15 (a)(1).   FINANCIAL STATEMENTS

 

Included in Part II ofthis report:

 

Reportof Independent Registered Public Accounting Firm

Consolidated Balance Sheets

ConsolidatedStatements of Operations

ConsolidatedStatements of Stockholders’ Equity

ConsolidatedStatements of Cash Flows

Notes toConsolidated Financial Statements

 

ITEM 15 (a)(2).   FINANCIAL STATEMENT SCHEDULES

 

Report of IndependentRegistered Public Accounting Firm on Financial Statement Schedule

Schedule II -Valuation and Qualifying Accounts

 

All other schedules havebeen omitted because they are either not required or not applicable, or theinformation is presented in the consolidated financial statements or notesthereto.

 

 

80

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ITEM 15 (a) (3).    EXHIBITS

 
| **EXHIBIT NUMBER** | ** ** | **DESCRIPTION AND REFERENCES**                                                                                                                                                                                                                                                                                                                                             |
|--------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *2.1               |       | Agreement and Plan of  Merger, dated as of June 29, 2001, by and among InSight Health Services  Holdings Corp. (the “Company”), JWCH Merger Corp. and InSight Health Services  Corp. (“InSight”), previously filed and incorporated herein by reference from  InSight’s Current Report on Form 8-K, filed on July 2, 2001.              |
|               |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *2.2               |       | Amendment No. 1 to  Agreement and Plan of Merger, dated as of June 29, 2001, by and among  the Company, JWCH Merger Corp. and InSight, previously filed and incorporated  by reference from InSight’s Annual Report on Form 10-K, filed on  September 14, 2001.                                                                                             |
|               |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *2.3               |       | Amendment No. 2 to  Agreement and Plan of Merger, dated as of October 9, 2001, by and among  the Company, InSight Health Services Acquisition Corp. and InSight,  previously filed and incorporated herein by reference from InSight’s Current  Report on Form 8-K, filed on October 9, 2001.                                                               |
|               |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *2.4               |       | Asset Purchase  Agreement, dated January 6, 2003, by and among InSight Health Corp.,  Comprehensive Medical Imaging Centers, Inc., Comprehensive Medical Imaging,  Inc. and Cardinal Health 414, Inc., previously filed and incorporated herein  by reference from the Company’s Current Report on Form 8-K, filed on  April 16, 2003.                      |
|               |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *2.5               |       | Amendment No. 1 to  Asset Purchase Agreement, dated February 21, 2003, by and among InSight  Health Corp., Comprehensive Medical Imaging Centers, Inc., Comprehensive  Medical Imaging, Inc. and Cardinal Health 414, Inc., previously filed and  incorporated herein by reference from the Company’s Current Report on Form  8-K, filed on April 16, 2003. |
|               |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *2.6               |       | Amendment No. 2 to  Asset Purchase Agreement, dated March 31, 2003, by and among InSight  Health Corp., Comprehensive Medical Imaging Centers, Inc., Comprehensive  Medical Imaging, Inc. and Cardinal Health 414, Inc., previously filed and  incorporated herein by reference from the Company’s Current Report on Form  8-K, filed on April 16, 2003.    |
|               |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *2.7               |       | Asset Purchase  Agreement, dated June 19, 2003, by and among InSight Health Corp., CDL  Medical Technologies, Inc., Keith E. Loiselle and David J. Simile, previously  filed and incorporated by reference from the Company’s Current Report on Form  8-K, filed on August 11, 2003.                                                                        |
|               |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *2.8               |       | Stock Purchase  Agreement dated February 13, 2004, by and among InSight Health Corp.,  Comprehensive Medical Imaging, Inc., Cardinal Health 414, Inc. and Cardinal  Health, Inc., previously filed and incorporated herein by reference from the  Company’s Current Report on Form 8-K, filed on April 8, 2004.                                             |
|               |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *2.9               |       | Amendment No. 1 to  Stock Purchase Agreement dated April 1, 2004, by and among InSight  Health Corp., Comprehensive Medical Imaging, Inc., Cardinal Health 414, Inc.  and Cardinal Health, Inc., previously filed and incorporated herein by  reference from the Company’s Current Report on Form 8-K, filed on  April 8, 2004.                             |
|               |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *3.1               |       | Certificate of  Incorporation of the Company, as amended, previously filed and incorporated  herein by reference from InSight’s Registration Statement on Form S-4, filed  on December 27, 2001.                                                                                                                                                                 |
|               |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *3.2               |       | Bylaws of the Company,  previously filed and incorporated herein by reference from InSight’s  Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                                    |

 

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| *4.1   |   | Indenture with respect  to 9.875% Senior Subordinated Notes due 2011 with State Street Bank and Trust  Company, N.A., as Trustee, dated October 30, 2002, previously filed and  incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                                                                                          |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *4.2   |   | Supplemental Indenture,  dated February 25, 2002, with respect to adding an additional Subsidiary  Guarantor (named therein), previously filed and incorporated herein by  reference from InSight’s Amendment No. 1 to Registration Statement on Form  S-4, filed on March 25, 2002.                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *4.3   |   | Supplemental Indenture,  dated April 2, 2003, with respect to adding additional Subsidiary  Guarantors (named therein), previously filed with the Company’s Annual Report  on Form 10-K, filed on September 26, 2003.                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *4.4   |   | Third Supplemental  Indenture, dated as of March 8, 2004, with respect to $25 million of  9.875% Senior Subordinated Notes due 2011, previously filed and incorporated  herein by reference from the Company’s Quarterly Report on Form 10-Q, filed  on May 13, 2004.                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.5    |   | Fourth Supplemental  Indenture, dated as of June 8, 2004, with respect to adding additional  Subsidiary Guarantors (named therein), filed herewith.                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *4.6   |   | Registration Rights  Agreement, dated March 8, 2004, by and among InSight, the Company, the  Subsidiary Guarantors (named therein), and Banc of America Securities LLC  with respect to $25 million of 9.875% Senior Subordinated Notes due 2011,  previously filed and incorporated herein by reference from the Company’s  Quarterly Report on Form 10-Q, filed on May 13, 2004.                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *10.1  |   | Credit Agreement, dated  October 17, 2001, by and among InSight, the Company, the Subsidiary  Guarantors (named therein), Banc of America Securities LLC and First Union  Securities, LLC, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *10.2  |   | First Amendment to  Credit Agreement, Waiver and Consent, dated as of January 24, 2003, by  and among InSight, the Company, the Subsidiary Guarantors (named therein),  the Lenders from time to time party thereto, Bank of America, N.A. as  Administrative Agent, Wachovia Bank, N.A. as Syndication Agent and The CIT  Group/Business Credit, Inc. as Documentation Agent, previously filed and  incorporated herein by reference from the Company’s Quarterly Report on Form  10-Q filed on May 15, 2003. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *10.3  |   | Second Amendment to  Credit Agreement, Waiver and Consent, dated as of July 11, 2003, by and  among InSight, the Company, the Subsidiary Guarantors (named therein), the  Lenders from time to time party thereto, Bank of America, N.A. as  Administrative Agent, Wachovia Bank, N.A. as Syndication Agent and The CIT  Group/Business Credit, Inc. as Documentation Agent, filed herewith.                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *10.4  |   | Note Purchase  Agreement, dated as of October 17, 2001, by and among InSight Health  Services Acquisition Corp., the Company, the Subsidiary Guarantors (as  defined therein), Banc of America Bridge LLC, and Banc of America Securities  LLC, previously filed and incorporated herein by reference from InSight’s Registration  Statement on Form S-4, filed on December 27, 2001.                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *10.5  |   | The Company’s  2001 Stock Option Plan, previously filed and incorporated herein by reference  from InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                                                                                                                                                                             |

 

82

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| *10.6  |   | The Company’s  2001 Stock Option Plan Stock Option Agreement, dated June 29, 2001, by  and between the Company and Steven T. Plochocki, previously filed and  incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                        |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.7  |   | The Company’s  2001 Stock Option Plan Stock Option Agreement, dated June 29, 2001, by  and between the Company and Michael A. Boylan, previously filed and  incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.8  |   | First Amendment  to Executive Employment Agreement, dated September 4, 2003, by and  between InSight and Steven T. Plochocki, previously filed and incorporated  herein by reference from the Company’s Registration Statement on Form S-1,  filed on June 23, 2004.                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.9  |   | The Company’s  2001 Stock Option Plan Stock Option Agreement, dated June 29, 2001, by  and between the Company and Michael S. Madler, previously filed and  incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.10 |   | Executive  Employment Agreement, dated June 29, 2001, between InSight and Steven T.  Plochocki, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.11 |   | Executive  Employment Agreement, dated June 29, 2001, between InSight and Patricia  R. Blank, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.12 |   | Executive  Employment Agreement, dated June 29, 2001, between InSight and Michael  A. Boylan, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.13 |   | Executive  Employment Agreement, dated June 29, 2001, between InSight and Thomas V.  Croal, previously filed and incorporated herein by reference from InSight’s  Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.14 |   | Executive  Employment Agreement, dated June 29, 2001, between InSight and Brian G.  Drazba, previously filed and incorporated herein by reference from InSight’s  Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.15 |   | Executive  Employment Agreement, dated June 29, 2001, between InSight and Michael  S. Madler, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.16 |   | Executive  Employment Agreement, dated December 27, 2001, between InSight and  Marilyn U. MacNiven-Young, previously filed and incorporated herein by  reference from InSight’s Registration Statement on Form S-4, filed on  December 27, 2001.                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.17 |   | Form of the  Company Performance Based Option Agreement, previously filed and incorporated  herein by reference from InSight’s Registration Statement on Form S-4, filed  on December 27, 2001.                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.18 |   | Third Amended and  Restated Stockholders Agreement, dated as of October 10, 2002, among the  Company, the JWC Holders (as defined therein), the Halifax Holders (as  defined therein), the Management Holders (as defined therein) and the  Additional Holders (as defined therein), previously filed and incorporated  herein by reference from the Company’s Quarterly Report on Form 10-Q, filed  on February 14, 2003. |

 

83

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| *10.19 |   | Management Agreement,  dated as of October 17, 2001, by and among J.W. Childs Advisors II,  L.P., Halifax Genpar, L.P., the Company and InSight, previously filed and  incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| *10.20 |   | Third Amendment to  Credit Agreement, Waiver and Consent, dated as of February 26, 2004, by  and among InSight, the Company, the Subsidiary Guarantors (named therein),  Bank of America, N.A., as Administrative Agent, Wachovia Bank, National  Association, as Syndication Agent, and The CIT Group/Business Credit, Inc. as  Documentation Agent, previously filed and incorporated herein by reference  from the Company’s Quarterly Report on Form 10-Q, filed on May 13, 2004. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.21  |   | Resignation  Agreement, dated May 19, 2003, by and between InSight and Thomas V. Croal, filed  herewith.                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 21     |   | Subsidiaries of  the Company, filed herewith.                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.1   |   | Certification of  Michael N. Cannizzaro, the Company’s Chief Executive Officer, pursuant to  Rule 15d-14 of the Securities Exchange Act of 1934, filed herewith.                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2   |   | Certification of  Brian G. Drazba, the Company’s Chief Financial Officer, pursuant to Rule  15d-14 of the Securities Exchange Act of 1934, filed herewith.                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.1   |   | Certification of  Michael N. Cannizzaro, the Company’s Chief Executive Officer, pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.2   |   | Certification of  Brian G. Drazba, the Company’s Chief Financial Officer, pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                                                                                                                            |

 

----

*                                         Previouslyfiled.

 
| ITEM 15 (b). |   | The Exhibits  described above in Item 15(a)(3) are attached hereto or incorporated by  reference herein, as noted. |
|--------------|--------|--------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                               |
| ITEM 15 (c). |   | Not applicable.                                                                                                    |

 

84

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15 (d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|   | INSIGHT HEALTH SERVICES  HOLDINGS CORP. |
|--------|-----------------------------------------|
|   |                                    |
|   | By                                      | /s/  Michael N. Cannizzaro |   |
|   |                                    |    Michael N. Cannizzaro, President and |
|   |                                    | Chief  Executive Officer |
|   |                                    |
|   | Date:  September 24, 2004     |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 
| **Signature**              | ** ** | **Title**                      | ** **                | **Date** |
|----------------------------|------------|--------------------------------|---------------------------|----------|
|                       |       |                           |                      |     |
| /s/ Michael N.  Cannizzaro |       |                           | Chairman of the  Board,   |     | September 24,  2004 |
| Michael N. Cannizzaro      |       | Director,  President and       |                      |     |
|                       |       | Chief Executive  Officer       |                      |     |
|                       |       | (Principal  Executive Officer) |                      |     |
|                       |       |                           |                      |     |
|                       |       |                           |                      |     |
| /s/ Brian G. Drazba        |       |                           | Executive Vice  President |     | September 24,  2004 |
| Brian G. Drazba            |       | and Chief  Financial Officer   |                      |     |
|                       |       | (Principal  Financial and      |                      |     |
|                       |       | Accounting  Officer)           |                      |     |
|                       |       |                           |                      |     |
|                       |       |                           |                      |     |
| /s/ Kenneth M. Doyle       |       |                           | Director                  |     | September 24,  2004 |
| Kenneth M. Doyle           |       |                           |                      |     |
|                       |       |                           |                      |     |
|                       |       |                           |                      |     |
| /s/ David W. Dupree        |       |                           | Director                  |     | September 24,  2004 |
| David W. Dupree            |       |                           |                      |     |
|                       |       |                           |                      |     |
|                       |       |                           |                      |     |
| /s/ Steven G. Segal        |       |                           | Director                  |     | September 24,  2004 |
| Steven G. Segal            |       |                           |                      |     |
|                       |       |                           |                      |     |
|                       |       |                           |                      |     |
| /s/ Mark J. Tricolli       |       |                           | Director                  |     | September 24,  2004 |
| Mark J. Tricolli           |       |                           |                      |     |
|                       |       |                           |                      |     |
|                       |       |                           |                      |     |
| /s/ Edward D. Yun          |       |                           | Director                  |     | September 24,  2004 |
| Edward D. Yun              |       |                           |                      |     |

 

85

----

 

**REPORT OF INDEPENDENT REGISTERED****PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTSCHEDULE**

 

To the Board of Directorsand Stockholders of InSight Health Services Holdings Corp.:

 

Our audits of theconsolidated financial statements referred to in our report dated September 23,2004, appearing in this Annual Report on Form 10-K also included an audit ofthe financial statement schedule listed in Item 15(a)(2) of this Form10-K.  In our opinion, this financialstatement schedule presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements.

 
| /s/  PRICEWATERHOUSECOOPERS LLP |   |
|---------------------------------|--------|
| Orange County,  California      |
| September 23, 2004         |

 

86

----

 

**SCHEDULE II**

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**VALUATIONAND QUALIFYING ACCOUNTS**

**FOR THEYEARS ENDED JUNE 30, 2004, 2003 AND 2002, AND THE PERIOD FROM JULY 1,2001 TO OCTOBER 17, 2001**

(amountsin thousands)

 
| ** **                             | ** ** | **Balance at  Beginning of  Year** | ** ** | **Charges to  Expenses** | ** ** | **Charges to  Revenues** | ** ** | **Other** | ** ** | **Balance at  End of  Year** | ** ** |
|----------------------------------------|------------|------------------------------------|------------|--------------------------|------------|--------------------------|------------|-----------|------------|------------------------------|------------|
|                                   |       |                               |       |                     |       |                     |       |      |       |                         |       |
| Predecessor                            |       |                               |       |                     |       |                     |       |      |       |                         |       |
| October 17,  2001:                |       |                               |       |                     |       |                     |       |      |       |                         |       |
| Allowance  for doubtful accounts       |       | $                                  | 8,655      |                     | $          | 1,110                    |       | $         | —     |                         | $          | (937 | )(A) | $ | 8,828 |   |
| Allowance  for contractual adjustments |       | 17,956                             |       | —                   |       | 26,740                   |       | (27,026   | )(C)       | 17,670                       |       |
|                                   |       | $                                  | 26,611     |                     | $          | 1,110                    |       | $         | 26,740     |                         | $          | (27,963 | ) | $ | 26,498 |   |
|                                   |       |                               |       |                     |       |                     |       |      |       |                         |       |
| Company                                |       |                               |       |                     |       |                     |       |      |       |                         |       |
| June 30,  2002:                   |       |                               |       |                     |       |                     |       |      |       |                         |       |
| Allowance  for doubtful accounts       |       | $                                  | —     |                     | $          | 2,785                    |       | $         | —     |                         | $          | 5,195 | (A)(B) | $ | 7,980 |   |
| Allowance  for contractual adjustments |       | —                             |       | —                   |       | 71,185                   |       | (52,675   | )(C)(B)    | 18,510                       |       |
|                                   |       | $                                  | —     |                     | $          | 2,785                    |       | $         | 71,185     |                         | $          | (47,480 | ) | $ | 26,490 |   |
|                                   |       |                               |       |                     |       |                     |       |      |       |                         |       |
| June 30,  2003:                   |       |                               |       |                     |       |                     |       |      |       |                         |       |
| Allowance  for doubtful accounts       |       | $                                  | 7,980      |                     | $          | 4,154                    |       | $         | —     |                         | $          | (4,230 | )(A) | $ | 7,904 |   |
| Allowance  for contractual adjustments |       | 18,510                             |       | —                   |       | 122,101                  |       | (112,242  | )(C)       | 28,369                       |       |
|                                   |       | $                                  | 26,490     |                     | $          | 4,154                    |       | $         | 122,101    |                         | $          | (116,472 | ) | $ | 36,273 |   |
|                                   |       |                               |       |                     |       |                     |       |      |       |                         |       |
| June 30,  2004:                   |       |                               |       |                     |       |                     |       |      |       |                         |       |
| Allowance  for doubtful accounts       |       | $                                  | 7,904      |                     | $          | 4,998                    |       | $         | —     |                         | $          | (4,805 | )(A) | $ | 8,097 |   |
| Allowance  for contractual adjustments |       | 28,369                             |       | —                   |       | 176,172                  |       | (167,332  | )(C)       | 37,209                       |       |
|                                   |       | $                                  | 36,273     |                     | $          | 4,998                    |       | $         | 176,172    |                         | $          | (172,137 | ) | $ | 45,306 |   |

 

----

(A) Write-off ofuncollectible accounts.

(B) In connection with theAcquisition, we acquired the valuation and qualifying accounts related toInSight.

(C) Write-off of contractualadjustments, representing the difference between our charge for a procedure andwhat we receive from payors.

 

87

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**EXHIBITINDEX**

 
| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION AND REFERENCES**                                                                                                                                                                                                                                                                                                                                             |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *2.1                |       | Agreement and Plan of  Merger, dated as of June 29, 2001, by and among InSight Health Services  Holdings Corp. (the “Company”), JWCH Merger Corp. and InSight Health Services  Corp. (“InSight”), previously filed and incorporated herein by reference from  InSight’s Current Report on Form 8-K, filed on July 2, 2001.              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *2.2                |       | Amendment No. 1 to  Agreement and Plan of Merger, dated as of June 29, 2001, by and among  the Company, JWCH Merger Corp. and InSight, previously filed and incorporated  by reference from InSight’s Annual Report on Form 10-K, filed on  September 14, 2001.                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *2.3                |       | Amendment No. 2 to  Agreement and Plan of Merger, dated as of October 9, 2001, by and among  the Company, InSight Health Services Acquisition Corp. and InSight,  previously filed and incorporated herein by reference from InSight’s Current  Report on Form 8-K, filed on October 9, 2001.                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *2.4                |       | Asset Purchase  Agreement, dated January 6, 2003, by and among InSight Health Corp.,  Comprehensive Medical Imaging Centers, Inc., Comprehensive Medical Imaging,  Inc. and Cardinal Health 414, Inc., previously filed and incorporated herein  by reference from the Company’s Current Report on Form 8-K, filed on  April 16, 2003.                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *2.5                |       | Amendment No. 1 to  Asset Purchase Agreement, dated February 21, 2003, by and among InSight  Health Corp., Comprehensive Medical Imaging Centers, Inc., Comprehensive  Medical Imaging, Inc. and Cardinal Health 414, Inc., previously filed and  incorporated herein by reference from the Company’s Current Report on Form  8-K, filed on April 16, 2003. |
|                |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *2.6                |       | Amendment No. 2 to  Asset Purchase Agreement, dated March 31, 2003, by and among InSight  Health Corp., Comprehensive Medical Imaging Centers, Inc., Comprehensive  Medical Imaging, Inc. and Cardinal Health 414, Inc., previously filed and  incorporated herein by reference from the Company’s Current Report on Form  8-K, filed on April 16, 2003.    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *2.7                |       | Asset Purchase  Agreement, dated June 19, 2003, by and among InSight Health Corp., CDL  Medical Technologies, Inc., Keith E. Loiselle and David J. Simile, previously  filed and incorporated by reference from the Company’s Current Report on Form  8-K, filed on August 11, 2003.                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *2.8                |       | Stock Purchase  Agreement dated February 13, 2004, by and among InSight Health Corp.,  Comprehensive Medical Imaging, Inc., Cardinal Health 414, Inc. and Cardinal  Health, Inc., previously filed and incorporated herein by reference from the  Company’s Current Report on Form 8-K, filed on April 8, 2004.                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *2.9                |       | Amendment No. 1 to  Stock Purchase Agreement dated April 1, 2004, by and among InSight  Health Corp., Comprehensive Medical Imaging, Inc., Cardinal Health 414, Inc.  and Cardinal Health, Inc., previously filed and incorporated herein by  reference from the Company’s Current Report on Form 8-K, filed on  April 8, 2004.                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *3.1                |       | Certificate of  Incorporation of the Company, as amended, previously filed and incorporated  herein by reference from InSight’s Registration Statement on Form S-4, filed  on December 27, 2001.                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                       |
| *3.2                |       | Bylaws of the Company,  previously filed and incorporated herein by reference from InSight’s  Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                                    |

 

88

----

 
| *4.1   |   | Indenture with respect  to 9.875% Senior Subordinated Notes due 2011 with State Street Bank and Trust  Company, N.A., as Trustee, dated October 30, 2002, previously filed and  incorporated herein by reference from InSight’s Registration Statement on Form  S-4, filed on December 27, 2001.                                                                                                                                                                                                          |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *4.2   |   | Supplemental Indenture,  dated February 25, 2002, with respect to adding an additional Subsidiary  Guarantor (named therein), previously filed and incorporated herein by  reference from InSight’s Amendment No. 1 to Registration Statement on Form  S-4, filed on March 25, 2002.                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *4.3   |   | Supplemental Indenture,  dated April 2, 2003, with respect to adding additional Subsidiary  Guarantors (named therein), previously filed with the Company’s Annual Report  on Form 10-K, filed on September 26, 2003.                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *4.4   |   | Third Supplemental  Indenture, dated as of March 8, 2004, with respect to $25 million of  9.875% Senior Subordinated Notes due 2011, previously filed and incorporated  herein by reference from the Company’s Quarterly Report on Form 10-Q, filed  on May 13, 2004.                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.5    |   | Fourth Supplemental  Indenture, dated as of June 8, 2004, with respect to adding additional  Subsidiary Guarantors (named therein), filed herewith.                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *4.6   |   | Registration Rights  Agreement, dated March 8, 2004, by and among InSight, the Company, the  Subsidiary Guarantors (named therein), and Banc of America Securities LLC  with respect to $25 million of 9.875% Senior Subordinated Notes due 2011,  previously filed and incorporated herein by reference from the Company’s  Quarterly Report on Form 10-Q, filed on May 13, 2004.                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *10.1  |   | Credit Agreement, dated  October 17, 2001, by and among InSight, the Company, the Subsidiary  Guarantors (named therein), Banc of America Securities LLC and First Union  Securities, LLC, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *10.2  |   | First Amendment to  Credit Agreement, Waiver and Consent, dated as of January 24, 2003, by  and among InSight, the Company, the Subsidiary Guarantors (named therein),  the Lenders from time to time party thereto, Bank of America, N.A. as  Administrative Agent, Wachovia Bank, N.A. as Syndication Agent and The CIT  Group/Business Credit, Inc. as Documentation Agent, previously filed and  incorporated herein by reference from the Company’s Quarterly Report on Form  10-Q filed on May 15, 2003. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *10.3  |   | Second Amendment to  Credit Agreement, Waiver and Consent, dated as of July 11, 2003, by and  among InSight, the Company, the Subsidiary Guarantors (named therein), the  Lenders from time to time party thereto, Bank of America, N.A. as  Administrative Agent, Wachovia Bank, N.A. as Syndication Agent and The CIT  Group/Business Credit, Inc. as Documentation Agent, filed herewith.                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *10.4  |   | Note Purchase  Agreement, dated as of October 17, 2001, by and among InSight Health  Services Acquisition Corp., the Company, the Subsidiary Guarantors (as  defined therein), Banc of America Bridge LLC, and Banc of America Securities  LLC, previously filed and incorporated herein by reference from InSight’s  Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *10.5  |   | The Company’s  2001 Stock Option Plan, previously filed and incorporated herein by reference  from InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                                                                                                                                                                             |

 

89

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| *10.6  |   | The Company’s  2001 Stock Option Plan Stock Option Agreement, dated June 29, 2001, by  and between the Company and Steven T. Plochocki, previously filed and  incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                        |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.7  |   | The Company’s  2001 Stock Option Plan Stock Option Agreement, dated June 29, 2001, by  and between the Company and Michael A. Boylan, previously filed and  incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.8  |   | First Amendment  to Executive Employment Agreement, dated September 4, 2003, by and  between InSight and Steven T. Plochocki, previously filed and incorporated  herein by reference from the Company’s Registration Statement on Form S-1  filed on June 23, 2004.                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.9  |   | The Company’s  2001 Stock Option Plan Stock Option Agreement, dated June 29, 2001, by  and between the Company and Michael S. Madler, previously filed and  incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.10 |   | Executive  Employment Agreement, dated June 29, 2001, between InSight and Steven T.  Plochocki, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.11 |   | Executive  Employment Agreement, dated June 29, 2001, between InSight and Patricia  R. Blank, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.12 |   | Executive  Employment Agreement, dated June 29, 2001, between InSight and Michael  A. Boylan, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.13 |   | Executive  Employment Agreement, dated June 29, 2001, between InSight and Thomas V.  Croal, previously filed and incorporated herein by reference from InSight’s  Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.14 |   | Executive  Employment Agreement, dated June 29, 2001, between InSight and Brian G.  Drazba, previously filed and incorporated herein by reference from InSight’s  Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.15 |   | Executive  Employment Agreement, dated June 29, 2001, between InSight and Michael  S. Madler, previously filed and incorporated herein by reference from InSight’s  Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.16 |   | Executive  Employment Agreement, dated December 27, 2001, between InSight and  Marilyn U. MacNiven-Young, previously filed and incorporated herein by  reference from InSight’s Registration Statement on Form S-4, filed on  December 27, 2001.                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.17 |   | Form of the  Company Performance Based Option Agreement, previously filed and incorporated  herein by reference from InSight’s Registration Statement on Form S-4, filed  on December 27, 2001.                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.18 |   | Third Amended and  Restated Stockholders Agreement, dated as of October 10, 2002, among the  Company, the JWC Holders (as defined therein), the Halifax Holders (as  defined therein), the Management Holders (as defined therein) and the Additional  Holders (as defined therein), previously filed and incorporated herein by  reference from the Company’s Quarterly Report on Form 10-Q, filed on  February 14, 2003. |

 

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| *10.19 |   | Management Agreement, dated  as of October 17, 2001, by and among J.W. Childs Advisors II, L.P.,  Halifax Genpar, L.P., the Company and InSight, previously filed and  incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| *10.20 |   | Third Amendment to  Credit Agreement, Waiver and Consent, dated as of February 26, 2004, by  and among InSight, the Company, the Subsidiary Guarantors (named therein),  Bank of America, N.A., as Administrative Agent, Wachovia Bank, National  Association, as Syndication Agent, and The CIT Group/Business Credit, Inc. as  Documentation Agent, previously filed and incorporated herein by reference  from the Company’s Quarterly Report on Form 10-Q, filed on May 13, 2004. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.21  |   | Resignation  Agreement, dated May 19, 2003, by and between InSight and Thomas V. Croal,  filed herewith.                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 21     |   | Subsidiaries of  the Company, filed herewith.                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.1   |   | Certification of  Michael N. Cannizzaro, the Company’s Chief Executive Officer, pursuant to  Rule 15d-14 of the Securities Exchange Act of 1934, filed herewith.                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2   |   | Certification of  Brian G. Drazba, the Company’s Chief Financial Officer, pursuant to Rule  15d-14 of the Securities Exchange Act of 1934, filed herewith.                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.2   |   | Certification of  Michael N. Cannizzaro, the Company’s Chief Executive Officer, pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.2   |   | Certification of  Brian G. Drazba, the Company’s Chief Financial Officer, pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                                                                                                                            |

 

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*                                         Previouslyfiled.

 

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