**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-K**

**(Mark One)**

**x****ANNUAL REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

**FOR THEFISCAL YEAR ENDED JUNE 30, 2007**

**OR**

**o****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF****1934**

**FOR THETRANSITION PERIOD FROM                 TO                 **

**COMMISSIONFILE NUMBER 333-75984**

**INSIGHT HEALTH SERVICES HOLDINGSCORP.**

(Exact name ofRegistrant as specified in its charter)

| **DELAWARE**                  | ** ** | **04-3570028**   |
|-------------------------------|------------|------------------|
| (State or other  jurisdiction |       | (I.R.S. Employer |
| of incorporation  or          |       | Identification   |
| organization)                 |       | 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 mark ifthe Registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.  Yes  o No  x

Indicate by check mark ifthe Registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.  Yes  o No  x

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 the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  x No  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained 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 Form 10-K.  x

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):
| Large accelerated filer  o |   | Accelerated filer  o |   | Non-accelerated filer  x |
|--------------------------------------|--------|--------------------------------|--------|------------------------------------|

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes  o No  x

The aggregate marketvalue of the voting and non-voting common stock held by non-affiliates of theRegistrant as of August 31, 2007 (based on the closing price for the commonstock on the Over-The-Counter Bulletin Board on that date) was $35,500,818.

Indicate  by check mark whether the Registrant hasfiled all documents and reports required to be filed by Section 12, 13 or 15(d)of the Securities Exchange Act of 1934 subsequent to the distribution ofsecurities under a plan confirmed by a court. Yes  x No  o

The number of sharesoutstanding of the Registrant’s common stock as of August 31, 2007 was8,644,444.

 

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**INSIGHT HEALTH SERVICES HOLDINGSCORP.**

**ANNUAL REPORT ON FORM 10-K**

**TABLE OFCONTENTS**
| **PART I**     | ** ** | ** **                                                                                                          | ** ** | ** ** |
|----------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|------------|
| Item  1.       |       | Business                                                                                                            |       |       |
| Item  1A.      |       | Risk  Factors                                                                                                       |       |       |
| Item  2.       |       | Properties                                                                                                          |       |       |
| Item 3.        |       | Legal Proceedings                                                                                                   |       |       |
| Item 4.        |       | Submission of  Matters to a Vote of Security Holders                                                                |       |       |
|           |       |                                                                                                                |       |       |
| **PART II**    |       |                                                                                                                |       |       |
| Item 5.        |       | Market for  Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities |       |       |
| Item 6.        |       | Selected Financial  Data                                                                                            |       |       |
| Item 7.        |       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                         |       |       |
| Item 7A.       |       | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       |       |
| Item 8.        |       | Financial  Statements and Supplementary Data                                                                        |       |       |
| Item 9.        |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                               |       |       |
| Item 9A.       |       | Controls and  Procedures                                                                                            |       |       |
| Item 9B.       |       | Other Information                                                                                                   |       |       |
|           |       |                                                                                                                |       |       |
| **PART III**   |       |                                                                                                                |       |       |
| Item 10.       |       | Directors,  Executive Officers and Corporate Governance                                                             |       |       |
| Item 11.       |       | Executive  Compensation                                                                                             |       |       |
| Item 12.       |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |       |       |
| Item 13.       |       | Certain  Relationships and Related Transactions, and Director Independence                                          |       |       |
| Item 14.       |       | Principal  Accounting Fees and Services                                                                             |       |       |
|           |       |                                                                                                                |       |       |
| **PART IV**    |       |                                                                                                                |       |       |
| Item 15.       |       | Exhibits,  Financial Statement Schedules                                                                            |       |       |
|           |       |                                                                                                                |       |       |
| **SIGNATURES** |       |                                                                                                                |

 

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**PART I**

**ITEM 1.          BUSINESS**

**OVERVIEW**

*Allreferences to*“*we,*”**“*us,*”**“*our”,*“*our company*” or**“*theCompany*”*in this annual report onForm 10-K, or Form 10-K, mean InSight Health Services Holdings Corp., aDelaware corporation, and all entities and subsidiaries owned or controlled byInSight Health Services Holdings Corp.**Allreferences to*“*Holdings*”*in this Form 10-K mean InSight Health Services Holdings Corp. byitself. All references to*“*InSight*”*inthis Form 10-K mean InSight Health Services Corp., a Delaware corporation and awholly owned subsidiary of Holdings, by itself.*

We are a nationwide provider of diagnostic imagingservices through our integrated network of fixed-site centers and mobilefacilities which are focused in core markets 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 thediagnosis and assessment of diseases and disorders.

We serve a diverseportfolio of customers, including healthcare providers, such as hospitals andphysicians, and payors, such as managed care organizations, Medicare, Medicaidand insurance companies. We operate in more than 30 states with a substantialpresence in California, Arizona, New England, the Carolinas, Florida and theMid-Atlantic states. While we generated approximately 69% of our total revenuesfrom MRI services during the year ended June 30, 2007, we provide acomprehensive offering of diagnostic imaging and treatment services, includingPET, PET/CT, CT, mammography, bone densitometry, ultrasound, lithotripsy andx-ray.

As of June 30, 2007, our network consists of 101fixed-site centers and 112 mobile facilities. This combination allows us toprovide a full continuum of imaging services to better meet the needs of ourcustomers. Our fixed-site centers include freestanding centers and jointventures with hospitals and radiology groups. Our mobile facilities providehospitals and physician groups access to imaging technologies when they lackeither the resources or patient volume to provide their own imaging services orrequire incremental capacity. We enter into agreements with radiologists toprovide professional services, which include supervision and interpretation ofradiological procedures and quality assurance. We do not engage in the practiceof medicine. We have two reportable segments: mobile operations and fixedoperations. Our mobile operations include 20 parked mobile facilities, each ofwhich serves a single customer. Our fixed operations include five mobilefacilities as part of our fixed operations in Maine. Certain financialinformation regarding our reportable segments is included in Note 17 to ourconsolidated financial statements, which are a part of this Form 10-K.

Historically, we pursueda strategy that was largely focused on growth through the acquisition ofimaging businesses in various parts of the country. More recently, we began theprocess of implementing a strategy based on core markets. A core marketstrategy may allow us more operating efficiencies and synergies than areavailable in a nationwide strategy. A core market will be based on many factorsand not just the number of fixed-site centers or mobile facilities in an area.Other factors would include, without limitation, the capabilities of ourcontracted radiologists, any hospital affiliations, the strength of returns oncapital investment, the potential for growth and sustainability of our businessin the area, the reimbursement environment for the area, the strength ofcompeting providers in the area, population growth trends, and any regulatoryrestrictions. We expect that this strategy will result in us exiting somemarkets while increasing our presence in others, which may be accomplishedthrough business or asset sales, swaps, purchases, closures and the developmentof new fixed-site centers. As discussed below, our board of directors wasrecently reconfigured with five new members. Our management is reviewing andanalyzing with our board of directors our core market strategy. As a result, wemay determine to continue with such strategy, modify such strategy or identifyan alternate strategy.

Our principalexecutive offices are located at 26250 Enterprise Court, Suite 100, LakeForest, California 92630, and our telephone number is (949) 282-6000. Ourinternet address is www.insighthealth.com. www.insighthealth.com is a textualreference only, meaning that the information contained on the website is notpart of this Form 10-K and is not incorporated by reference in this Form 10-Kor in any other filings we make with the Securities and Exchange Commission, orSEC.

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We file annual,quarterly and special reports and other information with the SEC. You may readand copy materials that we have filed with the SEC at the following SEC publicreference room:

450 Fifth Street,N.W.Room 1024Washington, D.C. 20549

Please call theSEC at 1-800-SEC-0330 for further information on the public reference room. OurSEC filings are also available to the public on the SEC’s internet website at http://www.sec.gov.

**Reorganization**

In November 2006, weengaged Lazard Frères & Co. LLC as our financial advisor to assist us inexploring strategic alternatives. In March 2007, we announced an offer toexchange shares of Holdings’common stock for up to $194.5 million aggregate principal amount of InSight’s 9.875% senior subordinated notes due2011, or senior subordinated notes. The exchange offer initially provided forconsummation on an out-of-court basis or in connection with the filing of aprepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. OnMay 29, 2007, Holdings and InSight filed voluntary petitions to reorganizetheir business under chapter 11 of the Bankruptcy Code in the U.S. BankruptcyCourt for the District of Delaware (Case No. 07-10700). The other subsidiariesof Holdings were not included in the bankruptcy filing and continued to operatetheir business. On July 10, 2007, the bankruptcy court confirmed Holdings’ and InSight’s Second Amended Joint Plan of Reorganization pursuant tochapter 11 of the Bankruptcy Code. The plan of reorganization becameeffective and Holdings and InSight emerged from bankruptcy protection on August1, 2007, or the effective date.

On August 1, 2007,pursuant to the exchange offer and the plan of reorganization, all of Holdings’ common stock, all options forHoldings’ common stock and all ofInSight’s senior subordinatednotes were cancelled, and the following distributions were made (after givingeffect to a 1 for 6.326392 reverse stock split of Holdings’ common stock):

·                  Holdersof InSight’s senior subordinatednotes received 7,780,000 shares of newly issued Holdings’ common stock, which represented 90% of all shares of Holdings’ common stock outstanding afterconsummation of the plan of reorganization.

·                  Holdersof Holdings’ common stock priorto the effective date received 864,444 shares of newly issued Holdings’ common stock, which represented 10%of all shares of Holdings’ commonstock after consummation of the plan of reorganization.

Holdings’ common stock islisted on the Over-The-Counter Bulletin Board under the symbol “ISGT”.

The plan ofreorganization provided for the assumption of substantially all executorycontracts and unexpired leases; provided, however, we did terminate (i) themanagement agreement with J.W. Childs Advisors II, L.P. and Halifax Genpar,L.P. and (ii) the stockholders agreement with holders of Holdings’ common stock and stock options.Pursuant to the plan of reorganization, the boards of directors of Holdings andInSight were reconfigured, and five of the directors of each board weredesignated by an ad hoc committee of holders of senior subordinated notes, onewas designated by the holders of Holdings’common stock prior to the effective date, and Bret W. Jorgensen, the Presidentand Chief Executive Officer of Holdings and InSight, remained a director.Additional information regarding the new board of directors is set forth belowin Part III of this Form 10-K.

This reorganization significantly deleveraged our balancesheet and improved our projected cash flow after debt service and long-termliquidity. As a result, we believe this reorganization has improved our abilityto compete in our industry, although we continue to operate with significantleverage and face the industry challenges of overcapacity and reimbursementreductions by Medicare and other third-party payors.

On August 1, 2007, weimplemented fresh-start reporting in accordance with American Institute ofCertified Public Accountants’Statement of Position 90-7 “Financial Reporting by Entities inReorganization under the Bankruptcy Code”, or SOP 90-7. The provisions of fresh-start reporting requirethat we revalue our assets and liabilities to fair value, reestablishstockholders’ equity using the reorganized value established in connection withthe plan of

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reorganization, andrecord any applicable reorganization value in excess of amounts allocable toidentifiable assets as an intangible asset. As a result of the adoption of SOP90-7, we are reviewing the fair value of our assets and liabilities and expectthat we will be required to adjust the value of some of our assets andliabilities. We expect that the implementation of fresh-start reporting underSOP 90-7 will have a material effect on our consolidated financial statements.As a result, our consolidated financial statements published for periodsfollowing the effectiveness of the plan of reorganization on August 1, 2007,will not be comparable to our consolidated financial statements publishedbefore the effectiveness of the plan and included elsewhere in this Form 10-K.See Note 20 to our consolidated financial statements, which are a part of thisForm 10-K.

**Fixed-Site Business**

Our fixed-site centers provide a full spectrum ofdiagnostic imaging services to patients, physicians, insurance payors andmanaged care organizations. Of our 101 fixed-site centers, 56 offer MRIservices exclusively and two offer either PET or PET/CT exclusively. Ourremaining 43 fixed-site centers are multi-modality sites typically offering MRIand one or more of PET, CT, x-ray, mammography, ultrasound, nuclear medicine,bone densitometry and nuclear cardiology. Diagnostic services are provided to apatient upon referral by a physician. Physicians refer patients to ourfixed-site centers based on our service reputation, equipment, breadth ofmanaged care contracts and convenient locations. Our fixed-site centers providethe equipment and technologists for the procedures, contract with radiologiststo interpret the procedures, and bill payors directly. We have more than 1,000managed care contracts with managed care organizations at our fixed-sitecenters. These managed care contracts often last for a period of multiple yearsbecause (1) they do not have specific terms or specific termination dates or(2) they contain annual “evergreen” provisions that provide for the contract toautomatically renew unless either party terminates the contract.

In addition to our independent facilities, we enterinto joint ventures with hospitals, pursuant to which the hospital outsourcesits radiology function (primarily MRI) to us and we then install theappropriate imaging equipment on the hospital campus. Joint ventures areattractive to hospitals that lack the resources, management expertise orpatient volume to provide their own imaging services or require incrementalcapacity. Joint ventures with hospitals provide us with partners capable ofgenerating significant inpatient procedure volumes through fixed-site centers.Furthermore, our joint ventures allow us to charge a management and billing feefor supporting the day-to-day operations of the jointly owned centers. Jointventures with radiology groups provide us with partners that have establishedrelationships in the fixed-site center’s surrounding community.

**Mobile Business**

Hospitals can access our diagnostic imaging technologythrough our network of 112 mobile facilities. We currently have contracts withmore than 300 hospitals, physician groups and other healthcare providers. Weenable hospitals, physician groups and other healthcare providers to benefitfrom our imaging equipment without investing their own capital directly.Interpretation services are generally provided by the hospital’s radiologists or physician groups andnot by us.

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 facilities while controlling the costs to transport the mobilefacilities from one location to another. Our mobile facilities are scheduledfor as little as one-half day and up to seven days per week at any particularsite. We generally enter into one to five year-term contracts with our mobilecustomers under which they assume responsibility for billing and collections.We are paid directly by our mobile customers on a contracted amount for ourservices, regardless of whether they are reimbursed.

Our mobile business provides a significant advantagefor establishing long-term arrangements with hospitals, physician groups andother healthcare providers and expanding our fixed-site business. We establishmobile 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 achieved to support a fixed-site center.

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**DIAGNOSTIC IMAGING TECHNOLOGY**

Ourdiagnostic imaging systems consist of MRI systems, PET/CT systems, PET systems,CT systems, digital ultrasound systems, x-ray, mammography,radiography/fluoroscopy systems and bone densitometry. Each of these types ofimaging systems (other than x-ray) represents the marriage of computertechnology and various medical imaging modalities. The following highlights ourprimary imaging systems:

*Magnetic Resonance Imaging or MRI*

MRIis a technique that involves the use of high-strength magnetic fields toproduce computer-processed, three-dimensional, cross-sectional images of thebody. The resulting image reproduces soft tissue anatomy (as found in thebrain, breast tissue, spinal cord and interior ligaments of body joints such asthe knee) with superior clarity, not available by any other currently existingimaging modality, and without exposing patients to ionizing radiation. MRIsystems are classified into two classes, conventional MRI systems and Open MRIsystems. The structure of conventional MRI systems allows for higher magnetfield strengths, better image quality and faster scanning times than Open MRIsystems. However, Open MRI systems are able to service patients who have accessdifficulties with conventional MRI systems, including pediatric patients andpatients suffering from post-traumatic stress, claustrophobia or significantobesity. A typical conventional MRI examination takes from 20 to 45 minutes. Atypical Open MRI examination takes from 30 to 60 minutes. MRI generally reducesthe cost and amount of care needed and often eliminates the need for invasivediagnostic procedures. MRI systems are typically priced in the range of$0.9 million to $2.5 million each.

*Computed Tomography or CT*

InCT imaging, a computer analyzes the information received from x-ray beams toproduce multiple cross-sectional images of a particular organ or area of thebody. CT imaging is used to detect tumors and other conditions affecting bonesand internal organs. A typical CT examination takes from five to20 minutes. CT systems are typically priced in the range of$0.7 million to $1.8 million each.

*Positron Emission Tomography or PET*

PETis a nuclear medicine procedure that produces pictures of the body’s metabolic and biological functions.PET can provide earlier detection as well as monitoring of certain cancers,coronary diseases or neurological problems than other diagnostic imagingsystems. The information provided by PET technology often obviates the need toperform further highly invasive or diagnostic surgical procedures. Interest inPET has increased due to several factors including a growing recognition byclinicians that PET is a powerful diagnostic tool, increased third-party payorcoverage and the availability of the isotopes used for PET scanning. PET/CTsystems fuse together the results of a PET scan and CT scan, which makes itpossible to collect both anatomical and biological information during a singleprocedure. A typical PET or PET/CT examination takes from 20 to 60 minutes.PET/CT systems are typically priced in the range of $1.8 million to$2.3 million each.

*Other Imaging Technologies*

·                  Ultrasound systems use,detect and process high frequency sound waves to generate images of softtissues and internal body organs.

·                  X-ray is the most commonenergy source used in imaging the body and is now employed in conventionalx-ray systems, CT and digital x-ray systems.

·                  Mammography is a low-levelconventional examination of the breasts. Its primary purpose is to detectlesions in the breast that may be too small or deeply buried to be felt in aregular breast examination.

·                  Bone densitometry uses anadvanced technology called dual-energy x-ray absorptiometry, or DEXA, whichsafely, accurately and painlessly measures bone density and the mineral contentof bone for the diagnosis of osteoporosis.

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**BUSINESS DEVELOPMENT**

Our objective is to be a leading provider ofdiagnostic imaging services in our core markets. Our efforts are focused on twocomponents.

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

·                  broadeningour physician referral base and generating new sources of revenues throughselective marketing activities;

·                  focusingour marketing efforts on attracting additional managed care customers;

·                  emphasizingquality of care and convenience to our customers; and

·                  expandingcurrent imaging applications of existing modalities to increase overallprocedure volume.

Second, we intend toimplement our core market strategy by:

·                  developingnew fixed-site centers, mobile routes, and joint ventures with hospitals orradiologists and making disciplined acquisitions where attractive returns oninvestment can be achieved and sustained; and

·                  sellingor closing certain existing fixed-site centers, restructuring or terminatingcertain mobile routes and redeploying such capital to obtain more attractivereturns.

Generally, theseactivities are aimed at increasing revenues and gross profit, maximizingutilization of existing capacity and increasing economies of scale. Incrementalgross profit resulting from such activities will vary depending on geographiclocation, whether facilities are mobile or fixed, the range of servicesprovided and the strength of our joint venture partners. We believe thatimplementing our core market strategy is a key factor in improving ouroperating results.

**GOVERNMENT REGULATION**

The healthcare industry ishighly 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.

*Federal False Claims Act:* The federal False Claims Act and, inparticular, the False Claims Act’s “qui tam” or “whistleblower” provisions allow a private individual to bringactions in the name of the government alleging that a defendant has made falseclaims for payment from federal funds. After the individual has initiated thelawsuit, the government must decide whether to intervene in the lawsuit and tobecome the primary prosecutor. Until the government makes a decision, thelawsuit is kept secret. If the government declines to join the lawsuit, theindividual may choose to pursue the case alone, in which case the individual’s counsel will have primary control overthe prosecution, although the government must be kept apprised of the progressof the 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 whetherthe government intervened in the case and other factors. In recent years thenumber of suits brought against healthcare providers by government regulatorsand private individuals has increased dramatically. In addition, various statesare considering or have enacted laws modeled after the federal False ClaimsAct, penalizing false claims against state funds. If a whistleblower action isbrought against us, even if it is dismissed with no judgment or settlement, wemay incur substantial legal fees and other costs relating to an investigation.Actions brought under the False Claims Act may result in significant fines andlegal

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fees and distract our management’s attention, which would adversely affectour financial condition and results of operations.

When an entity is determined to have violated thefederal False Claims Act, it must pay three times the actual damages sustainedby the government, plus mandatory civil penalties of between $5,500 to $11,000for each separate false claim, as well as the government’s attorneys’ fees. Liability arises when an entity knowinglysubmits, or causes someone else to submit, a false claim for reimbursement tothe federal government or submits a false claim with reckless disregard for, orin deliberate 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 to comply with themany technical billing requirements applicable to our Medicare and Medicaidbusiness.

·                  Failure to comply withMedicare requirements concerning the circumstances in which a hospital, ratherthan we, must bill Medicare for diagnostic imaging services we provide tooutpatients treated by the hospital.

·                  Failure of our hospitalcustomers to accurately identify and report our reimbursable and allowableservices to Medicare.

·                  Failure to comply with theprohibition against billing for services ordered or supervised by a physicianwho is excluded from any federal healthcare programs, or the prohibitionagainst employing or contracting with any person or entity excluded from anyfederal healthcare programs.

·                  Failure to comply with theMedicare physician supervision requirements for the services we provide, or theMedicare documentation requirements concerning physician supervision.

·                  The past conduct of thebusinesses we have acquired.

We strive to ensure that we meet applicable billingrequirements. However, the costs of defending claims under the False ClaimsAct, as well as sanctions imposed under the Act, could significantly affect ourbusiness, financial condition and results of operations.

*Anti-kickback Statutes:* We are subject to federal and state lawswhich govern financial and other arrangements between healthcare providers.These include the federal anti-kickback statute which, among other things,prohibits the knowing and willful solicitation, offer, payment or receipt ofany remuneration, direct or indirect, in cash or in kind, in return for or toinduce the referral of patients for items or services covered by Medicare,Medicaid and certain other governmental health programs. Violation of theanti-kickback statute may result in civil or criminal penalties and exclusionfrom the Medicare, Medicaid and other federal healthcare 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 payments for service contracts and equipment leases thatare designed, even if only in part, to provide direct or indirect remunerationfor patient referrals or similar opportunities to furnish reimbursable items orservices. 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 violate the anti-kickback statutes. The safeharbors are narrowly drawn and some of our relationships may not qualify forany “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

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provisions are interpreted broadly by regulatoryauthorities, we cannot be assured that law enforcement officials or others willnot challenge our operations under these statutes.

*Civil Money Penalty Law and OtherFederal Statutes:*The Civil Money Penalty, or CMP, law covers a variety of practices. It providesa means of administrative enforcement of the anti-kickback statute, andprohibits false claims, claims for medically unnecessary services, violationsof Medicare participating provider or assignment agreements and otherpractices. The statute gives the Office of Inspector General of the HHS thepower to seek substantial civil fines, exclusion and other sanctions againstproviders or others who violate the CMP prohibitions.

In addition, in 1996, Congress created a new federalcrime: healthcare fraud and false statements relating to healthcare matters.The healthcare fraud statute prohibits knowingly and willfully executing ascheme to defraud any healthcare benefit program, including private payors. Aviolation of this statute is a felony and may result in fines, imprisonment orexclusion from government sponsored programs such as the Medicare and Medicaidprograms. The false statements statute prohibits knowingly and willfullyfalsifying, concealing or covering up a material fact or making any materiallyfalse, fictitious or fraudulent statement in connection with the delivery of orpayment for healthcare benefits, items or services, including those provided byprivate payors. A violation of this statute is a felony and may result in finesor imprisonment.

We believe that ouroperations materially comply with the CMP law and the healthcare fraud andfalse statements 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 ourfinancial condition and results of operations.

*Health Insurance Portability andAccountability Act:*In 1996, Congress passed the Health Insurance Portability and AccountabilityAct, or HIPAA. Although the main focus of HIPAA was to make health insurancecoverage portable, HIPAA has become a short-hand reference to new standards forelectronic transactions and privacy and security obligations imposed onproviders and others who handle personal health information. HIPAA requireshealthcare providers to adopt standard formats for common electronictransactions with health plans, and to maintain the privacy and security ofindividual patients’ health information. The privacy standards went into effect onApril 14, 2003, the electronic standards for transactions went into effecton October 16, 2003 and the security standards went into effect on April20, 2005. A violation of HIPAA’s standard transactions, privacy and securityprovisions may result in criminal and civil penalties, which could adverselyaffect our financial condition and results of operations.

*Stark and State PhysicianSelf-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 health services under Stark includeradiology services (MRI, CT, x-ray, ultrasound and others), radiation therapy,inpatient and outpatient hospital services and several other services. Aviolation of the Stark Law does not require a showing of intent. If a physicianhas a financial relationship with an entity that does not qualify for an exception,the referral of Medicare patients to that entity for designated health servicesis prohibited and, if the entity bills for such services, the Stark sanctionsapply.

Sanctions for violating Stark include denial ofpayment, mandatory refunds, civil money penalties and/or exclusion from theMedicare program. In addition, some courts have allowed federal False ClaimsAct lawsuits premised on Stark Law violations.

The federal Stark Law prohibition is expansive, andits statutory language and implementing regulations are ambiguous.Consequently, the statute has been difficult to interpret. In 1995, the Centersfor Medicare and Medicaid Services, or CMS, published final regulationsinterpreting the Stark prohibition as applied to clinical laboratory services.In 2001, CMS published Phase I of the final Stark regulations relating toall designated health services (including clinical laboratory services) whichwent into effect in January 2002. On March 26, 2004, CMS publishedPhase II of the final Stark regulations which became effective in July2004. Phase II included some additional regulatory exceptions anddefinitions providing more flexibility in some areas and more specificity inothers, but did

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not extend designated health services to PET ornuclear medicine. In November 2005, CMS published final regulations thatdesignated PET, PET/CT and nuclear medicine as designated health services underStark Law but delayed implementation until January 1, 2007. On September 5,2007, CMS published Phase III of the final Stark regulations to be effective onDecember 4, 2007. Phase III modified certain definitions under the regulationsand amended certain existing exceptions in an effort to provide furtherclarification and respond to industry comments. In addition to the publicationof Phase III, on July 2, 2007, as part of the Medicare Physician Fee ScheduleProposed Rule, CMS published additional proposed changes to the Starkregulations and solicited comments on a number of issues. The earliest theseproposed rules could take effect is January 1, 2008; however, it is not certainthat all or even some of these proposed changes to the Stark regulations willbecome final.

With each set of regulations, CMS’s interpretation of the statute hasevolved. This has resulted in considerable confusion concerning the scope ofthe referral prohibition and the requirements of the various exceptions. It isnoteworthy, however, that CMS has taken the position that the Stark Law isself-effectuating and does not require implementing regulations. Thus, thegovernment believes that physicians and others must comply with the Stark Lawprohibitions regardless of the state of the regulatory guidance.

The Stark Law does notdirectly prohibit referral of Medicaid patients, but rather denies federalfinancial participation to state Medicaid programs for services providedpursuant to a tainted referral. Thus, Medicaid referrals are subject towhatever sanctions the relevant state has adopted. Several states in which weoperate 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 for violatingthese state statutes include loss of participation, civil fines and criminalpenalties. The laws vary from state to state and seldom have been interpretedby the courts or regulatory agencies. Nonetheless, strict enforcement of theserequirements is likely.

We believe our operations materially comply with thefederal and state physician self-referral laws. However, given the ambiguity ofthese statutes, the uncertainty of the regulations and the lack of judicialguidance on many key issues, we can give no assurance that the Stark Law orother physician self-referral regulations will not be interpreted in a mannerthat could adversely affect our financial condition and results of operations.

*FDA:* The U.S. Food and Drug Administration, or FDA,has issued the requisite premarket approval for all of our MRI, PET, PET/CT andCT systems. We do not believe that any further FDA approval is required inconnection with equipment currently in operation or proposed to be operated;except under regulations issued by the FDA pursuant to the Mammography QualityStandards Act of 1992, all mammography facilities must have a certificateissued by the FDA. In order to obtain a certificate, a mammography facility isrequired to be accredited by an FDA approved accrediting body (a private,non-profit organization or state agency) or other entity designated by the FDA.Pursuant to the accreditation process, each facility providing mammographyservices must comply with certain standards including annual inspection.

Compliance with these standards is required to obtainpayment for Medicare services and to avoid various sanctions, includingmonetary penalties, or suspension of certification. Although all of ourfacilities which provide mammography services are currently accredited by theMammography Accreditation Program of the American College of Radiology and weanticipate continuing to meet the requirements for accreditation, thewithdrawal of such accreditation could result in the revocation or suspensionof certification by the FDA, ineligibility for Medicare reimbursement andsanctions, including monetary penalties. Congress has extended Medicarebenefits to include coverage of screening mammography subject to the prescribedquality standards described above. The regulations apply to diagnosticmammography as well as screening mammography.

*Radiologistand Facility Licensing:* The radiologists with whom we contract toprovide professional services are subject to licensing and related regulationsby the states, including registrations to use radioactive materials. As aresult, we require our radiologists to have and maintain appropriate licensureand registrations. In addition, some states also impose licensing or otherrequirements on us at our facilities and other states may impose similarrequirements in the future. Some local authorities may also require us toobtain various licenses, permits and approvals. We believe that we haveobtained all required licenses and permits; however, the criteria governinglicensing or permitting may change or additional laws and licensingrequirements governing our facilities may be enacted. These changes couldadversely affect our financial condition and results of operations.

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*LiabilityInsurance:* The hospitals, physician groups and other healthcareproviders who use our diagnostic imaging systems are involved in the deliveryof healthcare services to the public and, therefore, are exposed to the risk ofliability claims. Our position is that we do not engage in the practice ofmedicine. We provide only the equipment and technical components of diagnosticimaging, 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 insurancein amounts we believe are adequate for our business of providing diagnosticimaging, treatment and management services. In addition, the radiologists orother healthcare professionals with whom we contract are required by suchcontracts to carry adequate medical malpractice insurance. Successfulmalpractice claims asserted against us, to the extent not covered by ourliability insurance, could adversely affect our financial condition and resultsof operations.

*IndependentDiagnostic Treatment Facilities:* CMS has established acategory of Medicare provider referred to as Independent Diagnostic TreatmentFacilities, or IDTFs. Imaging centers have the option to participate in theMedicare program as either IDTFs or medical groups. Most of our fixed-sitecenters are IDTFs. In August 2006, CMS proposed new certification standards forIDTFs, which were effective on January 1, 2007 and must be implemented byOctober 1, 2007. Although we expect our IDTFs to meet these new certificationstandards, CMS may increase its oversight to ensure compliance with the newstandards. Further, CMS proposed additional certification standards for IDTFsin the 2008 Medicare Physician Fee Schedule Proposed Rule. If thesecertification standards are deemed final, they could become effective January1, 2008. In addition, IDTFs are being monitored by CMS, particularly withrespect to physician supervision requirements. If CMS exercises increasedoversight of IDTFs, our financial condition and results of operations could be adverselyaffected.

*Certificates of Need**:* Some statesrequire hospitals and certain other healthcare facilities and providers toobtain a certificate of need, or CON, or similar regulatory approval prior toestablishing certain healthcare operations or services, incurring certaincapital projects and/or the acquisition of major medical equipment includingMRI, PET and PET/CT systems. We believe that we have complied or will complywith applicable CON requirements in those states where we operate. Nevertheless,this is an area of continuing legislative activity, and CON and licensingstatutes may be modified in the future in a manner that may have a materialadverse effect on our financial condition and results of operations.

*Environmental,Health and Safety Laws:* Our PET and PET/CT services and some of ourother imaging services require the use of radioactive materials, which aresubject to federal, state and local regulations governing the storage, use anddisposal of materials and waste products. We could incur significant costs inorder to comply with current or future environmental, health and safety lawsand regulations. However, we believe that environmental, health and safety lawsand regulations will not (1) cause us to incur any material capital expendituresin our current year or the succeeding year, including costs for environmentalcontrol facilities or (2) materially impact our revenues or our competitiveposition.

**SALES AND MARKETING**

We engage in salesand marketing activities to obtain new sources of revenues, expand businessrelationships, grow revenues at existing facilities, and maintain presentbusiness alliances and contractual relationships. Sales and marketingactivities for our fixed operations include educating physicians on new applicationsand uses of the technology and customer service programs. In addition, we seekto leverage our core market concentration to develop contractual relationshipswith managed care payors to increase patient volume. Sales and marketingactivities for our mobile business include direct marketing to hospitals anddeveloping leads through current customers, equipment manufacturers, and othervendors. In addition, marketing activities for our mobile operations 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 compete

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with groups ofradiologists, established hospitals and certain other independentorganizations, including equipment manufacturers and leasing companies that ownand operate imaging equipment. We will continue to encounter substantialcompetition from hospitals and independent organizations, including AllianceImaging, Inc., Radnet, Inc., Diagnostic Health Corporation, MedQuest, Inc.,Shared Imaging and Otter Tail Corporation doing business as DMS Imaging. Someof our direct competitors may have access to greater financial resources thanwe do.

Certain hospitals,particularly the larger or more financially stable hospitals, have and may beexpected to directly acquire and operate imaging equipment on-site as part oftheir overall inpatient servicing capability, assume the associated financialrisk, employ the necessary technologists and satisfy applicable CON and licensurerequirements, if any. Historically, smaller hospitals have been reluctant topurchase imaging equipment, but some have chosen to do so with attractivefinancing offered by equipment manufacturers. Some physician practices havealso established diagnostic imaging centers or purchased imaging equipment fortheir own offices, and we anticipate that others will as well.

**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 afee-for-service basis. Patient services revenues and management fees areprimarily earned through fixed-site centers. Contract services revenues aregenerally earned from services billed to a hospital, physician group or otherhealthcare provider, which include fee-for-service arrangements in whichrevenues are based upon a contractual rate per procedure and fixed feecontracts. Contract services revenues are primarily earned through mobilefacilities pursuant to contracts with a term from one to five years. Asignificant number of our mobile contracts will expire each year. Our mobilefacility contract renewal rate was 83% for the year ended June 30, 2007.However, we expect that some high volume customer accounts will elect not torenew their contracts and instead will purchase or lease their own diagnostic imagingequipment and some customers may choose an alternative services provider.

During the year endedJune 30, 2007, approximately 55% of our revenues were generated from patientservices and approximately 45% were generated from contract services.

**DIAGNOSTIC IMAGING AND OTHEREQUIPMENT**

As of June 30, 2007, weowned or leased 260 diagnostic imaging and treatment systems, with thefollowing classifications: 3.0 Tesla MRI, 1.5 Tesla MRI, 1.0 Tesla MRI, OpenMRI, PET, PET/CT, CT and other technology. Magnetic field strength is themeasurement of the magnet used inside an MRI system. If the magnetic fieldstrength is increased the image quality of the scan is improved and the timerequired to complete scans is decreased. Magnetic field strength on our MRIsystems currently ranges from 0.2 to 3.0 Tesla. Of our 169 conventional MRIsystems, 159 have a magnet field strength of 1.5 Tesla, which is the industrystandard magnet strength for conventional fixed and mobile MRI systems. Otherthan ultra-high field MRI systems and 256-slice CT systems, we are aware of nosubstantial technological changes; however, should such changes occur, we maynot be able to acquire the new or improved systems.

We continue to evaluatethe mix of our diagnostic imaging equipment in response to changes intechnology and to any overcapacity in the marketplace. We improve our equipmentthrough upgrades, disposal and/or trade-in of older equipment and the purchaseor execution of leases for new equipment in response to market demands.

Several large companiespresently manufacture MRI (including Open MRI), PET, PET/CT, CT and otherdiagnostic imaging equipment, including General Electric Health Care, HitachiMedical Systems, Siemens Medical Systems, Toshiba American Medical Systems andPhillips Medical Systems. We have acquired MRI and CT systems that weremanufactured by each of the foregoing companies. We have acquired PET or PET/CTsystems that were manufactured by General Electric Health Care and SiemensMedical Systems. We enter into individual purchase orders for each system thatwe acquire, and we do not have long-term purchase arrangements with anyequipment manufacturer. We maintain good working relationships with many of themajor manufacturers to better ensure adequate supply as well as access to thosetypes of diagnostic imaging systems which appear most appropriate for thespecific imaging facility to be established.

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**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.  Inaddition, we are installing new picture archiving and communication systems, orPACS, in our fixed-site centers for the digital management of diagnosticimages.

**COMPLIANCE PROGRAM**

We havevoluntarily implemented a program to monitor compliance with federal and statelaws and regulations applicable to healthcare organizations.  We have appointed a compliance officer who ischarged with implementing and supervising our compliance program, which includesa code of ethical conduct for our employees and affiliates and a process forreporting regulatory or ethical concerns to our compliance officer, including atoll-free telephone hotline. We believe that our compliance program meets therelevant standards provided by the Office of Inspector General of the HHS. Animportant part of our compliance program consists of conducting periodicreviews of various aspects of our operations. Our compliance program alsocontemplates mandatory education programs designed to familiarize our employeeswith the regulatory requirements and specific elements of our complianceprogram.

**EMPLOYEES**

As of August 31, 2007, wehad approximately 1,579 full-time, 105 part-time and 464 per diememployees.  None of our employees iscovered by a collective bargaining agreement. Management believes its employeerelations to be satisfactory.

**FORWARD-LOOKINGSTATEMENTS DISCLOSURE**

This Form 10-Kincludes “forward-looking statements.” Forward-looking statements include statements concerning our plans,objectives, goals, strategies, future events, future revenues or performance,capital projects, financing needs, debt repurchases, plans or intentionsrelating to acquisitions and new fixed-site developments, competitive strengthsand weaknesses, business strategy and the trends that we anticipate in theindustry and economies in which we operate and other information that is nothistorical information.  When used inthis Form 10-K the words “estimates,” “expects,” “anticipates,” “projects,”“plans,” “intends,” “believes,” and variations of such words or similarexpressions are intended to identify forward-looking statements.  All forward-looking statements, including,without limitation, our examination of historical operating trends, are basedupon our current expectations and various assumptions.  Our expectations, beliefs and projections areexpressed in good faith, and we believe there is a reasonable basis for them,but we can give no assurance that our expectations, beliefs and projectionswill 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 Form10-K.  Important factors that could causeour actual results to differ materially from the forward-looking statementsmade in this Form 10-K are set forth in this Form 10-K, including the factorsdescribed in Item 1A. “RiskFactors” below and the following:

·                  overcapacityand competition in our markets;

·                  reductions,limitations and delays in reimbursement by third-party payors;

·                  contractrenewals and financial stability of customers;

·                  conditionswithin the healthcare environment;

·                  thepotential for rapid and significant changes in technology and their effect onour operations;

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·                  operating,legal, governmental and regulatory risks;

·                  economic,political and competitive forces affecting our business; and

·                  ourability to successfully integrate acquisitions.

If any of theserisks or uncertainties materializes, 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 disclaim any intention or obligation toupdate or revise forward-looking statements to reflect future events orcircumstances.

**ITEM 1A.       RISK FACTORS**

In addition to the otherinformation contained in this Form 10-K, the following risk factors shouldbe carefully considered.  If any of these risks actually occur, ourfinancial condition and results of operations could be adversely affected.

*RISKSRELATING TO OUR INDEBTEDNESS*

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

Notwithstanding theconsummation of our exchange offer and plan of reorganization, we still have asubstantial amount of debt, which requires significant interest and principalpayments.  As of August 2, 2007, we hadtotal indebtedness of approximately $321.4 million.  In addition, subject to the limits containedin the indenture governing our floating rate notes and our other debt instruments,we may be able to incur additional indebtedness from time to time to financeworking capital, capital projects, investments or acquisitions, or for otherpurposes. If we do so, the risks related to our high level of debt couldintensify.   Specifically, our high levelof debt could have important consequences, including the following: 

·                  making it moredifficult for us to satisfy our obligations with respect to the floating ratenotes and our other debt; 

·                  limiting ourability to obtain additional financing to fund future working capital, capitalprojects, acquisitions or other general corporate requirements; 

·                  requiring asubstantial portion of our cash flows to be dedicated to debt service paymentsinstead of other purposes; 

·                  increasing ourvulnerability to general adverse economic and industry conditions; 

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

·                  placing us at acompetitive disadvantage compared to our competitors that have less debt; and 

·                  increasing ourcost of borrowing.

***We may be unable to service our debt.***

Our ability to makescheduled payments on or to refinance our obligations with respect to our debt,including, but not limited to, the floating rate notes, will depend on ourfinancial and operating performance, which will be affected by generaleconomic, financial, competitive, business and other factors beyond ourcontrol. We cannot assure you that our business will generate sufficient cashflow from operations or that future borrowings will be available to us in anamount sufficient to enable us to service our debt, including, but not limitedto, the floating rate notes, or to fund our other liquidity needs. 

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If we are unable to meetour debt obligations or fund our other liquidity needs, we may need torestructure or refinance all or a portion of our debt on or before maturity,including, but not limited to, the floating rate notes, or sell certain of ourassets. We cannot assure you that we will be able to restructure or refinanceany of our debt on commercially reasonable terms, if at all, which could causeus to default on our debt obligations and impair our liquidity. Anyrestructuring or refinancing of our debt could be at higher interest rates andmay require us to comply with more onerous covenants, which could furtherrestrict our business operations. 

***Our operations may be restricted by the terms of our debt,which could adversely affect us and increase our credit risk.***

The agreements governingour material indebtedness include a number of significant restrictivecovenants.  These covenants could adversely affect us, and adverselyaffect investors, by limiting our ability to plan for or react to marketconditions or to meet our capital needs. These covenants, among other things,restrict our ability to:

·                  incurmore debt;

·                  createliens;

·                  paydividends and make distributions or repurchase stock;

·                  makeinvestments;

·                  mergeor consolidate or transfer or sell assets; and

·                  engagein transactions with affiliates.

A breach of a covenant orother provision in any debt instrument governing our current or futureindebtedness could result in a default under that instrument and, due tocross-default and cross-acceleration provisions, could result in a defaultunder our other debt instruments. Upon the occurrence of an event of defaultunder our debt instruments, the lenders may be able to elect to declare allamounts outstanding to be immediately due and payable and terminate allcommitments to extend further credit. If we are unable to repay those amounts,the lenders could proceed against the collateral granted to them, if any, tosecure the indebtedness.  If the lendersunder our current or future indebtedness accelerate the payment of theindebtedness, we cannot assure you that our assets or cash flow would besufficient to repay in full our outstanding indebtedness.  Substantiallyall of our assets, other than those assets consisting of accounts receivablesand related assets or cash accounts related to receivables, which secure ourcredit facility, and a portion of InSight’s stock and the stock of itssubsidiaries, are subject to the liens in favor of the holders of our floatingrate notes. This may further limit our flexibility in obtaining secured orunsecured financing in the future.

***We may not have sufficient funds to purchase all outstandingfloating rate notes and our other debt upon a change of control.***

Upon a change of control,we will be required to make an offer to purchase all outstanding floating ratenotes at a price equal to 101% of their principal amount plus accrued andunpaid interest. Any future credit arrangements or other debt agreements towhich we become party may contain similar agreements. However, we cannot assureyou that we will have or will be able to borrow sufficient funds at the time ofany change of control to make any required repurchases of such notes or ourother debt. If we failed to make a change of control offer and to purchase allof the tendered notes, it would constitute an event of default under theindenture for the floating rate notes, and potentially, other debt. 

***If there is a default under the agreements governing ourmaterial indebtedness, the value of our assets may not be sufficient to repayour creditors.***

Our property andequipment (other than land, building and leasehold improvements and assetssecuring our capital lease obligations), which make up a significant portion ofour tangible assets, had a net book value as of June 30, 2007 of approximately$115.5 million.  The book value of these assets should not be relied on asa measure of

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realizable value for suchassets.  The realizable value of our assets may be greater or lower thansuch net book value.  The value of our assets in the event of liquidationwill depend upon market and economic conditions, the availability of buyers andsimilar factors.  A sale of these assets in a bankruptcy or similarproceeding would likely be made under duress, which would reduce the amountsthat could be recovered.  Furthermore, such a sale could occur when othercompanies in our industry also are distressed, which might increase the supplyof similar assets and therefore reduce the amounts that could berecovered.  Our intangible assets had a net book value as of June 30, 2007of approximately $95.1 million.  Theseassets primarily consist of the excess of the acquisition cost over the fairmarket value of the net assets acquired in purchase transactions. However, as a result of our adoption of fresh-start reporting on August 1, 2007all of our assets, including goodwill and other intangible assets will beremeasured using current fair value.  Asa result, in the event of a default under the agreements governing our materialindebtedness or any bankruptcy or dissolution of our company, the realizablevalue of these assets will likely be substantially lower and may beinsufficient to satisfy the claims of our creditors.

The condition of ourassets will likely deteriorate during any period of financial distresspreceding a sale of our assets.  In addition, much of our assets consistof illiquid assets that may have to be sold at a substantial discount in aninsolvency situation.  Accordingly, the proceeds of any such sale of ourassets may not be sufficient to satisfy, and may be substantially less than,amounts due to our creditors.

***Increases in interest rates could adversely affect ourfinancial condition and results of operations.***

An increase in prevailinginterest rates would have an immediate effect on the interest rates charged onour variable rate indebtedness, which rise and fall upon changes in interestrates.  At August 31, 2007, approximately 97.7% of our indebtedness wasvariable rate indebtedness.  In January2006, we entered into a two-year interest rate cap contract with a notionalamount of $100 million.  During the two-year term of this contract ourexposure on variable rate indebtedness is reduced by $100 million, or toapproximately 66.4% as of August 31, 2007.  Increases in interest rates wouldalso impact the refinancing of our fixed rate indebtedness.  If interestrates are higher when our fixed rate indebtedness becomes due, we may be forcedto 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 ourindebtedness.  As a protection against rising interest rates, we may enterinto agreements such as interest rate swaps, caps, floors and other interestrate exchange contracts.  These agreements, however, subject us to therisk that the other parties to the agreements may not perform their obligationsthereunder or that the agreements could be unenforceable.

*RISKSRELATING TO OUR BUSINESS*

***Changes in the rates or methods of third-partyreimbursements for our services could result in reduced demand for our servicesor create downward pricing pressure, which would result in a decline in ourrevenues and adversely affect our financial condition and results of operations.***

For the year ended June30, 2007, we derived approximately 55% of our revenues from direct billings topatients and third-party payors such as Medicare, Medicaid, managed care andprivate 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, whichprovided approximately 45% of our revenues during the year ended June 30, 2007,generally rely on reimbursement from third-party payors. To the extent ourprovider customers’ reimbursement from third-party payors is reduced, it willlikely have an adverse impact on our financial condition and results ofoperations since our provider customers will seek to offset decreasedreimbursement rates. In addition, the Medicare Payment Advisory Commission, inits March 2005 report to Congress, recommended that the government adoptstandards for physicians and providers who bill Medicare for interpretingdiagnostic imaging studies and adopt utilization management techniques used bythird-party private payors, such as the credentialing of physicians, in anattempt to control the rise of imaging costs.

Certain third-partypayors have proposed and implemented initiatives which have the effect ofsubstantially decreasing reimbursement rates for diagnostic imaging servicesprovided at non-hospital facilities, and third-party payors are continuing tomonitor reimbursement for diagnostic imaging services.  A third-party payorhas instituted a requirement of participation that freestanding imaging centerproviders offer multi-modality imaging services and not simply offer one typeof diagnostic imaging service. Similar initiatives enacted in the future bynumerous

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additional third-partypayors would have a material adverse impact on our financial condition andresults of operations.

Under Medicare’sprospective payment system for hospital outpatient services, or OPPS, ahospital is paid for outpatient services on a rate per service basis thatvaries according to the ambulatory payment classification, or APC, to which theservice is assigned rather than on a hospital’s costs.  Each year CMS publishes new APC rates thatare determined in accordance with the promulgated methodology.  Multi-modality and certain fixed-site centerswhich are freestanding and not hospital-based facilities are not directlyaffected by OPPS.

Under the final rule forOPPS effective January 1, 2007, technical fees for PET and PET/CT werereduced.  The national rate for PETchanged from $1,150 to $850 per scan plus reimbursement for the necessaryradiopharmaceutical and the national rate for PET/CT changed from $1,250 to$950 per scan plus reimbursement for the necessary radiopharmaceutical.  CMS posted the review copy of its notice ofproposed rule-making for OPPS on July 16, 2007. As part of the proposal, among other things, CMS seeks to package manyradiology and radiation oncology services and drugs into procedural codes,thereby paying one consolidated payment for a service that commonly involvesseveral coding components.  In addition,CMS is proposing to reassign the current procedural terminology codes forPET/CT scans to a new APC, with a proposed increased median of $1,093.52;however, this new payment rate includes the reimbursement for both thetechnical service and the necessary radiopharmaceutical. Because unfavorablereimbursement policies constrict the profit margins of the mobile customers webill directly, we have and may continue to lower our fees to retain existingPET and PET/CT customers and attract new ones.  Although CMS continues toexpand reimbursement for new applications of PET and PET/CT, expandedapplication is unlikely to significantly offset the anticipated overall reductionsin PET and PET/CT reimbursement.  Any modifications under OPPS furtherreducing reimbursement to hospitals may adversely impact our financialcondition and results of operations since hospitals will seek to offset suchmodifications.

In addition, in August 2005,CMS published proposed regulations that apply to hospital outpatient servicesthat significantly decrease the reimbursement for diagnostic proceduresperformed together on the same day.  Under the proposed new methodology,CMS has identified families of imaging procedures by imaging modality andcontiguous body area. Medicare would pay 100% of the technical component of thehigher priced procedure and 50% for the technical component of each additionalprocedure for procedures involving contiguous body parts within a family ofcodes when performed in the same session. Under the current methodology, Medicare pays 100% of the technicalcomponent of each procedure.  In November2006, CMS published final regulations that delay the implementation of this reimbursementmethodology.  Implementation of this reimbursement method would adverselyimpact our financial condition and results of operations since our hospitalcustomers would seek to offset their reduced reimbursement through lower rateswith us.  If third-party payors reduce the amount of their payments to ourcustomers, our customers will likely seek to reduce their payments to us orseek an alternate supplier of diagnostic imaging services. Because unfavorablereimbursement policies have constricted and may continue to constrict theprofit margins of the hospitals, physician groups and other healthcareproviders that we bill directly, we have lowered and may continue to need tolower our fees to retain existing customers and attract new ones.  Thesereductions would have a significant adverse effect on our financial conditionand results of operations by decreasing demand for our services or creatingdownward pricing pressure.

Services provided innon-hospital based freestanding facilities, including independent diagnostictreatment facilities, are paid under the Medicare Part B fee schedule.  InNovember 2005, CMS published final regulations, which would implement the samemulti-procedure methodology rate reduction proposed for hospital outpatientservices, for procedures reimbursed under the Part B fee schedule.  CMSproposed phasing this rate reduction over two years, 25% in 2006, and another25% in 2007.  The first phase of the rate reduction was effective January1, 2006; however, under final regulations released in November 2006, CMS willnot implement the second phase of the rate reduction in 2007.

The Deficit Reduction Actof 2005, or DRA, was signed into law by President Bush in February 2006. The DRA will result in significant reductions in reimbursement for radiologyservices for Medicare beneficiaries, with anticipated savings to the federalgovernment.  The DRA provides, among other things, that reimbursement forthe technical component for imaging services (excluding diagnostic and screeningmammography) in non-hospital based freestanding facilities will be the lesserof OPPS or the Medicare Part B fee schedule. These reductions became effectiveon January 1, 2007.  We believe that the implementation of thereimbursement reductions in the

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DRA will have a materialadverse effect on our financial condition and results of operations. For ourfiscal year ended June 30, 2007, Medicare revenues represented approximately$32 million, or approximately 11% of our total revenues.  We believe that theDRA reimbursement reduction decreased our patient services revenues byapproximately $3.1 million during the six months ended June 30, 2007.  We expect to experience a comparable decreasein our Medicare revenues for the six remaining months of calendar 2007.  While there are active and ongoing efforts tomodify or otherwise mitigate the financial impact of the DRA on radiologyservices, we currently do not anticipate that these efforts will be materiallysuccessful.  If these negative trendscontinue, our financial condition and results of operations could be adverselyaffected.

We do not know to whatextent other third-party payors may propose reimbursement reductions similar tothe DRA.  Several significant third-party payors implemented the reductionfor multiple images on contiguous body parts (as currently in effect under CMSregulations) and additional payors may implement this reduction aswell.   If CMS implements the secondphase of the rate reduction for multiple images on contiguous body parts, third-partypayors may follow CMS practice and implement a similar reduction.  Such reduction would further negativelyaffect our financial condition and results of operations.

Finally, Medicarereimbursement rates under the Medicare Part B fee schedule are calculated inaccordance with a statutory formula.  Asa result, for calendar years 2005, 2006 and 2007, CMS published regulationsdecreasing the Part B reimbursement rates by 3.3%, 4.3% and 5.0% respectively.  In each instance, Congress enactedlegislation preventing the decreases from taking effect.  This legislation increased the Part Breimbursement rates by 1.5% in 2005 and 2006. No specific increase was included in the 2007 legislation.  We anticipate that CMS will continue torelease regulations for decreases in reimbursement rates under the MedicarePart B fee schedule until the statutory formula is changed through enactment ofnew legislation.  In fact, the proposeddecrease under the Medicare Part B fee schedule is 5.1% for calendar 2008.

All of the congressionaland regulatory actions described above reflect industry-wide cost-containmentpressures that we believe will continue to affect healthcare providers for theforeseeable future.

***Negativetrends could continue to adversely affect our financial condition and resultsof operations.***

As a result of thevarious factors that affect our industry generally and our businessspecifically, we have experienced significant declines in Adjusted EBITDA ascompared to prior year periods for the past three fiscal years (see ourreconciliation of net cash provided by operating activities to Adjusted EBITDAin Item 7.  “Management’s Discussion andAnalysis of Financial Condition and Results of Operations – FinancialCondition, Liquidity and Capital Resources). We define Adjusted EBITDA as our earnings before interest expense,income taxes, depreciation and amortization, excluding the gain on repurchaseof notes payable, the loss on dissolution of partnership, the impairment ofgoodwill and other intangible assets and reorganization items.  For the year ended June 30, 2007, ourAdjusted EBITDA decreased approximately 24.2% as compared to the year endedJune 30, 2006.  This 24.2% decline in AdjustedEBITDA was preceded by an approximate 19.3% decline in Adjusted EBITDA for theyear ended June 30, 2006 compared to the year ended June 30, 2005.  Thedecline in Adjusted EBITDA as compared to prior years has become a historicaltrend based on our performance during the past three fiscal years.  Thisnegative trend in Adjusted EBITDA may continue and may be exacerbated by theadverse effects of the Medicare reimbursement reductions with respect to PETand PET/CT rates and the DRA, as discussed in the immediately preceding riskfactor.  If this negative trend does continue it would adverselyaffect our financial condition and results of operations.

***If we are unable torenew our existing customer contracts on favorable terms or at all, ourfinancial condition and results of operations would be adversely affected.***

Our financial conditionand results of operations depends on our ability to sustain and grow ourrevenues from existing customers.  Our revenues would decline if we areunable to renew our existing customer contracts on favorable terms.  For our mobile facilities, we generally enterinto contracts with hospitals having one to five year terms.  A significant number of our mobile contractswill expire each year.  Our mobile facility contract renewal rate was 83%for the year ended June 30, 2007.  We may not, however, achieve theserenewal rates in the future.  To the extent we do not renew a customercontract, it is not always possible to immediately obtain replacementcustomers.  Historically, many replacement customers have been smaller, whichhave lower procedure volumes.  In addition, attractive financing fromequipment manufacturers, as well as attractive gross margins have causedhospitals and

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physician groups who haveutilized shared mobile services from our company and our competitors topurchase and operate their own equipment.  Although the reductions inreimbursement under the Medicare Part B fee schedule may dissuade physiciangroups from operating their own equipment, we expect that some high volumecustomer accounts will continue to elect not to renew their contracts with usand instead acquire their own diagnostic imaging equipment.  This wouldadversely affect our financial condition and results of operations. Although the non-renewal of a single customer contract would not have amaterial impact on our revenues, non-renewal of several contracts on favorableterms, or at all, or the non-renewal of a long-term contract with a certaingovernmental entity, could have a significant negative impact on our financialcondition and results of operations.

***We have experienced, and will continue to experience,competition from hospitals, physician groups and other diagnostic imagingcompanies and this competition could adversely affect our financial conditionand results of operations.***

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 mustcompete with physician groups, established hospitals and certain otherindependent organizations, including equipment manufacturers and leasingcompanies that own and operate imaging equipment.  We have encountered andwe will continue to encounter competition from hospitals and physician groupsthat purchase their own diagnostic imaging equipment.  Some of our direct competitors may haveaccess to greater financial resources than we do.  If we are unable to successfully compete, ourcustomer base would decline and our financial condition and results ofoperations would be adversely affected.

***Our efforts toimplement initiatives to enhance revenues and reduce costs may not be adequateor successful.***

We have attempted to implement, and will continue todevelop and implement, various revenue enhancing and cost reductioninitiatives.  While we have experiencedsome improvements through our cost reduction initiatives, our revenue enhancinginitiatives have produced minimal improvements to date.  Moreover, future revenue enhancementinitiatives will face significant challenges because of the continuedovercapacity in the diagnostic imaging industry and reimbursement reductions byMedicare and other third-party payors. The adequacy and ultimate success of our initiatives to enhance revenuesand reduce costs cannot be assured.

***Consolidation in the imaging industry could adversely affectour financial condition and results of operations.***

We compete with several national and regionalproviders of diagnostic imaging services, as well as local providers.  Asa result of the reimbursement reductions by Medicare and other third-partypayors, some of these competitors may consolidate their operations in order toobtain certain cost structure advantages and improve equipmentutilization.  In calendar 2006, two fixed-site competitors consolidatedand formed a combined business that is the largest national provider offixed-site imaging services.  Recently, a fixed-site competitor agreed tobe acquired by a large not-for-profit integrated group of hospitals andphysicians clinics.  These companiescould achieve certain advantages over us including increased financial andbusiness resources, economies of scale, breadth of service offerings, andfavored relationships with equipment vendors, hospital systems, leadingradiologists and third-party payors.  We may be forced to reduce ourprices or provide state-of-the-art equipment in order to retain and attractcustomers.  These pressures could adversely affect our financial conditionand results of operations.

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

Our fixed-site centersare dependent on our ability to attract referrals from physicians and otherhealthcare providers representing a variety of specialties.  Oureligibility to provide services in response to a referral is often dependent onthe existence of a contractual arrangement with the referred patient’s managedcare organization.  Despite having a large number of contracts withmanaged care organizations, healthcare providers may be inhibited fromreferring patients to us in cases where the patient is not associated with oneof the managed care organizations with which we have contracted.  The lossof patient referrals causes us to lose procedure volume which adversely impactsour revenues.  A significant decline in referrals would have a materialadverse effect on our financial condition and results of operations.

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

We operate in acompetitive, capital intensive, high fixed-cost industry. The development ofnew technologies or refinements of existing ones might make our existingsystems technologically or economically obsolete, or reduce the need for oursystems.   MRI and other diagnostic imaging systems are currently manufacturedby numerous companies.   Competition among manufacturers for agreater share of the MRI and other diagnostic imaging systems market hasresulted in and likely will continue to result in technological advances in thespeed and imaging capacity of these new systems.  Consequently, theobsolescence of our systems may be accelerated.  Other than ultra-highfield MRI systems and 256-slice CT systems, we are aware of no substantialtechnological changes; however, should such changes occur, we may not be ableto acquire the new or improved systems.   In the future, to theextent we are unable to generate sufficient cash from our operations or obtainadditional funds through bank financing, the issuance of equity or debtsecurities, and operating leases, we may be unable to maintain a competitiveequipment base.  In addition, advancing technology may enable hospitals,physicians or other diagnostic imaging service providers to perform procedureswithout the assistance of diagnostic imaging service providers such asourselves.  As a result, we may not be able to maintain our competitiveposition in our core markets or expand our business.

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

Harsh weather conditionscan adversely impact our financial condition and results of operations. To the extent severe weather patterns affect the regions in which we operate,potential patients may find it difficult to travel to our centers and we mayhave difficulty moving our mobile facilities along their scheduledroutes.   As a result, we would experience a decrease in procedurevolume during that period.   Our equipment utilization, procedurevolume or revenues could be adversely affected by such conditions in thefuture.

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

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 aresult, a relatively small reduction in the prices we charge for our servicesor procedure volume could have a disproportionate negative effect on ourfinancial condition and results of operations.

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

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 assertedagainst us, to the extent not covered by our liability insurance, could have amaterial adverse effect on our financial condition and results ofoperations.  In addition 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 tomaintain insurance in the future at an acceptable cost or at all or if ourinsurance does not fully cover us in the event a successful claim was madeagainst us, we could incur substantial losses.  Any successful malpracticeor other professional liability claim made against us not fully covered byinsurance could be costly to defend against, result in a substantial damageaward against us and divert the attention of our management from ouroperations, which could have a material adverse effect on our financialcondition and results of operations.

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***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 coremarket strategy, we have pursued, and may continue to pursue, selectiveacquisitions and arrangements through partnerships and joint ventures withhospitals and other healthcare providers.  Our acquisition and jointventure strategies require substantial capital which may exceed the fundsavailable to us from internally generated funds and our available financingarrangements.  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:

·                  demandson management related to the increase in our size after an acquisition;

·                  thediversion of our management’s attention from the management of daily operationsto the integration of operations;

·                  integrationof information systems;

·                  risksassociated with unanticipated events or liabilities;

·                  difficultiesin the assimilation and retention of employees;

·                  potentialadverse effects on operating results;

·                  challengesin retaining customers and referral sources; and

·                  amortizationor write-offs of acquired intangible assets.

If we do not successfullyintegrate our acquisitions, we may not realize anticipated operatingadvantages, economies of scale and cost savings.   Also, we may notbe able to maintain the levels of operating efficiency that the acquiredcompanies would have achieved or might have achieved separately. Successful integration of acquisitions will depend upon our ability to managetheir operations and to eliminate excess costs.

***Loss of, and failure to attract, qualified employees,particularly technologists, could limit our growth and negatively impact ourfinancial condition and results of operations.***

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 qualified employees is intense.   Inparticular, there is a very high demand for qualified technologists who are necessaryto operate our systems, particularly MRI and PET technologists.  We maynot be able to hire and retain a sufficient number of technologists, and weexpect that our costs for the salaries and benefits of technologists willcontinue to increase for the foreseeable future because of the industry’scompetitive demand for their services.  

***Our PET and PET/CT service and some of our other imagingservices require the use of radioactive materials, which could subject us toregulation, related costs and delays and potential liabilities for injuries orviolations of environmental, health and safety laws.***

Our PET and PET/CTservices and some of our other imaging services require the use of radioactivematerials to produce the images.   While this radioactive materialhas a short half-life, meaning it quickly breaks down into non-radioactivesubstances, storage, use and disposal of these materials present the risk ofaccidental environmental contamination and physical injury.  We aresubject to federal, state and local regulations governing storage, handling anddisposal of these materials and waste products.  Although we believe thatour safety procedures for storing, handling and disposing of these hazardousmaterials comply with the standards prescribed by law and regulation, we cannotcompletely eliminate the risk of accidental contamination or injury from thosehazardous materials.  In the

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event of an accident, wewould be held liable for any resulting damages, and any liability could exceedthe limits of or fall outside the coverage of our insurance.  In addition,we may not be able to maintain insurance on acceptable terms, or atall.   We could incur significant costs in order to comply withcurrent or future environmental, health and safety laws and regulations.

***We may be unable to generate revenue when our equipment isnot operational.***

Timely, effective serviceis essential to maintaining our reputation and high utilization rates on ourimaging equipment.  Our warranties and maintenance contracts do not compensateus for the loss of revenue when our systems are not fully operational. Equipment manufacturers may not be able to perform repairs or supply neededparts in a timely manner.  Thus, if we experience more equipmentmalfunctions than anticipated or if we are unable to promptly obtain theservice necessary to keep our equipment functioning effectively, our financialcondition and results of operations would be adversely affected.

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

Our corporateheadquarters, including our information technology center, and a materialnumber of our fixed-site centers are located in California, which has a highrisk for earthquakes.  Depending upon its magnitude, an earthquake couldseverely damage our facilities or our information technology system or preventpotential patients from traveling to our centers.  Damage to our equipmentor our information technology system or any interruption in our business wouldadversely affect our financial condition and results of operations.  Wecurrently do not maintain a secondary disaster recovery facility for ourinformation technology operations.  Whilewe presently carry earthquake insurance in amounts we believe are appropriatein light of the risks, the amount of our earthquake insurance coverage may notbe sufficient to cover losses from earthquakes.  In addition, we maydiscontinue earthquake insurance on some or all of our centers in the future ifthe cost of premiums for earthquake insurance exceeds the value of the coveragediscounted 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 centers as well as the anticipated future cash flows from thosecenters.

***High fuel costs would adversely affect our financialcondition and results of operations.***

Fuel costs constitute asignificant portion of our mobile operating expenses. Historically, fuel costshave been subject to wide price fluctuations based on geopolitical issues andsupply and demand.  Fuel availability isalso affected by demand for home heating oil, diesel, gasoline and otherpetroleum products.  Because of theeffect of these events on the price and availability of fuel, the cost andfuture availability of fuel cannot be predicted with any degree ofcertainty.  In the event of a fuel supplyshortage or further increases in fuel prices, a curtailment of scheduled mobileservice could result. There have been significant fluctuations in fuel costsand any further increases to already high fuel costs would adversely affect ourfinancial condition and results of operations.

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

All of the states inwhich we operate require that technologists who operate our CT, PET/CT and PETsystems be licensed or certified.  Also, each of our fixed-site centersmust continue to meet various requirements in order to receive payments fromMedicare.  In addition, our mobile facilities and our fixed-site center inChattanooga, Tennessee are currently accredited by The Joint Commission,formerly Joint Commission on Accreditation of Healthcare Organizations, anindependent, non-profit organization that accredits various types of healthcareproviders, such as hospitals, nursing homes, outpatient ambulatory care centersand diagnostic imaging providers.  If we were to lose such accreditationfor our mobile facilities, it could adversely affect our mobile operationsbecause some of our mobile customer contracts require accreditation by TheJoint Commission and one of our primary competitors is accredited by The JointCommission.

Managed care providersprefer to contract with accredited organizations.  Any lapse in ourlicenses, certifications or accreditations, or those of our technologists, orthe failure of any of our fixed-site centers to satisfy the necessary requirementsunder Medicare could adversely affect our financial condition and results ofoperations.

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*RISKS RELATING TO GOVERNMENTREGULATION OF OUR BUSINESS*

***Complying with federal and state regulations pertaining toour business is an expensive and time-consuming process, and any failure tocomply could result in substantial penalties and adversely affect our abilityto operate our business and our financial condition and results of operations.***

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:

·                  thefederal False Claims Act;

·                  thefederal Medicare and Medicaid Anti-kickback Law, and state anti-kickbackprohibitions;

·                  thefederal Civil Money Penalty Law;

·                  thefederal Health Insurance Portability and Accountability Act of 1996;

·                  thefederal physician self-referral prohibition commonly known as the Stark Law andthe state law equivalents of the Stark Law;

·                  statelaws that prohibit the practice of medicine by non-physicians, and prohibitfee-splitting arrangements involving physicians;

·                  U.S.Food and Drug Administration requirements;

·                  statelicensing and certification requirements, including certificates ofneed; and

·                  federaland state laws governing the diagnostic imaging equipment used in our businessconcerning patient safety, equipment operating specifications and radiationexposure 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,exclusion from Medicare, Medicaid or other governmental programs and thecurtailment of our operations.  Any penalties, damages, fines orcurtailment of our operations, individually or in the aggregate, couldadversely affect our ability to operate our business and our financialcondition and results of operations.  The risks of our being found inviolation of these laws and regulations is increased by the fact that many ofthem have not been fully interpreted by the regulatory authorities or thecourts, 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 ourbusiness.  Moreover, if we areunsuccessful in defending against such action, the imposition of certainpenalties would adversely affect our financial condition and results ofoperations.  If we were excluded fromMedicare, Medicaid or other governmental programs, not only would we lose therevenues associated with such payors, but we anticipate that our othercustomers and partners would terminate their contracts or relationships withus. 

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

Healthcare laws andregulations may change significantly in the future.  We continuouslymonitor these 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 our financialcondition and results of operations.  Inaddition, although we believe that we are operating in compliance withapplicable federal and state laws, neither our current or anticipated businessoperations nor the operations of our contracted radiology groups have been thesubject 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.

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*RISKS RELATED TO RELATIONSHIPS WITH STOCKHOLDERS, AFFILIATES ANDRELATED PARTIES*

***A small number of stockholders may control a significantportion of Holdings***’***common stock.***

As a result of theconsummation of the exchange offer and plan of reorganization, a significantportion of Holdings’ outstanding common stock is held by a small number ofholders. As a result, these stockholders will have significant voting powerwith respect to the ability to: 

·                  authorizeadditional shares of Holdings’capital stock; 

·                  amendHoldings’ certificate ofincorporation or bylaws; 

·                  electHoldings’ directors; or 

·                  effector reject a merger, sale of assets or other fundamental transaction.

The extent of ownershipby these stockholders may also discourage a potential acquirer from making anoffer to acquire us. This could reduce the value of Holdings’ common stock. 

**ITEM 2.          PROPERTIES**

Welease approximately 48,400 square feet of office space for our corporateheadquarters and a billing office at 26250 Enterprise Court, Lake Forest,California 92630. The lease for this location expires in 2008. 

**ITEM 3.          LEGALPROCEEDINGS**

We areengaged from time to time in the defense of lawsuits arising out of theordinary course and conduct of our business and have insurance policies coveringsuch potential insurable losses where such coverage is cost-effective.  We believe that the outcome of any suchlawsuits will not have a material adverse impact on our financial condition andresults of operations.

On May29, 2007, Holdings and InSight filed voluntary petitions for reorganizationunder Chapter 11 of the U.S. Bankruptcy Code, in the U.S. Bankruptcy Court forthe District of Delaware (Case No. 07-10700).  On July 10, 2007, thebankruptcy court confirmed Holdings’ and InSight’s Second Amended Joint Plan of Reorganization pursuantto chapter 11 of the Bankruptcy Code. The plan of reorganization becameeffective and Holdings and InSight emerged from bankruptcy protection on August1, 2007.  For additional informationregarding the reorganization, please see Item 1. “Business-Reorganization” in this Form 10-K.

On February 3,2004, Southwest Outpatient Radiology, PC, or SWOR, filed a Summons andComplaint against InSight Health Corp., one of InSight’s subsidiaries, or IHC, in theSuperior Court, Maricopa County, Arizona, for Declaratory Relief seeking adeclaration as to the meaning and effect of a certain provision of theprofessional services agreement, or PSA, pursuant to which SWOR providedprofessional services at IHC’s facilities in Phoenix, Arizona.  SWORclaimed the PSA provided a right of first refusal to provide professionalservices at any center IHC acquired in Maricopa County.  IHC believes thatthe provision related only to “denovo” centers which IHCdeveloped.  In April 2004, IHC acquired the stock of Comprehensive MedicalImaging, Inc., which owned and operated 21 fixed-site centers, six of whichwere located in Maricopa County, pursuant to a stock purchase agreement.

Prior to signingthe stock purchase agreement, IHC gave SWOR 180 days notice to terminate thePSA in accordance with the PSA.  SWOR claimed that the PSA had alreadyterminated due to IHC’s breach of the right of first refusal provision. IHC answered the Summons and Complaint and was cooperating with SWOR in expeditingdiscovery and an early trial when SWOR decided to abandon the DeclaratoryRelief action and on April 20, 2004, SWOR filed a First Amended Complaintclaiming breach of contract, anticipatory breach of contract, negligentmisrepresentation, breach of the covenant of good faith and fair dealing,intentional interference with contract,

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breach offiduciary duty, declaratory relief and unspecified compensatory and punitivedamages, prejudgment interest, and attorneys fees. We have answered the FirstAmended Complaint and discovery has commenced and is on-going. We arevigorously defending this lawsuit and believe that SWOR’s claims are withoutmerit.  We are unable to predict the outcome of this lawsuit.

In August 2003,IHC entered into a series of agreements and acquired a joint venture interestthrough a limited liability company it formed called Kessler ImagingAssociates, LLC, or KIA, in a CT fixed-site center in Hammonton, NewJersey.  KIA is owned 55% by IHC and 45% by Bernard Neff, M.D., or Dr.Neff.  KIA managed Kessler CAT Scan Associates, LLC, which provided CT,and mobile MRI and PET (using IHC mobile facilities) services to inpatients ofWilliam B. Kessler Memorial Hospital, or the Hospital, and communityoutpatients.

Dr. Neff providedradiology services at the Hospital and to the outpatients.  IHC did notcontrol billing and collections to the Hospital for inpatients or tothird-party payors for outpatients.  Dr. Neff performed that function.

Management at theHospital changed in 2005, and in late 2005 the Hospital notified the partiesthat it was “voiding” all the agreements because the priormanagement had no authority to execute the agreements and stopped paying forthe inpatient services.  Immediately after the agreements were allegedly “voided,” Dr. Neff filed an arbitration claim against the Hospital, foramong other things, collection of outstanding amounts owed by the Hospital forservices previously rendered.  The Hospital has challenged Dr. Neff’sefforts to proceed with arbitration efforts in the New Jersey courts.  Theappellate division granted a stay motion, so the arbitration has been stayedpending oral argument, which has not yet been held and no decision has yet beenrendered.  Until the appellate court rules, matters in the arbitration cannotgo forward.

On March 8,2006, IHC filed suit in the U.S. District Court for the District of New Jerseyagainst the Hospital.  By the Complaint, IHC has asserted claims for fraudand seeks in excess of $4 million in compensatory damages plus additionalamounts for punitive damages.  The Hospital has denied the substantiveallegations against it.

The Hospital inturn filed a Counterclaim against IHC.  Initially, IHC moved to dismissthat Counterclaim for failure to state a claim and for failure to comply withpleading requirements.  Before that Motion could be ruled upon, theHospital filed an Amended Counterclaim.  By the Amended Counterclaim, theHospital asserts that IHC engaged in fraud as to the Hospital, allegedlyconcealing aspects of the overall transaction to the Hospital’s disadvantage,that IHC aided and abetted  Dr. Neff and his associates so they couldacquire certain allegedly valuable assets of the Hospital without fair,reasonable, and adequate consideration, and that IHC conspired with Dr. Neffand his associates to acquire certain allegedly valuable assets of the Hospitalwithout fair, reasonable, and adequate consideration.  By the AmendedCounterclaim, the Hospital seeks compensatory damages of not less than $5million and punitive damages of not less than $10 million.  IHC has movedto dismiss, and the motion remains pending at the present time.  IHC hasalso answered the Amended Counterclaim, denying all of the substantiveallegations.  IHC intends to vigorously prosecute its case against theHospital and defend against the Hospital’s claims.

On September 13,2006, the Hospital filed a voluntary bankruptcy petition under Chapter 11 ofTitle 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court, District ofNew Jersey (Camden).  As a result, this case and the arbitration have beenstayed pursuant to 11 U.S.C. § 362.  IHCand KIA have both filed proofs of claim in the Hospital’s bankruptcy case.  IHC has asserted contingent unliquidatedclaims based upon the litigation currently stayed in the U.S. District Courtfor the District of New Jersey.  KIA hasfiled a claim based upon the lease between KIA and the Hospital.  The Hospital remains a debtor-in-possessionand is attempting to reorganize.  OnAugust 16, 2007, the Hospital filed its first amended plan of reorganizationand accompanying disclosure statement.  

IHC no longerprovides any services to the Hospital and the lease has been terminated.   

**ITEM 4.          SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

Duringthe fourth quarter of our fiscal year 2007, we solicited the vote of eachrecord holder of Holdings’ common stock on the plan of reorganization.  Thevoting deadline for acceptances or rejections of the plan of reorganization forrecord holders of Holdings’ common stock was 5:00 p.m., New York City time, onMay 29, 2007.  Holders of all outstanding shares of Holdings’ common stock (5,468,814 shares prior tothe 1 for 6.326392 reverse stock split) voted for acceptance of the plan ofreorganization and no holder abstained or voted against the plan ofreorganization. 

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**PART II**

**ITEM 5.****                             MARKETFOR REGISTRANT**’**S COMMON EQUITY; RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

Holdings’ common stock is listed on theOver-The-Counter Bulletin Board under the symbol “ISGT.”   As of September 4, 2007, there were sevenrecord holders of Holdings’common stock and approximately 358 beneficial holders of Holdings’ common stock.  Holdings has never paid a cash dividend onits common stock and does not expect to do so in the foreseeable future.  The agreements governing our materialindebtedness obligations contain restrictions on Holdings’ ability to pay dividends on itscommon stock.

Information regardingsecurities authorized for issuance under our equity compensation plans is setforth under Item 12.  “Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.”

**ITEM 6.          SELECTED FINANCIAL DATA**

The selected consolidatedfinancial data presented as of and for the years ended June 30, 2007, 2006,2005, 2004 and 2003 has been derived from our audited consolidated financialstatements.  The information in thefollowing table should be read together with our audited consolidated financialstatements and related notes, and Item 7.  “Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” included elsewherein this Form 10-K.  

On August 1, 2007,we implemented fresh-start reporting in accordance with SOP 90-7. Theprovisions of fresh-start reporting require that we revalue our assets andliabilities to fair value, reestablish stockholders’ equity using thereorganized value established in connection with the plan of reorganization,and record any applicable reorganization value in excess of amounts allocableto identifiable assets as an intangible asset. As a result of the adoption ofSOP 90-7, we are reviewing the fair value of our assets and liabilities andexpect that we will be required to adjust the value of some of our assets andliabilities. We expect that the implementation of fresh-start reporting underSOP 90-7 will have a material effect on our consolidated financial statements.As a result, our consolidated financial statements published for periodsfollowing the effectiveness of the plan of reorganization on August 1, 2007,will not be comparable to our consolidated financial statements publishedbefore the effectiveness of the plan and included elsewhere in this Form10-K.  See Note 20 to our consolidatedfinancial statements, which are a part of this Form 10-K.
| ** **                     | ** ** | **Years Ended June 30,** | ** ** |
|--------------------------------|------------|-----------------------------------------|------------|
| ** **                     | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                     | ** ** | **(Amounts in thousands)**    | ** ** |
| STATEMENT OF  OPERATIONS DATA: |       |                                    |       |   |   |   |   |   |   |   |   |
| Revenues                       |       | $                                       | 286,914    |   | $ | 306,298 |   | $ | 316,873 |   | $ | 290,884 |   | $ | 237,752 |   |
| Gross profit                   |       | 25,488                                  |       | 35,026 |   | 48,716 |   | 57,463 |   | 57,708 |   |
| Interest  expense, net         |       | 52,780                                  |       | 50,754 |   | 44,860 |   | 40,682 |   | 37,514 |   |
| Net (loss) income  (1)(2)(3)   |       | (99,041                                 | )          | (210,218 | ) | (27,217 | ) | 2,924 |   | 4,922 |   |
|                                |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                            | ** ** | **June 30,** | ** ** |
|---------------------------------------|------------|-------------------|------------|
| ** **                            | ** ** | **2007**          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| BALANCE SHEET  DATA:                  |       |              |       |   |   |   |   |   |   |   |   |
| Working capital                       |       | $                 | 24,567     |   | $ | 34,550 |   | $ | 36,068 |   | $ | 48,116 |   | $ | 32,580 |   |
| Property and  equipment, net          |       | 144,823           |       | 181,026 |   | 209,461 |   | 242,336 |   | 219,121 |   |
| Goodwill and  other intangible assets |       | 95,084            |       | 125,936 |   | 314,989 |   | 319,463 |   | 260,292 |   |
| Total assets                          |       | 323,051           |       | 408,204 |   | 624,523 |   | 675,631 |   | 577,317 |   |
| Total long-term  liabilities          |       | 517,200           |       | 504,360 |   | 512,608 |   | 537,177 |   | 442,484 |   |
| Stockholders’ (deficit)  equity  |       | (241,432          | )          | (141,893 | ) | 67,724 |   | 94,941 |   | 91,614 |   |
|                                       |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)             Nocash dividends have been paid on Holdings’common stock for the periods indicated above.

(2)             Includesimpairment charges related to our goodwill of approximately $29.6 million andgoodwill and other intangible assets of approximately $190.8 million for theyears ended June 30, 2007 and 2006, respectively.

(3)             Includes a charge forreorganization items of approximately $17.5 million for the year ended June 30,2007.

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**ITEM 7.****                             MANAGEMENT**’**S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The following discussionand analysis of our financial condition and results of operations should beread in conjunction with our consolidated financial statements and accompanyingnotes which appear elsewhere in this Form 10-K. It contains forward-lookingstatements that reflect our plans, estimates and beliefs, and which involverisks, uncertainties and assumptions. Please see “Forward-Looking Statements Disclosure” for more information. Our actualresults could differ materially from those anticipated in these forward-lookingstatements as a result of various factors, including those discussed below andelsewhere in this Form 10-K, particularly under the headings “Forward-Looking Statements Disclosure”and Item 1A. “Risk Factors”.

**Overview**

We are a nationwide provider of diagnostic imagingservices through our integrated network of fixed-site centers and mobilefacilities which are focused in core markets throughout the United States. Ourservices include MRI, CT, PET, PET/CT, and other technologies.  These services are noninvasive techniquesthat generate representations of internal anatomy on film or digital media,which are used by physicians for the diagnosis and assessment of diseases anddisorders.

We serve a diverseportfolio of customers, including healthcare providers, such as hospitals andphysicians, and payors, such as managed care organizations, Medicare, Medicaidand insurance companies. We operate in more than 30 states with a substantialpresence in California, Arizona, New England, the Carolinas, Florida and theMid-Atlantic states. While we generated approximately 69% of our total revenuesfrom MRI services during the year ended June 30, 2007, we provide acomprehensive offering of diagnostic imaging and treatment services, includingPET, PET/CT, CT, mammography, bone densitometry, ultrasound, lithotripsy andx-ray.

As of June 30, 2007, our network consists of 101fixed-site centers and 112 mobile facilities. This combination allows us toprovide a full continuum of imaging services to better meet the needs of ourcustomers. Our fixed-site centers include freestanding centers and jointventures with hospitals and radiology groups. Our mobile facilities provide hospitals and physician groups access toimaging technologies when they lack either the resources or patient volume to providetheir own imaging services or require incremental capacity.  We enter into agreements with radiologists toprovide professional services, which include supervision and interpretation ofradiological procedures and quality assurance. We do not engage in the practice of medicine.  We have two reportable segments: mobileoperations and fixed operations.  Ourmobile operations include 20 parked mobile facilities, each of which serves asingle customer.  Our fixed operationsinclude five mobile facilities as part of our fixed operations in Maine.  Certain financial information regarding ourreportable segments is included in Note 17 to our consolidated financialstatements, which are a part of this Form 10-K.

Historically, wepursued a strategy that was largely focused on growth through the acquisitionof imaging businesses in various parts of the country. More recently, we beganthe process of implementing a strategy based on core markets.  A core market strategy may allow us moreoperating efficiencies and synergies than are available in a nationwidestrategy.  A core market will be based onmany factors and not just the number of fixed-site centers or mobile facilitiesin an area.  Other factors would include,without limitation, the capabilities of our contracted radiologists, anyhospital affiliations, the strength of returns on capital investment, thepotential for growth and sustainability of our business in the area, thereimbursement environment for the area, the strength of competing providers inthe area, population growth trends, and any regulatory restrictions.  We expect that this strategy will result inus exiting some markets while increasing our presence in others, which may beaccomplished through business or asset sales, swaps, purchases, closures andthe development of new fixed-site centers. As discussed below, our board ofdirectors was recently reconfigured with five new members.  Our management is reviewing and analyzingwith our board of directors our current core market strategy. As a result, we maydetermine to continue with such strategy, modify such strategy or identify analternate strategy.

Growth in the diagnosticimaging industry has been and will continue to be driven by (1) an aging population,(2) the increasing acceptance of diagnostic imaging, particularly PET/CTand (3) expanding applications of CT, MRI and PET technologies.

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**Reorganization**

In November 2006,we engaged Lazard Frères & Co. LLC as our financial advisor to assist us inexploring strategic alternatives.  In March 2007, we announced an offer toexchange shares of Holdings’common stock for up to $194.5 million aggregate principal amount of InSight’s 9.875% senior subordinated notes due2011, or senior subordinated notes.  The exchange offer initially providedfor consummation on an out-of-court basis or in connection with the filing of aprepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. OnMay 29, 2007, Holdings and InSight filed voluntary petitions to reorganizetheir business under chapter 11 of the Bankruptcy Code in the U.S. BankruptcyCourt for the District of Delaware (Case No. 07-10700).  The other subsidiaries of Holdings were notincluded in the bankruptcy filing and continued to operate their business.  On July 10, 2007, the bankruptcy courtconfirmed Holdings’ and InSight’s Second Amended Joint Plan ofReorganization pursuant to chapter 11 of the Bankruptcy Code. The plan ofreorganization became effective and Holdings and InSight emerged frombankruptcy protection on August 1, 2007, or the effective date.

On August, 1,2007, pursuant to the exchange offer and the plan of reorganization, all of Holdings’ common stock, all options forHoldings’ common stock and all ofInSight’s senior subordinatednotes were cancelled, and the following distributions were made (after givingeffect to a 1 for 6.326392 reverse stock split of Holdings’ common stock):

·                  Holdersof InSight’s senior subordinatednotes received 7,780,000 shares of newly issued Holdings’ common stock, which represented 90% of all shares of Holdings’ common stock outstanding afterconsummation of the plan of reorganization.

·                  Holdersof Holdings’ common stock priorto the effective date received 864,444 shares of newly issued Holdings’ common stock, which represented 10%of all shares of Holdings’ commonstock after consummation of the plan of reorganization.

Holdings’ common stock is listed on theOver-The-Counter Bulletin Board under the symbol “ISGT”.

The plan ofreorganization provided for the assumption of substantially all executorycontracts and unexpired leases; provided, however, we did terminate (i) themanagement agreement with J. W. Childs Advisors II, L.P. and Halifax Genpar,L.P. and (ii) the stockholders agreement with holders of Holdings’ common stock and stock options.  Pursuant to the plan of reorganization, theboards of directors of Holdings and InSight were reconfigured, and five of thedirectors of each board were designated by an ad hoc committee of holders ofsenior subordinated notes, one was designated by the holders of Holdings’ common stock prior to the effectivedate, and Bret W. Jorgensen, the President and Chief Executive Officer ofHoldings and InSight, remained a director. Additional information regarding the new board of directors is set forthbelow in Part III of this Form 10-K.

Thisreorganization significantly deleveraged our balance sheet and improved our projectedcash flow after debt service and long-term liquidity.  As a result, we believe this reorganizationhas improved our ability to compete in our industry, although we continue tooperate with significant leverage and face the industry challenges ofovercapacity and reimbursement reductions by Medicare and other third-partypayors.

**ExecutiveSummary**

As described ingreater detail below, our business faces many challenges.  Some of these challenges are unique to ourbusiness, while other challenges are industry-wide.  Our revenues for the year ended June 30, 2007decreased by approximately 6.3% as compared to the year ended June 30, 2006 andour costs of operations decreased by 3.6%. Moreover, our corporate operating expenses and interest expense roseduring the same period.  For the yearended June 30, 2007, our Adjusted EBITDA decreased approximately 24.2% ascompared to the year ended June 30, 2006 (see our reconciliation of net cashprovided by operating activities to Adjusted EBITDA in the subsection entitled“Financial Condition, Liquidity and Capital Resources” on page 41).  This 24.2% decline in Adjusted EBITDA waspreceded by an approximate 19.3% decline in Adjusted EBITDA for the year endedJune 30, 2006 compared to the year ended June 30, 2005.  The decline inAdjusted EBITDA as compared to prior years has become a historical trend basedon our performance during the past three fiscal years.  This negativetrend in Adjusted EBITDA may continue and may be exacerbated by the adverseeffects of the Medicare reimbursement reductions

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with respect toPET and PET/CT rates and the DRA, as discussed in the subsection entitled “Reimbursement” below.

We haveattempted to implement, and will continue to develop and implement, variousrevenue enhancement and cost reduction initiatives.  While we have experienced some improvementsthrough our cost reduction initiatives, our revenue enhancement initiativeshave produced minimal improvements to date. Moreover, future revenue enhancement initiatives will face significantchallenges because of the continued overcapacity in the diagnostic imagingindustry and reimbursement reductions by Medicare and other third-party payors.

In the secondquarter of fiscal 2007, we reduced our overall labor force by 40 positions,which we expect will result in estimated annual savings of approximately $3.3million.  Additionally, certain otheropen positions have been eliminated, which we expect will result in additionalannual savings of approximately $2.4 million. In connection with the reduction of our labor force, we recorded aseverance charge of approximately $0.6 million in the second quarter of fiscal2007.

Notwithstandingthe consummation of our exchange offer and plan of reorganization, we stillhave a substantial amount of debt, which requires significant interest and principalpayments.  As of August 2, 2007, we had total indebtedness ofapproximately $321.4 million.  In addition, as a result of the variousfactors that affect our industry generally and our business specifically, wehave experienced significant declines in our operating results and cash flowsas compared to prior year periods for the past three fiscal years.  We believe, based on currently availableinformation, that future net cash provided by operating activities and ourcredit facility will be adequate to meet our operating cash and debt servicerequirements for at least the next twelve months.  Moreover, if our net cash provided byoperating activities declines further than we have anticipated, we are preparedto take steps to conserve our cash, including delaying or restructuring ourcapital projects (entering into capital and operating leases rather than usingcash). We believe these steps would still enable us to meet our liquidity needseven if net cash provided by operating activities falls below what we haveanticipated.  If our net cash provided byoperating activities were to severely decline, we may be unable to service ourindebtedness.  However, we believe thatwe will be able to meet our liquidity needs to allow us to continue normaloperations.

**Acquisitionand Dispositions**

In March 2006, wepurchased a majority ownership interest in a joint venture that operates an MRIfixed-site center in San Ramon, California. The purchase price was approximately $2.3 million, net of cash acquired.

Duringthe fiscal year ended June 30, 2007, we closed three fixed-site centers andsold one fixed-site center.  During thefiscal year ended June 30, 2006, we closed four fixed-site centers anddissolved a mobile lithotripsy partnership. During the fiscal year ended June 30, 2005, we sold a fixed-site centerand our interests in two joint venture fixed-site centers.

**Segments**

We have two reportablesegments, fixed operations and mobile operations:

*FixedOperations:* Generally,our fixed operations consist of freestanding imaging centers which we refer toas fixed-site centers.  Revenues at our fixed-sitecenters are primarily generated from services billed, on a fee-for-servicebasis, directly to patients or third-party payors such as managed careorganizations, Medicare, Medicaid, commercial insurance carriers and workers’ compensation funds, which wegenerally refer to as our patient services revenues and management fees.  Revenues from our fixed operations have beenand will continue to be driven by the growth in the diagnostic imaging industrydiscussed above and are dependent on our ability to:

·                  attractpatient referrals from physician groups and hospitals;

·                  maximize  procedure volume;

·                  maintainour existing contracts and enter into new ones with managed care organizationsand commercial insurance carriers; and

·                  acquireor develop new fixed-site centers.

*MobileOperations: *Our mobileoperations consist of mobile facilities, which provide services to hospitals,physician groups and other healthcare providers.  Revenues from our mobile operations areprimarily generated from fee-for-service arrangements and fixed fee contractsbilled directly to our customers, which we generally refer

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to as contractservices revenues.  Revenues from ourmobile operations have been and will continue to be driven by the growth in thediagnostic imaging industry and are dependent on our ability to:

·                  establishnew mobile customers within our core markets;

·                  structureefficient mobile routes that maximize equipment utilization and reduce vehicleoperations costs; and

·                  renewexisting contracts with our mobile customers.

**Negative Trends**

Our fixed and mobileoperations have been and will continue to be adversely affected by thefollowing negative trends:

·                  overcapacity in the diagnosticimaging industry;

·                  reductions in reimbursement fromcertain third-party payors including planned reductions from Medicare;

·                  reductions in compensation paid byour mobile customers;

·                  competition from other mobileproviders;

·                  competition from equipmentmanufacturers which have caused some of our referral sources, some of ourmobile customers, and our mobile customers’referral sources to invest in their own diagnostic imaging equipment; and

·                  industry-wideincreases in salaries and benefits for technologists.

**Reimbursement**

*Medicare.*The Medicare program provides reimbursement for hospitalization,physician, diagnostic and certain other services to eligible persons 65 yearsof age and over and certain others. Providers are paid by the federalgovernment in accordance with regulations promulgated by the Department ofHealth and Human Services and generally accept the payment with nominaldeductible and co-insurance amounts required to be paid by the servicerecipient, as payment in full. Since 1983, hospital inpatient services havebeen reimbursed under a prospective payment system. Hospitals receive aspecific prospective payment for inpatient treatment services based upon thediagnosis of the patient.

Under Medicare’sprospective payment system for hospital outpatient services, or OPPS, ahospital is paid for outpatient services on a rate per service basis thatvaries according to the ambulatory payment classification group, or APC, towhich the service is assigned rather than on a hospital’s costs. Each year theCenters for Medicare and Medicaid Services, or CMS, publishes new APC ratesthat are determined in accordance with the promulgated methodology.Multi-modality and certain fixed-site centers which are freestanding and nothospital-based facilities are not directly affected by OPPS.

Under the finalrule for OPPS effective January 1, 2007, technical fees for PET and PET/CT werereduced.  The national rate for PETchanged from $1,150 to $850 per scan plus reimbursement for the necessaryradiopharmaceutical and the national rate for PET/CT changed from $1,250 to$950 per scan plus reimbursement for the necessary radiopharmaceutical. CMS posted the review copy of its notice of proposed rule-making for OPPS onJuly 16, 2007.  As part of the proposal,among other things, CMS seeks to package many radiology and radiation oncologyservices and drugs into procedural codes, thereby paying one consolidatedpayment for a service that commonly involves several coding components.  In addition, CMS is proposing to reassign thecurrent procedural terminology codes for PET/CT scans to a new APC, with aproposed increased median of $1,093.52; however, this new payment rate includesthe reimbursement for both the technical service and the necessaryradiopharmaceutical.

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Becauseunfavorable reimbursement policies constrict the profit margins of the mobilecustomers we bill directly, we have and may continue to lower our fees toretain existing PET and PET/CT customers and attract new ones.  AlthoughCMS continues to expand reimbursement for new applications of PET and PET/CT,expanded application is unlikely to significantly offset the anticipatedoverall reductions in PET and PET/CT reimbursement.  Any modificationsunder OPPS further reducing reimbursement to hospitals may adversely impact ourfinancial condition and results of operations since hospitals will seek tooffset such modifications.

Furthermore, inAugust 2005, CMS published proposed regulations that would apply to hospitaloutpatient services that significantly decrease the reimbursement fordiagnostic procedures performed together on the same day. Under the proposednew methodology, CMS identified families of imaging procedures by imagingmodality and contiguous body area. Medicare would pay 100% of the technicalcomponent of the higher priced procedure and 50% for the technical component ofeach additional procedure for procedures involving contiguous body parts withina family of codes when performed in the same session. Under the currentmethodology, Medicare pays 100% of the technical component of each procedure.In November 2006, CMS published final regulations that delay the implementationof this reimbursement methodology. Implementation of this reimbursement methodology would adversely impactour financial condition and results of operations since our hospital customerswould seek to offset their reduced reimbursement through lower rates with us.

Services providedin non-hospital based freestanding facilities, such as independent diagnostictreatment facilities, are paid under the Medicare Part B fee schedule. InNovember 2005, CMS published final regulations, which would implement the samemulti-procedure methodology rate reduction proposed for hospital outpatientservices, for procedures reimbursed under the Part B fee schedule.  CMSproposed phasing in this rate reduction over two years, 25% in 2006, andanother 25% in 2007.  The first phase of the rate reduction was effectiveJanuary 1, 2006; however, pursuant to final regulations released in November2006, CMS did not implement the second phase of the rate reduction in 2007.

The DRA was signedinto law by President Bush in February 2006.  The DRA will result insignificant reductions in reimbursement for radiology services for Medicarebeneficiaries, with anticipated savings to the federal government.  TheDRA provides, among other things, that reimbursement for the technicalcomponent for imaging services (excluding diagnostic and screening mammography)in non-hospital based freestanding facilities will be the lesser of OPPS or theMedicare Part B fee schedule.  These reductions became effective onJanuary 1, 2007.  We believe that theimplementation of the reimbursement reductions in the DRA will have a materialadverse effect on our financial condition and results of operations.  Forour fiscal year ended June 30, 2007, Medicare revenues representedapproximately $32 million, or approximately 11% of our total revenues.  Webelieve that the DRA reimbursement reduction decreased our patient servicesrevenues by approximately $3.1 million during the six months ended June 30,2007.  We expect to experience acomparable decrease in our Medicare revenues for the remaining six months ofcalendar 2007.  While there are activeand ongoing efforts to modify or otherwise mitigate the financial impact of theDRA on radiology services, we currently do not anticipate that these effortswill be materially successful.

Finally, Medicarereimbursement rates under the Medicare Part B fee schedule are calculated inaccordance with a statutory formula.  Asa result, for calendar years 2005, 2006 and 2007, CMS published regulationsdecreasing the Part B reimbursement rates by 3.3%, 4.3% and 5.0%,respectively.  In each instance, Congressenacted legislation preventing the decreases from taking effect.  This legislation increased the Part Breimbursement rates by 1.5% in 2005 and 2006. No specific increase was included in the 2007 legislation.  We anticipate that CMS will continue torelease regulations for decreases in reimbursement rates under the MedicarePart B fee schedule until the statutory formula is changed through enactment ofnew legislation.  In fact, the proposeddecrease under the Medicare Part B fee schedule is 5.1% for calendar 2008.

All of thecongressional and regulatory actions described above reflect industry-widecost-containment pressures that we believe will continue to affect healthcareproviders for the foreseeable future.

*Medicaid.*The Medicaid program is a jointly-funded federal and stateprogram providing coverage for low-income persons. In addition tofederally-mandated basic services, the services offered and reimbursementmethods vary from state to state.  In many states, Medicaid reimbursementis patterned after the Medicare program; however, an

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increasing numberof states have established or are establishing payment methodologies intendedto provide healthcare services to Medicaid patients through managed carearrangements.

*ManagedCare and Private Insurance.*Health Maintenance Organizations,or HMOs, Preferred Provider Organizations, or PPOs, and other managed careorganizations attempt to control the cost of healthcare services by a varietyof measures, including imposing lower payment rates, preauthorizationrequirements, limiting services and mandating less costly treatmentalternatives. Managed care contracting is competitive and reimbursementschedules are at or below Medicare reimbursement levels. However, we believethat managed care organizations may also reduce or otherwise limitreimbursement in response to reductions in government reimbursement, whichcould have an adverse impact on our financial condition and results ofoperations.  These reductions may be similar to the reimbursementreductions set forth in the DRA.  Thedevelopment and expansion of HMOs, PPOs and other managed care organizationswithin our core markets could have a negative impact on utilization of ourservices in certain markets and/or affect the revenues per procedure which wecan collect, since such organizations will exert greater control over patients’access to diagnostic imaging services, the selection of the provider of suchservices and the reimbursement thereof.

Some states haveadopted or expanded laws or regulations restricting the assumption of financialrisk by healthcare 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.

Private healthinsurance programs generally have authorized payment for our services onsatisfactory terms. However, we believe that private health insurance programsmay also reduce or otherwise limit reimbursement in response to reductions ingovernment reimbursement, which could have an adverse impact on our financialcondition and results of operations. These reductions may be similar to thereimbursement reductions set forth in the DRA.

Severalsignificant third-party payors implemented the reduction for multiple images oncontiguous body parts (as currently in effect under CMS regulations) andadditional payors may propose to implement this reduction as well.  If CMSimplements the second phase of the rate reduction for multiple images oncontiguous body parts, third-party payors may follow CMS practice and implementa similar reduction.  Such reductionwould further negatively affect our financial condition and results ofoperations.

Furthermore,certain third-party payors have proposed and implemented initiatives which havethe effect of substantially decreasing reimbursement rates for diagnosticimaging services provided at non-hospital facilities, and payors are continuingto monitor reimbursement for diagnostic imaging services. A third-party payorhas instituted a requirement of participation that requires freestandingimaging center providers offer multi-modality imaging services and not simplyoffer one type of diagnostic imaging service. Similar initiatives enacted inthe future by a significant number of additional third-party payors would havean adverse impact on our financial condition and results of operations.

**Revenues**

We earn revenues by providing services to patients,hospitals and other healthcare providers. Our patient services revenues are billed, on a fee-for-service basis,directly to patients or third-party payors such as managed care organizations,Medicare, Medicaid, commercial insurance carriers and workers’ compensationfunds, collectively, payors.  Patientservices revenues also includes balances due from patients, which are primarilycollected at the time the procedure is performed.  Our charge for a procedure is comprised ofcharges for both the technical and professional components of the service.  Patient services revenues are presented netof (1) related contractual adjustments, which represent the difference betweenour charge for a procedure and what we will ultimately receive from the payors,and (2) payments due to radiologists for interpreting the results of thediagnostic imaging procedures.

Our billing system does not generate contractualadjustments.  Contractual adjustments aremanual estimates based upon an analysis of historical experience of contractualpayments from payors and the outstanding accounts

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receivables from payors. Contractual adjustments arewritten off against their corresponding asset account at the time a payment isreceived from a payor, with a reduction to the allowance for contractualadjustments to the extent such an allowance was previously recorded.

We report payments to radiologists on a net basisbecause (1) we are not the primary obligor for the provision of professionalservices, (2) the radiologists receive contractually agreed upon amounts fromcollections and (3) the radiologists bear the risk of non-collection; however,we have entered into arrangements with several radiologists pursuant to whichwe pay the radiologists directly for their professional services at an agreedupon contractual rate.  With respect tothese arrangements, the professional component is included in our revenues, andour payments to the radiologists are included in costs of services.

Our collection policy is to obtain all requiredinsurance information at the time a procedure is scheduled, and to submit aninvoice to the payor immediately after a procedure is completed.  Most third-party payors requirepreauthorization before an MRI or PET procedure is performed on a patient.

We refer to our revenues from hospitals, physiciangroups and other healthcare providers as contract services revenues.  Contract services revenues are primarilygenerated from fee-for-service arrangements, fixed-fee contracts and managementfees billed to the hospital, physician group or other healthcare provider.  Contract services revenues are generallybilled to our customers on a monthly basis. Contract services revenues are recognized over the applicable contractperiod.  Revenues collected in advanceare recorded as unearned revenue. Revenues are affected by the timing of holidays, patient and referringphysician vacation schedules and inclement weather.

The provision for doubtful accounts is reflected as anoperating expense rather than a reduction of revenues and represents ourestimate of amounts that will be uncollectible from patients, payors, hospitalsand other healthcare providers.  Theprovision for doubtful accounts includes amounts to be written off with respectto specific accounts involving customers which are financially unstable ormaterially fail to comply with the payment terms of their contract and otheraccounts based on our historical collection experience, including payor mix andthe aging of patient accounts receivables balances.  Estimates of uncollectible amounts are revisedeach period, and changes are recorded in the period they become known.Receivables deemed to be uncollectible, either through a customer default onpayment terms or after reasonable collection efforts have been exhausted, arefully written off against their corresponding asset account, with a reductionto the allowance for doubtful accounts to the extent such an allowance waspreviously recorded.  Our historicalwrite-offs for uncollectible accounts are not concentrated in a specific payorclass.

The following illustrates our payor mix based onrevenues for the year ended June 30, 2007:
| **Percentage of Total Revenues**                 | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|
|                                                            |       |       |       |
| Hospitals,  physician groups and other healthcare providers (1) |       | 46         | %          |
| Managed care and  insurance                                     |       | 37         | %          |
| Medicare                                                        |       | 11         | %          |
| Medicaid                                                        |       | 2          | %          |
| Workers’ compensation                                      |       | 2          | %          |
| Other, including  self-pay patients                             |       | 2          | %          |

 

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(1)          No single hospital,physician group or other healthcare provider accounted for more than 5% of ourtotal revenues.

As of June 30, 2007, ourdays sales outstanding for trade accounts receivables on a net basis was 54days.  We calculate days salesoutstanding by dividing accounts receivables, net of allowances, by thethree-month average revenue per day.

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Theaging of our gross and net trade accounts receivables as of June 30, 2007 is asfollows (amounts in thousands):
|                                                             | ** ** | ** **      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | **120 days**  | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|-----------------|------------|------------------|------------|------------------|------------|------------------|------------|--------------------|------------|------------|------------|
| ** **                                                  | ** ** | **Current**     | ** ** | **30 days** | ** ** | **60 days** | ** ** | **90 days** | ** ** | **and older** | ** ** | **Total**  | ** ** |
| ** **                                                  | ** ** | **(unaudited)** | ** ** |
|                                                        |       |            |       |             |       |             |       |             |       |               |       |       |       |
| Hospitals,  physician groups and other healthcare providers |       | $               | 10,360     |             | $          | 4,645            |       | $                | 1,248      |               | $          | 564        |       | $ | 2,213 |   | $ | 19,030 |   |
| Managed care and  insurance                                 |       | 19,547          |       | 8,613            |       | 4,488            |       | 3,106            |       | 14,196             |       | 49,950     |       |
| Medicare/Medicaid                                           |       | 5,740           |       | 1,468            |       | 977              |       | 744              |       | 3,818              |       | 12,747     |       |
| Workers’ compensation                                  |       | 1,236           |       | 776              |       | 568              |       | 444              |       | 1,875              |       | 4,899      |       |
| Other, including  self-pay patients                         |       | 236             |       | 101              |       | 104              |       | 95               |       | 84                 |       | 620        |       |
| Trade accounts  receivables                                 |       | 37,119          |       | 15,603           |       | 7,385            |       | 4,953            |       | 22,186             |       | 87,246     |       |
|                                                        |       |            |       |             |       |             |       |             |       |               |       |       |       |
| Less: Allowances  for professional fees                     |       | (4,193          | )          | (1,595           | )          | (892             | )          | (629             | )          | (3,152             | )          | (10,461    | )          |
| Allowances for contractual adjustments                      |       | (12,490         | )          | (4,413           | )          | (2,611           | )          | (157             | )          | (1,783             | )          | (21,454    | )          |
| Allowances for doubtful accounts                            |       | (318            | )          | (146             | )          | (67              | )          | (2,038           | )          | (10,079            | )          | (12,648    | )          |
| Trade accounts  receivables, net                            |       | $               | 20,118     |             | $          | 9,449            |       | $                | 3,815      |               | $          | 2,129      |       | $ | 7,172 |   | $ | 42,683 |   |

 

**Operating Expenses**

We operate in a capitalintensive industry that requires significant amounts of capital to fundoperations.  As a result, a highpercentage of our total operating expenses are fixed.  Our fixed costs include depreciation andamortization, debt service and capital lease payments, rent and operating leasepayments, salaries and benefit obligations, equipment maintenance expenses, andinsurance and vehicle operation costs. We expect that our costs for the salaries and benefits of technologistswill continue to increase for the foreseeable future because of the industry’s competitive demand for theirservices.  Due to the increase in ourmobile PET and PET/CT facilities, which are moved more frequently, our vehicleoperation costs will continue to increase until we can maximize geographicoperating efficiencies.  Because a largeportion of our operating expenses are fixed, any increase in our procedure volumedisproportionately increases our operating cash flow.  Conversely, any decrease in our procedurevolume disproportionately decreases our operating cash flow.  Our variable costs, which comprise only asmall portion of our total operating expenses, include the cost of servicesupplies such as film, contrast media and radiopharmaceuticals used in PET andPET/CT procedures.

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**Resultsof Operations**

Thefollowing table sets forth certain historical financial data expressed as apercentage of revenues for each of the periods indicated:
|                                                     | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                |       |                                    |       |   |   |   |   |
| REVENUES                                            |       | 100.0                                   | %          | 100.0 | % | 100.0 | % |
|                                                |       |                                    |       |   |   |   |   |
| COSTS OF  OPERATIONS:                               |       |                                    |       |   |   |   |   |
| Costs of services                                   |       | 67.1                                    |       | 64.6 |   | 61.4 |   |
| Provision for doubtful accounts                     |       | 2.0                                     |       | 1.7 |   | 1.8 |   |
| Equipment leases                                    |       | 2.1                                     |       | 1.1 |   | 0.7 |   |
| Depreciation and amortization                       |       | 19.9                                    |       | 21.2 |   | 20.7 |   |
| Total costs of operations                           |       | 91.1                                    |       | 88.6 |   | 84.6 |   |
|                                                |       |                                    |       |   |   |   |   |
| Gross profit                                        |       | 8.9                                     |       | 11.4 |   | 15.4 |   |
|                                                |       |                                    |       |   |   |   |   |
| CORPORATE  OPERATING EXPENSES                       |       | (8.9                                    | )          | (7.7 | ) | (5.8 | ) |
|                                                |       |                                    |       |   |   |   |   |
| EQUITY IN  EARNINGS OF UNCONSOLIDATED PARTNERSHIPS  |       | 1.1                                     |       | 1.0 |   | 0.8 |   |
|                                                |       |                                    |       |   |   |   |   |
| INTEREST  EXPENSE, net                              |       | (18.5                                   | )          | (16.6 | ) | (14.2 | ) |
|                                                |       |                                    |       |   |   |   |   |
| GAIN ON  REPURCHASE OF NOTES PAYABLE                |       | —                                  |       | 1.0 |   | — |   |
|                                                |       |                                    |       |   |   |   |   |
| LOSS ON  DISSOLUTION OF PARTNERSHIP                 |       | —                                  |       | (0.3 | ) | — |   |
|                                                |       |                                    |       |   |   |   |   |
| IMPAIRMENT OF  GOODWILL AND OTHER INTANGIBLE ASSETS |       | (10.3                                   | )          | (62.3 | ) | — |   |
|                                                |       |                                    |       |   |   |   |   |
| Loss before reorganization items and income taxes   |       | (27.7                                   | )          | (73.5 | ) | (3.8 | ) |
|                                                |       |                                    |       |   |   |   |   |
| REORGANIZATION  ITEMS                               |       | (6.1                                    | )          | — |   | — |   |
|                                                |       |                                    |       |   |   |   |   |
| Loss before income taxes                            |       | (33.8                                   | )          | (73.5 | ) | (3.8 | ) |
|                                                |       |                                    |       |   |   |   |   |
| PROVISION (BENEFIT)  FOR INCOME TAXES               |       | 0.8                                     |       | (4.8 | ) | 4.8 |   |
|                                                |       |                                    |       |   |   |   |   |
| Net loss                                            |       | (34.6                                   | )%         | (68.6 | )% | (8.6 | )% |

 

Thefollowing table sets forth certain historical financial data by segment for theperiods indicated (amounts in thousands):
|                                                 | ** ** | **Years Ended June 30,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                        |       |                                    |       |   |   |   |   |
| Fixed operations                                |       | $                                       | 180,115    |   | $ | 191,637 |   | $ | 196,482 |   |
| Mobile  operations                              |       | 106,799                                 |       | 114,661 |   | 120,391 |   |
| Total                                           |       | $                                       | 286,914    |   | $ | 306,298 |   | $ | 316,873 |   |
|                                            |       |                                    |       |   |   |   |   |
| Costs of Operations                             |       |                                    |       |   |   |   |   |
| Fixed operations                                |       | $                                       | 151,447    |   | $ | 154,377 |   | $ | 150,105 |   |
| Mobile  operations                              |       | 91,345                                  |       | 97,586 |   | 98,147 |   |
| Other                                           |       | 18,634                                  |       | 19,309 |   | 19,905 |   |
| Total                                           |       | $                                       | 261,426    |   | $ | 271,272 |   | $ | 268,157 |   |
|                                            |       |                                    |       |   |   |   |   |
| Costs of Operations as a Percentage of Revenues |       |                                    |       |   |   |   |   |
| Fixed operations                                |       | 84.1                                    | %          | 80.6 | % | 76.4 | % |
| Mobile operations                               |       | 85.5                                    |       | 85.1 |   | 81.5 |   |
| Total                                           |       | 91.1                                    | %          | 88.6 | % | 84.6 | % |

 

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***Years Ended June 30, 2007 and2006***

*Revenues:* Revenues decreased approximately 6.3% from approximately $306.3 millionfor the year ended June 30, 2006, to approximately $286.9 million for theyear ended June 30, 2007. This decrease was due to lower revenues from ourfixed operations (approximately $11.5 million) and from our mobileoperations (approximately $7.9 million). Revenues from our fixed andmobile operations represented approximately 63% and 37%, respectively, of ourtotal revenues for the years ended June 30, 2007 and 2006.

Revenues from ourfixed operations decreased approximately 6.0% from approximately$191.6 million for the year ended June 30, 2006, to approximately $180.1 millionfor the year ended June 30, 2007. This decrease was due primarily to (1) lowerrevenues from our existing fixed-site centers (approximately $8.5 million,which amount includes approximately $3.1 million as a result of the DRA) and(2) the loss of revenues from the centers we sold or closed during fiscal 2007and 2006 (approximately $5.8 million), partially offset by (1) higherrevenues from changes in payment arrangements with certain radiologistsdiscussed above (approximately $2.0 million) and (2) revenues from a jointventure fixed-site center we acquired during the third quarter of fiscal 2006(approximately $0.8 million).  Revenuesfrom our existing fixed-site centers decreased because of (1) lower procedurevolume (approximately 1%) as a result of the negative trends discussed aboveand (2) a decline in our average reimbursement from payors (approximately4%).  Revenues have been and may continueto be adversely affected by the negative trends discussed above.

Revenues from ourmobile operations decreased approximately 6.9% from approximately $114.7million for the year ended June 30, 2006, to approximately $106.8 million forthe year ended June 30, 2007. This decrease was partially due to (1) lowerrevenues from our existing mobile facilities (approximately $7.5 million) and(2) loss of revenues from a mobile lithotripsy partnership we dissolved duringthe second quarter of fiscal 2006 (approximately $0.4 million).  Revenues from our existing mobile facilitiesdecreased because of lower MRI and lithotripsy revenues.  Revenues have been and may continue to beadversely affected by the negative trends discussed above.

Approximately 55%of our total revenues were generated from patient services revenues for theyear ended June 30, 2007.  All patientservices revenues were earned from our fixed operations for the year ended June30, 2007. Approximately 45% of our total revenues for the year ended June 30,2007 were generated from contract services revenues. Contract services revenuesfor fixed and mobile operations represented approximately 17% and 83%,respectively, of total contract services revenues for the year ended June 30,2007.

*Costsof Operations: *Costs of operations decreasedapproximately 3.6% from approximately $271.3 million for the year ended June30, 2006, to approximately $261.4 million for the year ended June 30, 2007.This decrease was due primarily to (1) lower costs at our mobile operations(approximately $6.3 million); (2) lower costs at our fixed operations(approximately $3.0 million); and (3) lower costs at our billing and otheroperations (approximately $0.6 million). The decrease at our billing and other operations is due to loweramortization expense on our other intangible assets as a result of a reductionin their carrying value from an impairment charge taken during the fourthquarter of fiscal 2006, partially offset by higher salaries and benefits,partially as a result of severance payments in connection with theconsolidation of a billing office.

Costs of operationsat our fixed operations decreased approximately 1.9% from approximately $154.4million for the year ended June 30, 2006, to approximately $151.4 million forthe year ended June 30, 2007.  Costs ofoperations decreased due to the elimination of costs from the centers we soldor closed in fiscal 2007 and 2006 (approximately $5.0 million), offset by (1)higher costs at our existing fixed-site centers (approximately $0.8 million);(2) costs from a joint venture fixed-site center we acquired during thethird quarter of fiscal 2006 (approximately $0.8 million); (3) charges to closetwo fixed-site centers during the first quarter of fiscal 2007 (approximately$0.3 million); and (4) severance charges related to the reduction in laborforce in the second quarter of fiscal 2007 discussed above (approximately $0.1million). The increase in costs at our existing fixed-site centers wasprimarily due to (1) higher payments to radiologists (approximately $2.0million) discussed above; (2) higher equipment lease costs as a result ofentering into more operating leases (approximately $1.4 million);(3) higher occupancy costs (approximately $0.7 million); and (4) higherequipment maintenance costs (approximately $0.3 million), partially offset by(1) lower medical supply costs as a result of lower volumes and cost reductioninitiatives throughout our fixed-site centers (approximately $1.2 million); (2)reduced taxes, primarily property taxes (approximately $0.7 million); (3)reduced

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minority interestexpense and management fees as a result of lower earnings from our consolidatedpartnerships (approximately $0.5 million); and (4) reduced insurance premiumcosts (approximately $0.3 million).

Costs ofoperations at our mobile operations decreased approximately 6.5% from approximately$97.6 million for the year ended June 30, 2006, to approximately $91.3 millionfor the year ended June 30, 2007. The decrease was due primarily to a reductionin costs at our existing mobile facilities (approximately $6.7 million),partially offset by severance charges related to the reduction in labor forcein the second quarter of fiscal 2007 discussed above (approximately $0.4million).  The reduction in costs at ourexisting mobile facilities was primarily caused by (1) lower depreciation andamortization expense (approximately $4.9 million); (2) lower salaries andbenefits (approximately $2.6 million); (3) lower medical supply costs as aresult of lower volumes and cost reduction initiatives (approximately $0.6million); (4) reduced travel and entertainment costs (approximately $0.5million); and (5) reduced insurance premium costs (approximately $0.2 million),partially offset by (1) higher equipment lease costs as a result of enteringinto more operating leases (approximately $1.9 million); (2) higher vehicleoperation costs (approximately $0.7 million); and (3) bad debt expense(approximately $0.5 million).

*CorporateOperating Expenses:*  Corporate operating expensesincreased approximately 7.6% from approximately $23.7 million for the yearended June 30, 2006, to approximately $25.5 million for the year endedJune 30, 2007.  The increase was dueprimarily to (1) higher legal and consulting fees relating to certain legalproceedings described in Item 3.  “Legal Proceedings” (approximately $2.2 million); (2)higher sales and marketing costs (approximately $0.8 million); and (3) higheraccounting costs (approximately $0.5 million), primarily related to compliancewith regulations related to the Sarbanes-Oxley Act, partially offset by theelimination of costs from a national sales meeting in the first quarter offiscal 2006 (approximately $0.9 million).

*InterestExpense, net:*  Interest expense, net increasedapproximately 4.1% from approximately $50.7 million for the year endedJune 30, 2006, to approximately $52.8 million for the year ended June 30,2007.  The increase was due primarily tohigher interest rates on our variable rate indebtedness.  We expect that interest expense, net willdecrease materially for fiscal 2008 as a result of the cancellation andexchange of approximately $194.5 million of senior subordinated notes forHoldings’ common stock pursuantto the exchange offer and the plan of reorganization.

*Impairmentof Goodwill:*  During the second quarter of fiscal 2007 werecorded a non-cash goodwill impairment charge of approximately $29.6million.  This charge is a reduction inthe carrying value of goodwill for our fixed reporting unit.  See “Critical Accounting Policies and Estimates” below and Note 7 to our consolidated financial statements, which are a part ofthis Form 10-K.

*ReorganizationItems:*  During thefourth quarter of fiscal 2007, we recorded approximately $17.5 million foritems in accordance with SOP 90-7 for expenses related to Holdings’ and InSight’sreorganization.  We expect to incurapproximately $7.3 million in additional fees and expenses related to Holdings’and InSight’s reorganization.

*Provision(Benefit) for Income Taxes: *Provision (benefit) forincome taxes increased from a benefit of approximately $14.8 million for theyear ended June 30, 2006, to a provision of approximately $2.2 million for theyear ended June 30, 2007.  The provisionfor income taxes for the year ended June 30, 2007 is primarily related toestimated state income taxes.  Thebenefit for the year ended June 30, 2006 is primarily related to a reduction indeferred tax liabilities related to financial statement and tax basisdifferences for goodwill.  As a result ofthe plan of reorganization, future utilization of our NOL carryforwards will belimited.  We anticipate that thelimitation will allow use of approximately $3.0 million of attributes per year.

***Years Ended June 30, 2006 and 2005***

*Revenues:*  Revenues decreased approximately 3.3% fromapproximately $316.9 million for the year ended June 30, 2005, toapproximately $306.3 million for the year ended June 30, 2006.  This decrease was due to lower revenues fromour fixed operations (approximately $4.9 million) and from our mobileoperations (approximately $5.7 million). Revenues from our fixed operations and mobile operations representedapproximately 63% and 37%, respectively, of our total revenues for the yearended June 30, 2006.

Revenues from ourfixed operations decreased approximately 2.5% from approximately$196.5 million for the year ended June 30, 2005, to approximately$191.6 million for the year ended June 30, 2006.  This decrease was due

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primarily to (1) aloss of revenues from the centers we sold, deconsolidated or closed duringfiscal 2006 and 2005 (approximately $5.9 million) and (2) lower revenuesfrom our existing fixed-site centers (approximately $1.5 million), partiallyoffset by (1) higher revenues from changes in payment arrangements with certainradiologists (approximately $2.1 million) and (2) increased revenues from theacquisition of a joint venture fixed-site center during the third quarter offiscal 2006 (approximately $0.4 million). Revenues were adversely affected by the negative trends described above.

Revenues from ourmobile operations decreased approximately 4.7% from approximately$120.4 million for the year ended June 30, 2005, to approximately $114.7million for the year ended June 30, 2006. This decrease was partially due to the dissolution of a mobilelithotripsy partnership during the second quarter of fiscal 2006 (approximately$1.4 million) and lower revenues from our existing mobile facilities(approximately $4.4 million).  Thisdecrease was due to lower MRI and lithotripsy revenues, partially offset by anincrease in PET/CT revenues.  Our mobileoperations revenues were also adversely affected by Hurricanes Katrina, Ritaand Wilma (approximately $0.2 million). Revenues were adversely affected by the negative trends described above.

Approximately 56%of our total revenues for the year ended June 30, 2006 were generated frompatient services revenues.  Primarily allpatient services revenues were earned from our fixed operations for the yearended June 30, 2006.  Approximately 44%of our total revenues for the year ended June 30, 2006, were generated fromcontract services revenues.  Contractservices revenues from fixed operations and mobile operations representedapproximately 15% and 85%, respectively, of total contract services revenuesfor the year ended June 30, 2006.

*Costsof Operations: *Costsof operations increased approximately 1.2% from approximately $268.2 millionfor the year ended June 30, 2005, to approximately $271.3 million for the yearended June 30, 2006.  This increase wasdue primarily to higher costs in our fixed operations (approximately $4.3million), partially offset by lower costs in our mobile operations(approximately $0.6 million) and at our billing and other operations(approximately $0.6 million).  Thedecrease at our billing and other operations is due to overall cost savingsfrom the closure of two billing centers during fiscal 2005, offset by a chargefor certain severance and the closure of two additional billing centers duringfiscal 2006.

Costs ofoperations at our fixed operations increased approximately 2.9% fromapproximately $150.1 million for the year ended June 30, 2005, to approximately$154.4 million for the year ended June 30, 2006.  The increase was due primarily to highercosts at our existing fixed-site centers (approximately $9.7 million),partially offset by (1) the elimination of costs from the centers we sold,deconsolidated or closed in fiscal 2006 and 2005 (approximately $5.5 million)and (2) a charge for severance payments for a terminated employee during thefirst quarter of fiscal 2005 (approximately $0.3 million).  The increase at our existing fixed-sitecenters was primarily due to (1) higher salaries and benefits related totechnologists and to additional field and center management (approximately $3.6million); (2) higher payments to radiologists (approximately $2.0 million)discussed above; (3) higher equipment maintenance costs (approximately $1.3million); (4) charges related to the closure of centers (approximately $0.4million); and (5) higher occupancy costs (approximately $0.4 million).

Costs of operationsat our mobile operations decreased approximately 0.5% from approximately $98.1million for the year ended June 30, 2005, to approximately $97.6 million forthe year ended June 30, 2006.  Thedecrease was due primarily to a reduction in costs associated with thedissolution of a mobile lithotripsy partnership during the second quarter offiscal 2006 (approximately $1.1 million), partially offset by higher costs atour existing mobile facilities (approximately $0.6 million).  The increase in costs at our existing mobilefacilities was primarily caused by higher travel and vehicle operations costs(approximately $1.4 million), partially offset by reduced bad debt expenserelated to certain mobile customers (approximately $0.6 million).

*CorporateOperating Expenses*: Corporate operating expenses increased approximately 28.8% fromapproximately $18.4 million for the year ended June 30, 2005, to approximately$23.7 million for the year ended June 30, 2006. The increase was due primarily to (1) higher salaries and benefitsprimarily relating to the transfer of certain field responsibilities tocorporate (approximately $2.1 million); (2) higher legal and consulting feesrelating to certain legal proceedings described in Item 3. “Legal Proceedings” (approximately $0.9 million); (3)severance charges related to organizational realignments during the third andfourth quarters of fiscal 2006 (approximately $0.7 million); (4) costs incurredas a result of a national sales meeting in September 2005 (approximately $0.7 million);and (5) higher consulting costs related to revenue enhancement initiatives(approximately $0.3 million), partially

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offset by a chargefor severance payments for a terminated employee during the first quarter offiscal 2005 (approximately $0.8 million).

*InterestExpense, net:*  Interestexpense, net increased approximately 13.1% from approximately$44.9 million for the year ended June 30, 2005, to approximately$50.8 million for the year ended June 30, 2006.  The increase was due primarily to higherinterest rates on our variable rate indebtedness, partially offset by loweroutstanding debt due to principal payments on capital lease obligations.

*Gain onRepurchase of Notes Payable: *InSeptember 2005, we realized a net gain of $3.1 million in connection with ourrepurchase of approximately $55.5 million of our unsecured senior subordinatednotes due 2011.

*Losson Dissolution of Partnership*:  In December 2005, we dissolved a mobilelithotripsy partnership in Connecticut. In connection with this dissolution, we recorded a $1.0 millionreduction in associated goodwill.

*Impairment of Goodwill and Other Intangible Assets: *For the year ended June 30, 2006, we recorded non-cash impairment chargesof approximately $190.8 million.  Thesecharges are a reduction in the carrying value of goodwill and other intangibleassets at our reporting units (approximately $126.8 million for ourfixed reporting unit and approximately $64.0 million for our mobile reportingunit).  See “Critical Accounting Policies and Estimates” below and Note 7 to our consolidatedfinancial statements, which are a part of this Form 10-K.

*Provision(Benefit) for Income Taxes:*Provision (benefit) for incometaxes changed from a provision of approximately $15.1 million for the yearended June 30, 2005 to a benefit of approximately $14.8 million for the yearended June 30, 2006.  As a result of ourpre-tax loss for the year ended June 30, 2006 and anticipated future losses, wedetermined that a valuation allowance continued to be necessary due to theuncertainty of the future realization of net operating loss carryforwards andother assets.  This valuation allowance does not affect our cash flows orthe timing of income taxes payable in the future.  The net deferred taxliability of approximately $15.2 million at the year ended June 30, 2005 wasthe result of financial statement and tax basis differences for goodwill. These differences were not expected to reverse in the foreseeable future. In the year ended June 30, 2006 this deferred tax liability was reducedto $3.5 million as a result of the impairment charges, net of recording adeferred tax liability related to financial and tax basis differences on ourindefinite-lived other intangible assets.

**Financial Condition, Liquidity and Capital Resources**

We havehistorically funded our operations and capital project requirements from netcash provided by operating activities and capital and operating leases.  We expect to fund future working capital andcapital project requirements from net cash provided by operating activities,capital and operating leases, and our revolving credit facility.  Due to the severity and duration of thenegative trend in our Adjusted EBITDA and Medicare reimbursement reductions, weanticipate that operating cash flow will continue to decline as well, whichwill result in:

·                  areduction in the amounts available under our revolving credit facility, andtherefore a decline in our borrowing base;

·                  difficultyfunding our capital projects; and

·                  morestringent financing and leasing terms from equipment manufacturers and otherfinancing resources.

*Liquidity:*During recent years, we have experienced many adverse marketconditions and our financial performance has deteriorated.  We reported anet loss of approximately $99.0 million, $210.2 million and $27.2 million forthe years ended June 30, 2007, 2006 and 2005, respectively.  Thoughnon-cash goodwill impairment charges and reorganization charges constituted asignificant component of reported net losses, we have experienced, and expectto continue to experience, decreases in revenues and increases in cost ofoperations at our existing mobile facilities and fixed-site centers andcorporate operating expenses; however, the reorganization materially improvedour long-term liquidity by cancelling $194.5 million of long-term debt andassociated interest expense.

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On and prior toMay 29, 2007, we entered into several amendments to our $30 million asset-basedrevolving credit facility with Bank of America, N.A., as collateral agent,administrative agent and lender thereunder. These amendments, among otherthings, permitted Holdings and InSight to file voluntary petitions forreorganization pursuant to chapter 11 of the Bankruptcy Code (the “Chapter 11Petitions”) and consummate their plan of reorganization. On May 29, 2007, weentered into Waiver and Agreement No. 1 to our floating rate notes indenture(the “Indenture Waiver”) and a Second Supplemental Indenture to our floatingrate notes indenture (the “Indenture Supplement”), in each case with U.S. BankNational Association, as indenture trustee, and the holders of a majority ofour floating rate notes. The Indenture Waiver and Indenture Supplement providedfor, among other things, (1) a waiver of compliance by Holdings and itssubsidiaries with those provisions of the floating rate notes indenture thatthe majority noteholders could waive that would restrict the filing of theChapter 11 Petitions and consummation of the plan of reorganization, (2) aprohibition on optional redemptions by InSight of the floating rate notes priorto January 1, 2008 and the payment of redemption premiums to the extent thefloating rate notes are redeemed thereafter and (3) various amendments to thenegative covenants in the floating rate notes indenture, including removing theability of Holdings and its subsidiaries (other than in certain limitedcircumstances) to pay dividends, redeem stock and make investments and furtherrestricting the ability of Holdings and its subsidiaries to engage in assetsales and incur liens and additional indebtedness.  On May 29, 2007, Holdings and InSight filedthe Chapter 11 Petitions.  Holdings andInSight emerged from bankruptcy on August 1, 2007, under a plan ofreorganization that was approved by the U.S. Bankruptcy Court for the Districtof Delaware. The other subsidiaries of Holdings were not included in thebankruptcy filing and continued to operate their business.  Please see Item 1. “Business-Reorganization” for further information regardingbankruptcy matters.

Notwithstandingthe consummation of our exchange offer and plan of reorganization, we stillhave a substantial amount of debt, which requires significant interest andprincipal payments.  As of August 2, 2007, we had total indebtedness ofapproximately $321.4 million.  In addition, as a result of the variousfactors that affect our industry generally and our business specifically, wehave experienced significant declines in our operating results and cash flowsas compared to prior year periods for the past three fiscal years.  We believe, based on currently availableinformation, that future net cash provided by operating activities and our creditfacility will be adequate to meet our operating cash and debt servicerequirements for at least the next twelve months.  Moreover, if our net cash provided byoperating activities declines further than we have anticipated, we are preparedto take steps to conserve our cash, including delaying or restructuring ourcapital projects (entering into capital and operating leases rather than usingcash). We believe these steps would still enable us to meet our liquidity needseven if net cash provided by operating activities falls below what we haveanticipated.  If our net cash provided byoperating activities were to severely decline, we may be unable to service ourindebtedness.  However, we believe thatwe will be able to meet our liquidity needs to allow us to continue normaloperations.

Our short-term andlong-term liquidity needs will arise primarily from:

·                  interest payments relating to ourfloating rate notes and revolving credit facility;

·                  capitalprojects;

·                  workingcapital requirements; and

·                  potentialacquisitions.

There are noscheduled principal repayments on our floating rate notes until 2011.

Cash and cashequivalents as of June 30, 2007 were approximately $20.8 million.  Our primary source of liquidity is cashprovided by operating activities.  Ourability to generate cash flows from operating activities is based upon severalfactors including the following:

·                  thevolume of patients at our fixed-site centers;

·                  thereimbursement we receive for our services;

·                  thedemand for our mobile services;

·                  ourability to control expenses; and

·                  ourability to collect our trade accounts receivables from third-party payors,hospitals, physician groups, other healthcare providers and patients.

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A summary of cash flowsis as follows (amounts in thousands):
|                                                   | ** ** | **Years Ended June 30,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net cash  provided by operating activities        |       | $                                       | 9,065      |   | $ | 37,628 |   | $ | 64,045 |   |
| Net cash used in  investing activities            |       | (16,045                                 | )          | (28,507 | ) | (35,759 | ) |
| Net cash used in  financing activities            |       | (396                                    | )          | (1,752 | ) | (37,859 | ) |
|                                              |       |                                    |       |   |   |   |   |
| Increase (decrease) in  cash and cash equivalents |       | $                                       | (7,376     | ) | $ | 7,369 |   | $ | (9,573 | ) |

 

Net cash providedby operating activities was approximately $9.1 million for the year ended June30, 2007 and resulted primarily from (1) the net income before depreciation,amortization, impairment of goodwill and reorganization items; (2) an increasein accounts payable, other accrued expenses and accrued liabilities subject tocompromise (approximately $11.1 million); and (3) a decrease in trade accountsreceivables, net (approximately $1.0 million), partially offset bypayments made in connection with our reorganization efforts (approximately$11.4 million).  The increase in accountspayable, other accrued expenses and accrued liabilities subject to compromiseis primarily due to accrued interest on the senior subordinated notes.

Net cash used ininvesting activities was approximately $16.0 million for the year endedJune 30, 2007.  Cash used in investingactivities resulted primarily from our purchase or upgrade of diagnosticimaging equipment at our existing fixed-site centers and mobile facilities(approximately $16.2 million).

Net cash used infinancing activities was approximately $0.4 million for the year ended June 30,2007. Cash used in financing activities resulted primarily from notes payableand capital lease payments (approximately $6.5 million), partially offset bynet proceeds from borrowings on our revolving credit facility and other notespayable (approximately $6.1 million).

The following table sets forth our Adjusted EBITDA forthe years ended June 30, 2007, 2006 and 2005. We define Adjusted EBITDA as our earnings before interest expense,income taxes, depreciation and amortization excluding the gain on repurchase ofnotes payable, the loss on dissolution of partnership, the impairment ofgoodwill and other intangible assets and reorganization items.  Adjusted EBITDA has been included because webelieve that it is a useful tool for us and our investors to measure ourability to provide cash flows to meet debt service, capital projects andworking capital requirements.  AdjustedEBITDA should not be considered an alternative to, or more meaningful than,income from company operations or other traditional indicators of operating performanceand cash flow from operating activities determined in accordance withaccounting principles generally accepted in the United States.  We presentthe discussion of Adjusted EBITDA because covenants in the agreements governingour material indebtedness contain ratios based on this measure.   While Adjusted EBITDA is used as a measureof liquidity and the ability to meet debt service requirements, it is notnecessarily comparable to other similarly titled captions of other companiesdue to differences in methods of calculations. Our reconciliation of net cash provided by operating activities toAdjusted EBITDA is as follows (amounts in thousands):
|                                                   | ** ** | **Years Ended June 30,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                              |       |                                    |       |   |   |   |   |
| Net cash  provided by operating activities        |       | $                                       | 9,065      |   | $ | 37,628 |   | $ | 64,045 |   |
| Cash used for reorganization items                |       | 11,367                                  |       | — |   | — |   |
| Provision (benefit) for income taxes              |       | 2,175                                   |       | (14,824 | ) | 15,069 |   |
| Interest expense, net                             |       | 52,780                                  |       | 50,754 |   | 44,860 |   |
| Loss on sales of centers                          |       | —                                  |       | — |   | (170 | ) |
| Amortization of deferred financing costs          |       | (3,158                                  | )          | (3,051 | ) | (3,173 | ) |
| Equity in earnings of unconsolidated partnerships |       | 3,030                                   |       | 3,072 |   | 2,613 |   |
| Distributions from unconsolidated partnerships    |       | (3,008                                  | )          | (3,387 | ) | (2,621 | ) |
| Net change in operating assets and liabilities    |       | (12,189                                 | )          | (6,121 | ) | (7,086 | ) |
| Net change in deferred income taxes               |       | —                                  |       | 15,224 |   | (15,224 | ) |
|                                              |       |                                    |       |   |   |   |   |
| Adjusted EBITDA                                   |       | $                                       | 60,062     |   | $ | 79,295 |   | $ | 98,313 |   |

 

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Adjusted EBITDAdecreased approximately 24.2% from approximately $79.3 million for the yearended June 30, 2006, to approximately $60.1 million for the year ended June 30,2007.  This decrease was due primarily to (1) reductions in AdjustedEBITDA from our fixed operations (approximately $9.0 million) and our mobileoperations (approximately $6.5 million); (2) an increase in costs at ourbilling and other operations (approximately $1.9 million); and (3) an increasein corporate operating expenses (approximately $1.8 million).

Adjusted EBITDAfrom our fixed operations decreased approximately 13.7% from approximately$65.6 million for the year ended June 30, 2006, to approximately $56.6 millionfor the year ended June 30, 2007.  This decrease was due primarily to (1)a reduction in Adjusted EBITDA at our existing fixed-site centers(approximately $7.7 million); (2) the elimination of Adjusted EBITDA at thefixed-site centers we sold or closed during fiscal 2007 and 2006 (approximately$1.2 million); (3) charges to close two centers discussed above (approximately$0.3 million); and (4) severance charges discussed above (approximately $0.1million), partially offset by Adjusted EBITDA from a joint venture fixed-sitecenter we acquired during the third quarter of fiscal 2006 (approximately $0.3million).  The reduction in Adjusted EBITDA at our existing fixed-site centersis primarily due to the reduction in revenues, including the reimbursementreductions from the DRA, offset by the decrease in costs discussed above.

Adjusted EBITDAfrom our mobile operations decreased approximately 13.7% from approximately$47.6 million for the year ended June 30, 2006, to approximately $41.1 millionfor the year ended June 30, 2007.  This decrease was due primarily to (1)the reduction in revenues discussed above; (2) severance charges discussedabove (approximately $0.4 million); and (3) the elimination of Adjusted EBITDAfrom a mobile lithotripsy partnership we dissolved during the second quarter offiscal 2006 (approximately $0.4 million), partially offset by the reduction incosts discussed above.

Adjusted EBITDAdecreased approximately 19.3% from approximately $98.3 million for the yearended June 30, 2005, to approximately $79.3 million for the year ended June 30,2006.  This decrease was due primarily to(1) reductions in Adjusted EBITDA from our fixed operations (approximately $8.5million) and our mobile operations (approximately $5.8 million) and (2) anincrease in corporate operating expenses (approximately $5.2 million),partially offset by a reduction in costs at our billing and other operations(approximately $0.6 million).

Adjusted EBITDAfrom our fixed operations decreased approximately 11.5% from approximately$74.1 million for the year ended June 30, 2005, to approximately $65.6 millionfor the year ended June 30, 2006.  Thisdecrease was due primarily to (1) a reduction in Adjusted EBITDA at ourexisting fixed-site centers (approximately $8.1 million) and (2) theelimination of Adjusted EBITDA at the fixed-site centers we sold or closedduring fiscal 2006 and 2005 (approximately $0.9 million), partially offset by(1) a charge for severance payments for a terminated employee during the firstquarter of fiscal 2005 (approximately $0.3 million) and (2) an increase inAdjusted EBITDA from a joint venture fixed-site center we acquired during thethird quarter of fiscal 2006 (approximately $0.2 million).  The reduction in Adjusted EBITDA at ourexisting fixed-site centers is primarily due to the reduction in revenues andincrease in costs discussed above.

Adjusted EBITDA from our mobile operations decreasedapproximately 10.8% from approximately $53.4 million for the year ended June30, 2005, to approximately $47.6 million for the year ended June 30, 2006.  This decrease was due primarily to thereduction in revenues and increase in costs discussed above.

*Capital Projects: *In fiscal 2007, wepurchased or leased 10 MRI systems, seven PET/CT systems and two CTsystems.   As of June 30, 2007, we havecommitted to capital projects of approximately $2.4 million throughSeptember 2007, which includes the purchase of one MRI system (approximately$1.2 million) and one CT system (approximately $0.7 million).  We expect to use either internally generatedfunds or capital or operating leases to finance the acquisition of suchequipment.  We may purchase, lease orupgrade other diagnostic imaging systems as opportunities arise to place newequipment into service when new contract services agreements are signed,existing agreements are renewed, acquisitions are completed, or new fixed-sitecenters and mobile facilities are developed in accordance with our core marketstrategy.  If we are unable to generatesufficient cash from our operations or obtain additional funds through bankfinancing, the issuance of equity or debt securities, or operating leases, wemay be unable to maintain a competitive equipment base.  As a result, we may not be able to maintainour competitive position in our core markets or expand our business.

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*FloatingRate Notes and Credit Facility: *Asof June 30, 2007, through InSight, we had outstanding $300 million aggregateprincipal amount of floating rate notes. The floating rate notes mature in November 2011 and bear interest atLIBOR plus 5.25% per annum, payable quarterly. Holdings’ and InSight’s wholly owned subsidiariesunconditionally guarantee all of InSight’sobligations under the indenture for the floating rate notes.   The floating rate notes are secured by afirst priority lien on substantially all of InSight’s and the guarantors’ existing and future tangible andintangible personal property including, without limitation, equipment, certaincontracts and intellectual property, but are not secured by a lien on theiraccounts receivables and related assets, cash accounts related to receivablesand certain other assets.  In addition,the floating rate notes are secured by a portion of InSight’s stock and thestock or other equity interests of InSight’s subsidiaries.

On July9, 2007, certain holders of floating rate notes purchased from InSight anadditional $15 million of aggregate principal amount of floating rate notes,which increased the aggregate principal amount of outstanding floating ratenotes to $315 million.  Such notes wereissued at 85% of their principal amount, or $12.75 million in cash, and aresubject to customary registration rights and other terms in most casesconsistent with our original issuance of floating rate notes.  We used a portion of the cash proceeds fromsuch issuance to pay the approximately $3.0 million consent payment to thoseholders of floating rate notes who consented to the Indenture Waiver withrespect to the floating rate notes indenture that was entered into on May 29,2007, and will use the remainder of such proceeds for working capital andgeneral corporate purposes.

In January 2006,through InSight, we purchased an interest rate cap contract.  The contract is for a term of two years, witha notional amount of $100 million and a LIBOR cap of 5.0%.  As of June 30, 2007, the fair value of theinterest rate cap contract was approximately $0.3 million.

As of June 30, 2007,in addition to the indebtedness under the floating rate notes, through InSight,we had outstanding $194.5 million aggregate principal amount of seniorsubordinated notes.  The seniorsubordinated notes were cancelled in exchange for Holdings’ common stock on August 1, 2007 inconnection with the exchange offer and plan of reorganization.

Inconnection with the consummation of the plan of reorganization, InSight’s wholly owned subsidiaries entered intoa Second Amended and Restated Loan and Security Agreement, dated August 1,2007, with the lenders named therein and Bank of America, N.A., as collateraland administrative agent.  Pursuant to such agreement, Bank of America,N.A. and the other lenders agreed to provide InSight’s wholly owned subsidiaries with an asset-basedrevolving credit facility of up to $30 million, maturing on June 30, 2011, tobe used for working capital and general corporate purposes.  Thisagreement amends and restates our prior $30 million asset-based revolvingcredit facility with the lenders and Bank of America, N.A., as collateral andadministrative agent.  As of August 31,2007, there were no outstanding borrowings under this credit facility; however,there were letters of credit of approximately $2.6 million outstanding under thecredit facility, of which approximately $0.6 million are cash collateralized.

Borrowingsunder the credit facility bear interest at a per annum rate equal to LIBOR,plus an applicable margin, or, at our option, the base rate (which is the Bankof America, N.A. prime rate).  The applicable margin is initially 2.50%per annum; however, commencing with delivery of our consolidated financialstatements for the fiscal month ending March 31, 2008 and quarterly thereafter,the applicable margin will be adjusted in accordance with a pricing grid basedon our fixed charge coverage ratio, and will range from 2.50% to 2.00% perannum.  In addition to paying interest on outstanding loans under thecredit facility, we are required to pay a commitment fee to the lenders inrespect of unutilized commitments thereunder at a rate equal to 0.50% perannum, subject to reduction based on a performance grid tied to our fixedcharge coverage ratio, as well as customary letter-of-credit fees and fees ofBank of America, N.A.  There are nofinancial covenants included in the credit facility, except a minimum fixedcharge coverage ratio test which will be triggered if availability under thecredit facility plus eligible cash falls below $7.5 million.

Holdingsand InSight unconditionally guarantee all obligations of InSight’s subsidiaries that are borrowers underthe credit facility.  All obligations under the credit facility and theobligations of Holdings and InSight under the guarantees are secured, subjectto certain exceptions, by a first priority security interest in all of Holdings’, InSight’s and the borrowers’: (i) accounts;(ii) instruments, chattel paper (including, without limitation, electronicchattel paper), documents, letter-of-credit rights and supporting obligations relatingto any account; (iii) general intangibles that relate to any account;(iv) monies in the possession or under the control of the lenders underthe credit facility;

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(v) productsand cash and non-cash proceeds of the foregoing; (vi) deposit accountsestablished for the collection of proceeds from the assets described above; and(vii) books and records pertaining to any of the foregoing.

The agreementsgoverning our credit facility and floating rate notes contain restrictions onamong other things, our ability to incur additional liens and indebtedness,engage in mergers, consolidations and asset sales, make dividend payments,prepay other indebtedness, make investments and engage in transactions withaffiliates.

*ContractualCommitments: * Asdefined by SEC reporting regulations, our contractual obligations as of June30, 2007 are as follows (amounts in thousands):

|                                | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | ** ** | ** ** | **Less than**                        | ** ** | **1-3** | ** ** | **3-5** | ** ** | **More than** | ** ** |
| ** **                     | ** ** | **Total**  | ** ** | **1 Year**                           | ** ** | **Years** | ** ** | **Years** | ** ** | **5 Years** | ** ** |
| Long-term debt  obligations    |       | $          | 730,817    |                                      | $          | 56,622 |   | $ | 102,928 |   | $ | 571,267 |   | $ | — |   |
| Capital lease  obligations     |       | 6,970      |       | 3,265                                     |       | 2,442 |   | 1,263 |   | — |   |
| Operating lease  obligations   |       | 54,888     |       | 14,070                                    |       | 22,401 |   | 13,947 |   | 4,470 |   |
| Purchase  commitments          |       | 2,423      |       | 2,423                                     |       | — |   | — |   | — |   |
|                           |       |       |       |                                      |       |   |   |   |   |   |   |
| Total  contractual obligations |       | $          | 795,098    |                                      | $          | 76,380 |   | $ | 127,771 |   | $ | 586,477 |   | $ | 4,470 |   |

 

The long-term debtobligations and capital lease obligations include both principal and interestcommitments for the periods presented. The long-term debt obligations include the $194.5 million of seniorsubordinated notes, which were exchanged for Holdings’ common stock on August 1, 2007, butexclude the $15 million of floating rate notes issued on July 9, 2007.   The interest commitment on our floating ratenotes is based on the effective interest rate at June 30, 2007 (10.61%), aftergiving effect to our interest rate cap contract.

**Off-BalanceSheet Arrangements**

There are no off-balancesheet transactions, arrangements or obligations (including contingentobligations) that have, or are reasonably likely to have a current or futurematerial effect on our financial condition, changes in financial condition,revenues or expenses, results of operations, liquidity, capital projects orcapital resources.

**CriticalAccounting Policies and Estimates**

Management’s discussion and analysis of financialcondition and results of operations, as well as disclosures included elsewherein this Form 10-K are based upon our consolidated financial statements, whichhave been prepared in accordance with accounting principles generally acceptedin the United States. The preparation of these consolidated financialstatements requires management to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues, expenses and relateddisclosure of contingencies. We believe the critical accounting policies thatmost impact the consolidated financial statements are described below. Asummary of our significant accounting policies can be found in the notes to ourconsolidated financial statements, which are a part of this Form 10-K.

*Fresh-StartReporting: *On August1, 2007, we implemented fresh-start reporting in accordance with SOP 90-7. Theprovisions of fresh-start reporting require that we revalue our assets andliabilities to fair value, reestablish stockholders’ equity using thereorganized value established in connection with the plan of reorganization,and record any applicable reorganization value in excess of amounts allocableto identifiable assets as an intangible asset. As a result of the adoption ofSOP 90-7, we are reviewing the fair value of our assets and liabilities andexpect that we will be required to adjust the value of some of our assets andliabilities. We expect that the implementation of fresh-start reporting underSOP 90-7 will have a material effect on our consolidated financial statements.As a result, our consolidated financial statements published for periodsfollowing the effectiveness of the plan of reorganization on August 1, 2007,will not be comparable to our consolidated financial statements publishedbefore the effectiveness of the plan and included elsewhere in this Form10-K.  See Note 20 to our consolidatedfinancial statements, which are a part of this Form 10-K.

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*RevenueRecognition: *Revenuesfrom patient services and from contract services are recognized when servicesare provided. Patient services revenues are presented net of (1) relatedcontractual adjustments, which represent the difference between our charge fora procedure and what we will ultimately receive from private health insuranceprograms, Medicare, Medicaid and other federal healthcare programs, and(2) payments due to radiologists. We report payments made to radiologistson a net basis because (1) we are not the primary obligor for the provision ofprofessional services, (2) the radiologists receive contractually agreed uponamounts from collections and (3) the radiologists bear the risk ofnon-collection; however, we have recently entered into arrangements withseveral radiologists pursuant to which we pay the radiologists directly fortheir professional services at an agreed upon contractual rate.  With respect to these arrangements, theprofessional component is included in our revenues, and our payments to theradiologists are included in costs of services. Contract services revenues are recognized over the applicable contractperiod.  Revenues collected in advanceare recorded as unearned revenue.

*Trade Accounts Receivables: *We review our tradeaccounts receivables and our estimates of the allowance for doubtful accountsand contractual adjustments each period. Contractual adjustments are manual estimates based upon an analysis of(1) historical experience of contractual payments from payors and (2) theoutstanding accounts receivables from payors. Contractual adjustments are written off against their correspondingasset account at the time a payment is received from a payor, with a reductionto the allowance for contractual adjustments to the extent such an allowancewas previously recorded.  Estimates ofuncollectible amounts are revised each period, and changes are recorded in theperiod they become known. The provision for doubtful accounts includes amountsto be written off with respect to (1) specific accounts involving customers,which are financially unstable or materially fail to comply with the paymentterms of their contract and (2) other accounts based on our historicalcollection experience, including payor mix and the aging of patient accountsreceivables balances.  Receivables deemedto be uncollectible, either through a customer default on payment terms orafter reasonable collection efforts have been exhausted, are fully written offagainst their corresponding asset account, with a reduction to the allowancefor doubtful accounts to the extent such an allowance was previouslyrecorded.  Our historical write-offs foruncollectible accounts receivables are not concentrated in a specific payorclass.  While we have not in the pastexperienced material differences between the amounts we have collected and ourestimated allowances, the amounts we realize in the future could differmaterially from the amounts assumed in arriving at the allowance for doubtfulaccounts and contractual adjustments.

*Goodwilland Other Intangible Assets: *Goodwillrepresents the excess purchase price we paid over the fair value of thetangible and intangible assets and liabilities acquired in acquisitions.   In accordance with Statement of FinancialAccounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, orSFAS 142, the goodwill and indefinite-lived intangible asset balances are notbeing amortized, but instead are subject to an annual assessment of impairmentby applying a fair-value based test.  Other intangible assets are amortized on a straight-line basis over theestimated lives of the assets ranging from five to thirty years.

We evaluate thecarrying value of goodwill and other intangible assets, including the related amortizationperiod, in the second quarter of each fiscal year.  Additionally, we review the carrying amountof goodwill and other intangible assets whenever events and circumstancesindicate that their respective carrying amounts may not be recoverable. Impairmentindicators include, among other conditions, cash flow deficits, historic oranticipated declines in revenue or operating profit and adverse legal orregulatory developments.  In a businesscombination, goodwill is allocated to our two reporting units (mobile andfixed), which are the same as our reportable operating segments, based onrelative fair value of the assets acquired and liabilities assumed. Inevaluating goodwill and other intangible assets not subject to amortization, wecomplete the two-step impairment test as required by SFAS 142.  In the first of a two-step impairment test,we determine the fair value of these reporting units using a discounted cashflow valuation model, market multiple model or appraised values, asappropriate.  SFAS 142 requires us tocompare the fair value for the reporting unit to its carrying value on anannual basis to determine if there is potential impairment.  If the fair value of a reporting unit exceedsits carrying value, goodwill of the reporting unit is considered not impairedand no further testing is required.  Ifthe fair value does not exceed the carrying value, the second step of thegoodwill impairment test is performed to measure the amount of impairment loss,if any.  The second step compares the impliedfair value of the reporting unit with the carrying amount of that goodwill.

For the year endedJune 30, 2007, based on the factors described above and in Note 7 to theconsolidated financial statements, which are a part of this Form 10-K, inconnection with our annual evaluation of the fair value of our reporting units,we recorded a non-cash goodwill impairment charge of approximately $29.6million related to our

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fixed reportingunit.  For the year ended June 30, 2006,we performed an interim evaluation in accordance with SFAS 142 using adiscounted cash flow valuation model and a market multiple model, and werecorded a non-cash goodwill impairment charge of approximately $189.4 millionrelated to our reporting units (approximately $126.8 million for our fixedreporting unit and approximately $62.6 for our mobile reporting unit).

We assess theongoing recoverability of our intangible assets subject to amortization bydetermining whether the intangible asset balance can be recovered over theremaining amortization period through projected undiscounted future cashflows.  If projected future cash flowsindicate that the unamortized intangible asset balances will not be recovered,an adjustment is made to reduce the net intangible asset to an amount consistentwith projected future cash flows discounted at our incremental borrowingrate.  Cash flow projections, althoughsubject to a degree of uncertainty, are based on trends of historicalperformance and management’sestimate of future performance, giving consideration to existing andanticipated competitive and economic conditions.  During the year ended June 30, 2006, inaccordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets”, we recorded a non-cash impairment charge related to our otherintangible assets of approximately $1.4 million related to wholesale contractsin our mobile reporting unit.

*IncomeTaxes: *We account forincome taxes using the asset and liability method.  Deferred tax assets and liabilities are recognizedfor the estimated future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective 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.

**NewPronouncements**

In September 2006,the Financial Accounting Standards Board (FASB) issued SFAS No. 157, “Fair Value Measurement”, or SFAS 157.  SFAS 157 defines fair value, establishes aframework for measuring fair value under accounting principles generallyaccepted in the United States, and expands disclosures about fair valuemeasurements.  SFAS 157 does not requireany new fair value measurements.  We willbe required to adopt SFAS 157 as of August 1, 2007.  We are currently assessing the effect of SFAS157 on our financial condition and results of operations.

In September 2006,the SEC issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior YearMisstatements when Qualifying Misstatements in Current Year FinancialStatements”, or SAB 108, whichprovides interpretive guidance on the consideration of the effects of prioryear misstatements in quantifying current year misstatements for the purpose ofa materiality assessment. SAB 108 is effective for companies with fiscal yearsending after November 15, 2006 and we were required to adopt itsprovisions in our fiscal year ending June 30, 2007. The adoption of SAB 108 didnot have a material effect on our financial condition and results ofoperations.

In July 2006,the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes - an interpretation of FASB Statement No. 109”, or FIN 48.  FIN 48clarifies the accounting for uncertainty in income taxes recognized in acompany’s financial statements.  FIN 48 prescribes a recognition thresholdand measurement attribute for financial statement recognition and measurementof a tax position taken or expected to be taken in the tax return.  We are required to adopt the provisions ofFIN 48 beginning in fiscal 2008.  The adoption of FIN 48 will not have amaterial effect on our financial condition and results of operations.

**ITEM7A.    QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

We provide ourservices in the United States and receive payment for our services exclusivelyin United States dollars. Accordingly, our business is unlikely to be affectedby factors such as changes in foreign market conditions or foreign currencyexchange rates.

Our market riskexposure relates primarily to interest rates relating to our floating ratenotes and our credit facility.  As aresult, we will periodically use interest rate swaps to hedge variable interestrates on long-term debt. We believe there was not a material quantitativechange in our market risk exposure during the fiscal year ended June

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30, 2007, ascompared to prior periods.  However, as aresult of the cancellation of $194.5 million of fixed-rate long-termindebtedness on August 1, 2007, pursuant to the exchange offer and plan ofreorganization, the percentage of our total indebtedness which is variableindebtedness increased significantly.  At August 31, 2007, approximately 97.7% of our indebtedness was variablerate indebtedness; however, as a result of the interest rate cap contractdiscussed below our exposure on variable rate indebtedness is reduced by $100million, to approximately 66.4% of our total indebtedness as of August 31,2007.   We do not engage inactivities using complex or highly leveraged instruments.

**Interest Rate Risk**

Inorder to modify and manage the interest characteristics of our outstandingindebtedness and limit the effects of interest rates on our operations, we mayuse a variety of financial instruments, including interest rate hedges, caps,floors and other interest rate exchange contracts. The use of these types ofinstruments to hedge our exposure to changes in interest rates carriesadditional risks such as counter-party credit risk and legal enforceability ofhedging contracts. We do not enter into any transactions for speculative ortrading purposes.

In January 2006, throughInSight, we purchased an interest rate cap contract.  The contract is for a term of two years, witha notional amount of $100 million and a LIBOR cap of 5.0%.  As of June 30, 2007, the fair value of theinterest rate cap contract was approximately $0.3 million.  The contract exposes us to credit risk in theevent that the counterparty to the contract does not or cannot meet itsobligations.  The counterparty to thecontract is a major financial institution and we expect the counterparty to beable to perform its obligations under the contract.

Our future earnings andcash flows and some of our fair values relating to financial instruments aredependent upon prevailing market rates of interest, such as LIBOR. Based oninterest rates and outstanding balances as of June 30, 2007, and after givingeffect to our interest rate cap contract discussed above, a 1% increase ordecrease in interest rates on our $300.0 million of floating rate debt wouldaffect annual future earnings and cash flows by approximately $2.0 and $3.0million, respectively.  The weightedaverage interest rate on our floating indebtedness as of June 30, 2007 was10.61%.

These amounts aredetermined by considering the impact of hypothetical interest rates on ourborrowing cost. These analyses do not consider the effects of the reduced levelof overall economic activity that could exist in that environment. Further, inthe event of a change of this magnitude, we would consider taking actions tofurther mitigate 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 thatinflation has had a material adverse impact on our business or operatingresults during the periods presented. We cannot assure you, however, that ourbusiness will not be affected by inflation in the future.

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**PART II**

**ITEM 8.          FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

**INSIGHT HEALTH SERVICES HOLDINGSCORP. AND SUBSIDIARIES**Index to Consolidated Financial StatementsFor the Years Ended June 30, 2007, 2006 and 2005
|                                                                 | ** ** | ** ** |
|-----------------------------------------------------------------|------------|------------|
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING  FIRM        |       |       |
|                                                            |       |       |
| CONSOLIDATED  BALANCE SHEETS                                    |       |       |
|                                                            |       |       |
| CONSOLIDATED STATEMENTS OF OPERATIONS                           |       |       |
|                                                            |       |       |
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY  (DEFICIT) |       |       |
|                                                            |       |       |
| CONSOLIDATED STATEMENTS OF CASH FLOWS                           |       |       |
|                                                            |       |       |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                      |       |       |
|                                                            |       |       |
| SCHEDULE  II - VALUATION AND QUALIFYING ACCOUNTS                |       |       |

 

In accordance with****SEC Rule 3-10of Regulation S-X, the consolidated financial statements of InSight HealthServices Holdings Corp., or the Company, are included herein and separatefinancial statements of InSight Health Services Corp., or InSight, the Company’s wholly owned subsidiary, and InSight’ssubsidiary guarantors are not included. Condensed financial data for InSight and its subsidiary guarantors isincluded in Note 21 to the consolidated financial statements.

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**Reportof Independent Registered Public Accounting Firm**

To theBoard of Directors and Stockholders of InSight Health Services Holdings Corp.:

In ouropinion, the consolidated financial statements listed in the accompanying indexpresent fairly, in all material respects, the financial position of InSightHealth Services Holdings Corp. (Debtor and Debtor-in-Possession) and itssubsidiaries (the “Company”) at June 30, 2007 and 2006 and the results of theiroperations and their cash flows for each of the three years in the period endedJune 30, 2007 in conformity with accounting principles generally accepted inthe United States of America.  Inaddition, in our opinion, the financial statement schedule listed in the accompanyingindex presents fairly, in all material respects, the information set forththerein when read in conjunction with the related consolidated financialstatements.  These financial statementsand the financial statement schedule are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements and financial statementschedule based on our audits. We conducted our audits of these statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial 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.

Asdiscussed in Note 2 to the consolidated financial statements, on July 10, 2007the U.S. Bankruptcy Court for the District of Delaware entered an orderconfirming the Company’s plan of reorganization which became effective onAugust 1, 2007.

Asdiscussed in Note 3 to the consolidated financial statements, the Companychanged the manner in which it accounts for share-based compensation in theyear ended June 30, 2007.

 
| /s/ PRICEWATERHOUSECOOPERS LLP |   |
|--------------------------------|--------|
|                           |
|                           |
| Orange County, California      |
| September 21, 2007        |

 

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**(DEBTORAND DEBTOR-IN-POSSESSION)**

**CONSOLIDATED BALANCE SHEETS**

**AS OFJUNE 30, 2007 AND 2006**

(Amounts inthousands, except share data)
| ** **                                                                                                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                                                                                           |       |     |       |     |       |
| CURRENT ASSETS:                                                                                                                  |       |     |       |     |       |
| Cash and cash  equivalents                                                                                                       |       | $        | 20,832     |     | $          | 28,208 |   |
| Trade accounts  receivables, net                                                                                                 |       | 42,683   |       | 43,690   |       |
| Other current  assets                                                                                                            |       | 8,335    |       | 8,389    |       |
| Total current  assets                                                                                                            |       | 71,850   |       | 80,287   |       |
|                                                                                                                             |       |     |       |     |       |
| PROPERTY AND EQUIPMENT,  net                                                                                                     |       | 144,823  |       | 181,026  |       |
| INVESTMENTS IN  PARTNERSHIPS                                                                                                     |       | 3,413    |       | 3,051    |       |
| OTHER ASSETS                                                                                                                     |       | 7,881    |       | 17,904   |       |
| OTHER INTANGIBLE  ASSETS, net                                                                                                    |       | 30,216   |       | 31,473   |       |
| GOODWILL                                                                                                                         |       | 64,868   |       | 94,463   |       |
|                                                                                                                             |       | $        | 323,051    |     | $          | 408,204 |   |
|                                                                                                                             |       |     |       |     |       |
| LIABILITIES AND  STOCKHOLDERS’ DEFICIT                                                                                      |       |     |       |     |       |
| CURRENT LIABILITIES:                                                                                                             |       |     |       |     |       |
| Current portion  of notes payable                                                                                                |       | $        | 5,737      |     | $          | 555 |   |
| Current portion  of capital lease obligations                                                                                    |       | 2,927    |       | 5,105    |       |
| Accounts payable  and other accrued expenses                                                                                     |       | 38,619   |       | 40,077   |       |
| Total current  liabilities                                                                                                       |       | 47,283   |       | 45,737   |       |
|                                                                                                                             |       |     |       |     |       |
| LONG-TERM LIABILITIES:                                                                                                           |       |     |       |     |       |
| Notes payable,  less current portion                                                                                             |       | 299,890  |       | 494,203  |       |
| Liabilities  subject to compromise                                                                                               |       | 205,704  |       | —   |       |
| Capital lease  obligations, less current portion                                                                                 |       | 3,302    |       | 3,519    |       |
| Other long-term  liabilities                                                                                                     |       | 4,832    |       | 3,166    |       |
| Deferred income  taxes                                                                                                           |       | 3,472    |       | 3,472    |       |
| Total long-term  liabilities                                                                                                     |       | 517,200  |       | 504,360  |       |
|                                                                                                                             |       |     |       |     |       |
| COMMITMENTS AND  CONTINGENCIES (Note 11)                                                                                         |       |     |       |     |       |
|                                                                                                                             |       |     |       |     |       |
| STOCKHOLDERS’ DEFICIT:                                                                                                      |       |     |       |     |       |
| Common stock,  $.001 par value, 10,000,000 shares authorized, 5,468,814 shares issued and  outstanding at June 30, 2007 and 2006 |       | 5        |       | 5        |       |
| Additional  paid-in capital                                                                                                      |       | 87,081   |       | 87,081   |       |
| Accumulated  other comprehensive income                                                                                          |       | 103      |       | 601      |       |
| Accumulated  deficit                                                                                                             |       | (328,621 | )          | (229,580 | )          |
| Total  stockholders’ deficit                                                                                                |       | (241,432 | )          | (141,893 | )          |
|                                                                                                                             |       | $        | 323,051    |     | $          | 408,204 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

50

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**(DEBTORAND DEBTOR-IN-POSSESSION)**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THEYEARS ENDED JUNE 30, 2007, 2006 AND 2005**

(Amounts inthousands)
| ** **                                          | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| REVENUES:                                           |       |                                    |       |   |   |   |   |
| Contract services                                   |       | $                                       | 128,693    |   | $ | 134,406 |   | $ | 136,537 |   |
| Patient services                                    |       | 158,221                                 |       | 171,892 |   | 180,336 |   |
| Total revenues                                      |       | 286,914                                 |       | 306,298 |   | 316,873 |   |
|                                                |       |                                    |       |   |   |   |   |
| COSTS OF  OPERATIONS:                               |       |                                    |       |   |   |   |   |
| Costs of services                                   |       | 192,599                                 |       | 197,812 |   | 194,507 |   |
| Provision for doubtful accounts                     |       | 5,643                                   |       | 5,351 |   | 5,723 |   |
| Equipment leases                                    |       | 6,144                                   |       | 3,257 |   | 2,326 |   |
| Depreciation and amortization                       |       | 57,040                                  |       | 64,852 |   | 65,601 |   |
| Total costs of operations                           |       | 261,426                                 |       | 271,272 |   | 268,157 |   |
|                                                |       |                                    |       |   |   |   |   |
| Gross profit                                        |       | 25,488                                  |       | 35,026 |   | 48,716 |   |
|                                                |       |                                    |       |   |   |   |   |
| CORPORATE  OPERATING EXPENSES                       |       | (25,496                                 | )          | (23,655 | ) | (18,447 | ) |
|                                                |       |                                    |       |   |   |   |   |
| LOSS ON SALES OF  CENTERS                           |       | —                                  |       | — |   | (170 | ) |
|                                                |       |                                    |       |   |   |   |   |
| EQUITY IN  EARNINGS OF UNCONSOLIDATED PARTNERSHIPS  |       | 3,030                                   |       | 3,072 |   | 2,613 |   |
|                                                |       |                                    |       |   |   |   |   |
| INTEREST  EXPENSE, net                              |       | (52,780                                 | )          | (50,754 | ) | (44,860 | ) |
|                                                |       |                                    |       |   |   |   |   |
| GAIN ON  REPURCHASE OF NOTES PAYABLE                |       | —                                  |       | 3,076 |   | — |   |
|                                                |       |                                    |       |   |   |   |   |
| LOSS ON  DISSOLUTION OF PARTNERSHIP                 |       | —                                  |       | (1,000 | ) | — |   |
|                                                |       |                                    |       |   |   |   |   |
| IMPAIRMENT OF  GOODWILL AND OTHER INTANGIBLE ASSETS |       | (29,595                                 | )          | (190,807 | ) | — |   |
|                                                |       |                                    |       |   |   |   |   |
| Loss before reorganization items and income taxes   |       | (79,353                                 | )          | (225,042 | ) | (12,148 | ) |
|                                                |       |                                    |       |   |   |   |   |
| REORGANIZATION  ITEMS                               |       | (17,513                                 | )          | — |   | — |   |
|                                                |       |                                    |       |   |   |   |   |
| Loss before income taxes                            |       | (96,866                                 | )          | (225,042 | ) | (12,148 | ) |
|                                                |       |                                    |       |   |   |   |   |
| PROVISION  (BENEFIT) FOR INCOME TAXES               |       | 2,175                                   |       | (14,824 | ) | 15,069 |   |
|                                                |       |                                    |       |   |   |   |   |
| Net loss                                            |       | $                                       | (99,041    | ) | $ | (210,218 | ) | $ | (27,217 | ) |

 

The accompanying notesare an integral part of these consolidated financial statements.

51

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**(DEBTORAND DEBTOR-IN-POSSESSION)**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**

**FOR THEYEARS ENDED JUNE 30, 2007, 2006 AND 2005**

(Amounts inthousands, except share data)
| ** **                                                          | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**      | ** ** | ** **    | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-------------------|------------|----------------------|------------|---------------|------------|------------|------------|
| ** **                                                          | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**    | ** ** | **Other**            | ** ** | **Retained**  | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Comprehensive** | ** ** | **Earnings**         | ** ** | ** **    | ** ** |
| ** **                                                          | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Gain (Loss)** | ** ** | **(Deficit)** | ** ** | **Total**  | ** ** |
| BALANCE AT JUNE  30, 2004                                           |       | 5,468,814             |       | $           | 5          |              | $          | 87,081               |       | $             | —     |       | $          | 7,855 |   | $ | 94,941 |   |
|                                                                |       |                  |       |        |       |              |       |                 |       |          |       |       |       |
| Net loss                                                            |       | —                |       | —      |       | —            |       | —               |       | (27,217       | )          | (27,217    | )          |
| BALANCE AT JUNE  30, 2005                                           |       | 5,468,814             |       | 5           |       | 87,081            |       | —               |       | (19,362       | )          | 67,724     |       |
|                                                                |       |                  |       |        |       |              |       |                 |       |          |       |       |       |
| Net loss                                                            |       | —                |       | —      |       | —            |       | —               |       | (210,218      | )          | (210,218   | )          |
|                                                                |       |                  |       |        |       |              |       |                 |       |          |       |       |       |
| Other  comprehensive income:                                        |       |                  |       |        |       |              |       |                 |       |          |       |       |       |
| Unrealized gain attributable to change in fair value  of derivative |       | —                |       | —      |       | —            |       | 601                  |       | —        |       | 601        |       |
| Comprehensive  loss                                                 |       |                  |       |        |       |              |       |                 |       |          |       | (209,617   | )          |
| BALANCE AT JUNE  30, 2006                                           |       | 5,468,814             |       | 5           |       | 87,081            |       | 601                  |       | (229,580      | )          | (141,893   | )          |
|                                                                |       |                  |       |        |       |              |       |                 |       |          |       |       |       |
| Net loss                                                            |       | —                |       | —      |       | —            |       | —               |       | (99,041       | )          | (99,041    | )          |
|                                                                |       |                  |       |        |       |              |       |                 |       |          |       |       |       |
| Other  comprehensive income:                                        |       |                  |       |        |       |              |       |                 |       |          |       |       |       |
| Unrealized loss attributable to change in fair value  of derivative |       | —                |       | —      |       | —            |       | (498                 | )          | —        |       | (498       | )          |
| Comprehensive  loss                                                 |       |                  |       |        |       |              |       |                 |       |          |       | (99,539    | )          |
| BALANCE AT JUNE 30,  2007                                           |       | 5,468,814             |       | $           | 5          |              | $          | 87,081               |       | $             | 103        |       | $          | (328,621 | ) | $ | (241,432 | ) |

 

The accompanying notesare an integral part of these consolidated financial statements.

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**(DEBTORAND DEBTOR-IN-POSSESSION)**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THEYEARS ENDED JUNE 30, 2007, 2006 AND 2005**

(Amounts in thousands)
| ** **                                                                           | ** ** | **Years Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                           | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| OPERATING  ACTIVITIES:                                                               |       |                                    |       |   |   |   |   |
| Net loss                                                                             |       | $                                       | (99,041    | ) | $ | (210,218 | ) | $ | (27,217 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities:     |       |                                    |       |   |   |   |   |
| Cash used for reorganization items                                                   |       | 11,367                                  |       | — |   | — |   |
| Write-off of deferred financing costs, included in  reorganization items             |       | 6,146                                   |       | — |   | — |   |
| Loss on sales of centers                                                             |       | —                                  |       | — |   | 170 |   |
| Depreciation and amortization                                                        |       | 57,040                                  |       | 64,852 |   | 65,601 |   |
| Amortization of deferred financing costs                                             |       | 3,158                                   |       | 3,051 |   | 3,173 |   |
| Equity in earnings of unconsolidated partnerships                                    |       | (3,030                                  | )          | (3,072 | ) | (2,613 | ) |
| Distributions from unconsolidated partnerships                                       |       | 3,008                                   |       | 3,387 |   | 2,621 |   |
| Gain on repurchase of notes payable                                                  |       | —                                  |       | (3,076 | ) | — |   |
| Loss on dissolution of partnership                                                   |       | —                                  |       | 1,000 |   | — |   |
| Impairment of goodwill and other intangible assets                                   |       | 29,595                                  |       | 190,807 |   | — |   |
| Deferred income taxes                                                                |       | —                                  |       | (15,224 | ) | 15,224 |   |
| Changes in operating assets and liabilites:                                          |       |                                    |       |   |   |   |   |
| Trade accounts receivables, net                                                      |       | 1,007                                   |       | 3,016 |   | 8,096 |   |
| Other current assets                                                                 |       | 81                                      |       | (407 | ) | (1,736 | ) |
| Accounts payable, other accrued expenses and accrued  interest subject to compromise |       | 11,101                                  |       | 3,512 |   | 726 |   |
| Net cash provided by operating activities before  reorganization items               |       | 20,432                                  |       | 37,628 |   | 64,045 |   |
|                                                                                 |       |                                    |       |   |   |   |   |
| Cash used for reorganization items                                                   |       | (11,367                                 | )          | — |   | — |   |
| Net cash provided by operating activities                                            |       | 9,065                                   |       | 37,628 |   | 64,045 |   |
|                                                                                 |       |                                    |       |   |   |   |   |
| INVESTING  ACTIVITIES:                                                               |       |                                    |       |   |   |   |   |
| Acquisition of fixed-site center, net of cash  acquired                              |       | —                                  |       | (2,345 | ) | — |   |
| Proceeds from sales of centers                                                       |       | —                                  |       | — |   | 2,810 |   |
| Additions to property and equipment                                                  |       | (16,163                                 | )          | (30,927 | ) | (30,459 | ) |
| Sale (purchase) of short-term investments                                            |       | —                                  |       | 5,000 |   | (5,000 | ) |
| Other                                                                                |       | 118                                     |       | (235 | ) | (3,110 | ) |
| Net cash used in investing activities                                                |       | (16,045                                 | )          | (28,507 | ) | (35,759 | ) |
|                                                                                 |       |                                    |       |   |   |   |   |
| FINANCING  ACTIVITIES:                                                               |       |                                    |       |   |   |   |   |
| Principal payments of notes payable and capital  lease obligations                   |       | (6,529                                  | )          | (293,109 | ) | (37,781 | ) |
| Proceeds from issuance of notes payable                                              |       | 1,145                                   |       | 298,500 |   | — |   |
| Borrowings on credit facility                                                        |       | 5,000                                   |       | — |   | — |   |
| Payments made in connection with refinancing notes  payable                          |       | —                                  |       | (6,836 | ) | — |   |
| Payment for interest rate cap contract                                               |       | —                                  |       | (307 | ) | — |   |
| Other                                                                                |       | (12                                     | )          | — |   | (78 | ) |
| Net cash used in financing activities                                                |       | (396                                    | )          | (1,752 | ) | (37,859 | ) |
|                                                                                 |       |                                    |       |   |   |   |   |
| INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS:                                   |       | (7,376                                  | )          | 7,369 |   | (9,573 | ) |
| Cash, beginning of period                                                            |       | 28,208                                  |       | 20,839 |   | 30,412 |   |
| Cash, end of period                                                                  |       | $                                       | 20,832     |   | $ | 28,208 |   | $ | 20,839 |   |
|                                                                                 |       |                                    |       |   |   |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                   |       |                                    |       |   |   |   |   |
| Interest paid                                                                        |       | $                                       | 42,116     |   | $ | 42,852 |   | $ | 42,461 |   |
| Income taxes paid                                                                    |       | 318                                     |       | 422 |   | 202 |   |
| Equipment  additions under capital leases                                            |       | 3,358                                   |       | 737 |   | — |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30,2007**

**1.       NATURE OF BUSINESS**

Allreferences to “we,” “us,” “our,” “our company” or “the Company” mean InSightHealth Services Holdings Corp., a Delaware corporation, and all entities andsubsidiaries owned or controlled by InSight Health Services Holdings Corp.   All references to “Holdings” mean InSight Health Services Holdings Corp. by itself.  All references to “InSight” mean InSightHealth Services Corp., a Delaware corporation and a wholly owned subsidiary ofHoldings by itself.  Through InSight andits subsidiaries, we provide diagnostic imaging, and related managementservices in more than 30 states throughout the United States.   Our operations are primarily concentrated inCalifornia, Arizona, New England, the Carolinas, Florida and the Mid-Atlanticstates.  We have two reportablesegments:  fixed operations and mobileoperations.  Our services are providedthrough a network of 86 mobile magnetic resonance imaging, or MRI, facilities,seven mobile positron emission tomography, or PET, facilities, 14 mobile PET/CTfacilities, two mobile lithotripsy facilities, three mobile computed tomography,or CT, facilities (collectively, mobile facilities), 56 MRI fixed-sitecenters, 43 multi-modality fixed-site centers, one PET/CT fixed centerand one PET fixed-site center (collectively, fixed-site centers).

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

**2.     REORGANIZATION**

In November 2006,we engaged Lazard Frères & Co. LLC as our financial advisor to assist us inexploring strategic alternatives.  In March 2007, we announced an offer toexchange shares of Holdings’common stock for up to $194.5 million aggregate principal amount of InSight’s 9.875% senior subordinated notes due2011, or senior subordinated notes.  The exchange offer initially providedfor consummation on an out-of-court basis or in connection with the filing of aprepackaged plan of reorganization under chapter 11 of the Bankruptcy Code. OnMay 29, 2007, Holdings and InSight filed voluntary petitions to reorganizetheir business under chapter 11 of the Bankruptcy Code in the U.S. BankruptcyCourt for the District of Delaware (Case No. 07-10700).  The other subsidiaries of Holdings were notincluded in the bankruptcy filing and continued to operate their business.  On July 10, 2007, the bankruptcy courtconfirmed Holdings’ and InSight’s Second Amended Joint Plan ofReorganization pursuant to chapter 11 of the Bankruptcy Code. The plan ofreorganization became effective and Holdings and InSight emerged frombankruptcy protection on August 1, 2007, or the effective date.

On August 1, 2007pursuant to the exchange offer and plan of reorganization, all of Holdings’ common stock, all options forHoldings’ common stock and all ofInSight’s senior subordinatednotes were cancelled and the following distributions were made (after givingeffect to a 1 for 6.326392 reverse stock split of Holdings’ common stock):

·                  Holdersof InSight’s senior subordinatednotes received 7,780,000 shares of newly issued Holdings’ common stock, which represented 90% of all shares of Holdings’ common stock outstanding afterconsummation of the plan of reorganization.

·                  Holdersof Holdings’ common stock priorto the effective date received 864,444 shares of newly issued Holdings’ common stock, which represented 10%of all shares of Holdings’ commonstock after consummation of the plan of reorganization.

Holdings’ common stock is listed on theOver-The-Counter Bulletin Board under the symbol “ISGT”.

The plan ofreorganization provided for the assumption of substantially all executorycontracts and unexpired leases; provided, however, we did terminate (i) themanagement agreement with J.W. Childs Advisors II, L.P. and Halifax Genpar,L.P. and (ii) the stockholders agreement with holders of Holdings’ common stock and stock options.

OnAugust 1, 2007, we implemented fresh-start reporting in accordance withAmerican Institute of Certified Public Accountants’ Statement of Position 90-7 “FinancialReporting by Entities in Reorganization under the Bankruptcy 

54

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Code”, or SOP 90-7. The provisions of fresh-start reporting require that we revalue ourassets and liabilities to fair value, reestablish stockholders’ equity usingthe reorganized value established in connection with the plan ofreorganization, and record any applicable reorganization value in excess ofamounts allocable to identifiable assets as an intangible asset. As a result ofthe adoption of SOP 90-7, we are reviewing the fair value of our assets andliabilities and expect that we will be required to adjust the value of some ofour assets and liabilities. We expect that the implementation of fresh-startreporting under SOP 90-7 will have a material effect on our consolidatedfinancial statements. As a result, our consolidated financial statementspublished for periods following the effectiveness of our plan of reorganizationon August 1, 2007, will not be comparable to our consolidated financialstatements published before the effectiveness of the plan (Note 20).

We have preparedthe accompanying consolidated financial statements in accordance with SOP 90-7and on a going-concern basis, which assumes continuity of operations,realization of assets and satisfaction of liabilities in the ordinary course ofbusiness.

SOP 90-7 requiresthat the consolidated financial statements for periods subsequent to a Chapter11 filing separate transactions and events that are directly associated withthe reorganization from the ongoing operations of the business.  Accordingly, all transactions (including, butnot limited to, all professional fees) directly associated with thereorganization of the business are reported separately in the financialstatements.  As of June 30, 2007, we hadrecognized the following reorganization items in our consolidated financialstatements (amounts in thousands):
|                                        | ** ** | **Year Ended**         | ** ** |
|----------------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **June 30, 2007** | ** ** |
|                                   |       |                        |       |
| Professional  fees                     |       | $                           | 7,559      |   |
| Write-off of  deferred financing costs |       | 6,146                       |       |
| Consent fees                           |       | 1,250                       |       |
| Management incentive                   |       | 1,698                       |       |
| Other                                  |       | 860                         |       |
|                                   |       | $                           | 17,513     |   |

 

Notwithstandingthe consummation of our exchange offer and plan of reorganization, we stillhave a substantial amount of debt, which requires significant interest andprincipal payments.  As of August 2,2007, we had total indebtedness of approximately $321.4 million.  In addition, as a result of the variousfactors that affect our industry generally and our business specifically, wehave experienced significant declines in our operating results and cash flowsas compared to prior year periods for the past three fiscal years.  We believe, based on currently availableinformation, that future net cash provided by operating activities and ourcredit facility will be adequate to meet our operating cash and debt servicerequirements for at least the next twelve months.  Moreover, if our net cash provided byoperating activities declines further than we have anticipated, we are preparedto take steps to conserve our cash, including delaying or restructuring ourcapital projects (entering into capital and operating leases rather than usingcash). We believe these steps would still enable us to meet our liquidity needseven if net cash provided by operating activities falls below what we haveanticipated.  If our net cash provided byoperating activities were to severely decline, we may be unable to service ourindebtedness.  However, we believe thatwe will be able to meet our liquidity needs to allow us to continue normaloperations. 

**3.       SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

a.     CONSOLIDATED FINANCIAL STATEMENTS

Our consolidated financial statements include ouraccounts and those of all controlled subsidiaries.  All significant intercompany transactions andbalances have been eliminated,  Equityinvestments in which the Company exercises significant influence, but does notcontrol, and is not the primary beneficiary are accounted for using the equitymethod (Note 15).  Investments in whichthe Company does not exercise significant influence over the investee areaccounted for under the cost method.

b.     USE OF ESTIMATES

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make certain estimates and assumptions that affect the reportedamounts of assets and liabilities at the date of the financial statements,disclosures of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

55

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c.     REVENUE RECOGNITION

Revenues fromcontract services 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.   We report payments made to radiologists on anet basis because (i) we are not the primary obligor for the provision ofprofessional services, (ii) the radiologists receive contractually agreed uponamounts from collections and (iii) the radiologists bear the risk ofnon-collection; however, we have entered into arrangements with severalradiologists pursuant to which we pay the radiologists directly for theirprofessional services at an agreed upon contractual rate.  With respect to these arrangements, theprofessional component is included in our revenues, and our payments to theradiologists are included in costs of services.    Contract services revenues are recognizedover the applicable contract period. Revenues collected in advance are recorded as unearned revenue.

d.   CASHEQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash equivalents are generally composed of liquidinvestments with original maturities of three months or less, such ascertificates of deposit and commercial paper.

e.     TRADE ACCOUNTS RECEIVABLES

We review our trade accounts receivables and ourestimates of the allowance for doubtful accounts and contractual adjustmentseach period.  Contractual adjustments aremanual estimates based upon an analysis of (i) historical experience ofcontractual payments from payors and (ii) the outstanding accounts receivablesfrom payors.  Contractual adjustments arewritten off against their corresponding asset account at the time a payment isreceived from a payor, with a reduction to the allowance for contractualadjustments to the extent such an allowance was previously recorded.  Estimates of uncollectible amounts arerevised each period, and changes are recorded in the period they become known.The provision for doubtful accounts includes amounts to be written off withrespect to (1) specific accounts involving customers, which are financiallyunstable or materially fail to comply with the payment terms of their contractand (2) other accounts based on our historical collection experience, includingpayor mix and the aging of patient accounts receivables balances.  Receivables deemed to be uncollectible,either through a customer default on payment terms or after reasonablecollection efforts have been exhausted, are fully written off against theircorresponding asset account, with a reduction to the allowance for doubtfulaccounts to the extent such an allowance was previously recorded.

f.      LONG-LIVED ASSETS

*Property and Equipment*.  Property and equipment are depreciated andamortized on the straight-line method using the following estimateduseful 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 capitalize expenditures for improvements and majorequipment upgrades.  Maintenance, repairsand minor replacements are charged to operations as incurred. When assets aresold or otherwise disposed of, the cost and related accumulated depreciationare removed from the accounts and any resulting gain or loss is included in theresults of operations.

*Long-lived Asset Impairment*.We review 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 

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undiscounted cash flows are less than the carryingamounts.  Fair value is determined basedon the present value of the expected associated cash flows.

g.     DEFERRED FINANCING COSTS

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, 2007 and 2006 were approximately $7.5 million and $16.8million, respectively.  During the fourthquarter of fiscal 2007 we wrote-off approximately $6.1 million of deferredfinancing costs associated with our senior subordinated notes, which are includedin reorganization items in the consolidated statements of operations (Note 2).

h.      SHARE-BASED COMPENSATION

On July 1, 2006, we adopted SFAS No. 123R, “Share-Based Payment”, or SFAS 123R.  SFAS 123R revises SFAS No. 123, “Accounting for Stock-BasedCompensation”, or SFAS 123, andsupersedes Accounting Principles Board (APB) No. 25, “Accounting for Stock Issued toEmployees”, or APB 25.  SFAS 123R focuses primarily on theaccounting for transactions in which an entity obtains employee services in share-basedpayment transactions.  SFAS123R requires companies to recognize in the statement of operations thecost of employee services received in exchange for awards of equity instrumentsbased on the grant date fair value of those awards.  Because we used the minimum value method ofmeasuring share-based compensation expense under SFAS 123, and because we meetthe definition of a nonpublic entity under SFAS 123R, we are required to adoptthe provisions of SFAS 123R prospectively to new and modified awards on orafter July 1, 2006.  Accordingly, we willcontinue to account for any portion of awards outstanding prior to July 1, 2006under the pro forma provisions of SFAS 123, and prior periods have not beenrestated to reflect the impact of SFAS 123R. There were no options or other forms of share-based payment grantedduring the year ended June 30, 2007.  Asa result, no amounts of compensation cost were recognized in the consolidatedstatements of operations.
|            | ** **  | **Years Ended June 30,** | ** ** |
|------------|-------------|-----------------------------------------|------------|
| ** ** | ** **  | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net loss:  | As reported |                                    | $          | (99,041 | ) | $ | (210,218 | ) | $ | (27,217 | ) |
|       | Expense     |                                    | (259       | ) | (291 | ) | (245 | ) |
|       | Pro forma   |                                    | $          | (99,300 | ) | $ | (210,509 | ) | $ | (27,462 | ) |

 

The fair value of each option grant issued isestimated on the date of grant or issuance using the Black-Scholespricing model under the minimum value method with the following assumptionsused for the grants and issuances in the years ended June 30, 2006 and 2005,respectively.

|                                                           | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| Assumptions                                               |       |                                    |       |   |   |
| Weighted average  estimated fair value per option granted |       | $                                       | 6.65       |   | $ | 6.80 |   |
| Risk-free  interest rate                                  |       | 4.06-4.40                               | %          | 4.13-4.50 | % |
| Volatility                                                |       | 0.00                                    | %          | 0.00 | % |
| Expected  dividend yield                                  |       | 0.00                                    | %          | 0.00 | % |
| Estimated life                                            |       | 10.00 years                             |       | 10.00 years |   |
|                                                           |            |                                         |            |  |  |  |  |

 

SFAS 123R requires the use of a valuation modelto calculate the fair value of share-based awards.  We have elected to use the Black-Scholesoption pricing model, which incorporates various assumptions includingvolatility, estimated life and interest rates. The estimated life of an award is based on historical experience and onthe terms and conditions of the stock awards granted to employees.  The average risk-free interest rate is basedon the ten-year U.S. treasury security rate in effect as of the grant date.

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i.      GOODWILL AND OTHER INTANGIBLE ASSETS

*Goodwill and Other Intangible Assets. *Goodwill represents theexcess purchase price we paid over the fair value of the tangible andintangible assets and liabilities acquired in acquisitions.   In accordance with SFAS No. 142, “Goodwilland Other Intangible Assets”, or SFAS 142, the goodwill and indefinite-livedintangible asset balances are not being amortized, but instead are subject toan annual assessment of impairment by applying a fair-value based test.   Other intangible assets are amortized on astraight-line basis over the estimated lives of the assets ranging from five tothirty years.

We evaluate the carrying value of goodwill andacquisition-related intangible assets, including the related amortizationperiod, in the second quarter of each fiscal year.  Additionally, we review the carrying amountof goodwill whenever events and circumstances indicate that the carrying amountof goodwill may not be recoverable. Impairment indicators include, among otherconditions, cash flow deficits, historic or anticipated declines in revenue oroperating profit and adverse legal or regulatory developments.  In a business combination, goodwill isallocated to our two reporting units (mobile and fixed), which are the same asour reportable operating segments, based on relative fair value of the assetsacquired and liabilities assumed.  Inevaluating goodwill and intangible assets not subject to amortization, wecomplete the two-step goodwill impairment test as required by SFAS 142.  In the first of a two-step impairment test,we determine the fair value of these reporting units using a discounted cashflow valuation model, market multiple model or appraised values, as appropriate.  SFAS 142 requires us to compare the fairvalue of the reporting unit to its carrying value on an annual basis todetermine if there is potential impairment. If the fair value of a reporting unit exceeds its carrying value,goodwill of the reporting unit is considered not impaired and no furthertesting is required.  If the fair valuedoes not exceed the carrying value, the second step of the goodwill impairmenttest is performed to measure the amount of impairment loss, if any.  The second step compares the implied fairvalue of the reporting unit with the carrying amount of that goodwill.  Impairment losses, if any, are reflected inthe consolidated statements of operations.

We assess the ongoing recoverability of our intangibleassets subject to amortization in accordance with SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets”, orSFAS 144, by determining whether the intangible asset balance can be recoveredover the remaining amortization period through projected undiscounted futurecash flows.  If projected future cashflows indicate that the unamortized intangible asset balances will not berecovered, an adjustment is made to reduce the net intangible asset to anamount consistent with projected future cash flows discounted at ourincremental borrowing rate.  Cash flowprojections, although subject to a degree of uncertainty, are based on trendsof historical performance and management’sestimate of future performance, giving consideration to existing andanticipated competitive and economic conditions.

In connection withadoption of fresh-start reporting as of August 1, 2007, all of our goodwill andother intangible assets will be remeasured using current fair value (Note 20).

j.      INCOME TAXES

We account for incometaxes using the asset and liability method.  Deferred tax assets and liabilities arerecognized for the estimated future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted taxrates in effect for the year in which those temporary differences are expectedto be recovered or settled.  The effecton deferred tax assets and liabilities of a change in tax rates is recognizedin income in the period that includes the enactment date.  A valuation allowance is recognized if, basedon the weight of available evidence, it is more likely than not that someportion or all of the deferred tax asset will not be realized.

k.   COMPREHENSIVE INCOME (LOSS)

Components ofcomprehensive income (loss) are changes in equity other than those resultingfrom investments by owners and distributions to owners. Net income (loss) isthe primary component of comprehensive income (loss).  Our only component of comprehensive income(loss) other than net income (loss) is the change in unrealized gain or loss onderivatives qualifying for hedge accounting, net of tax. The aggregate amountof 

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such changes toequity that have not yet been recognized in net income (loss) are reported inthe equity portion of the accompanying consolidated balance sheets asaccumulated other comprehensive income.

l.    FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of financial instruments is estimatedusing available market information and other valuation methodologies. The fairvalue of our financial instruments is estimated to approximate the related bookvalue, unless otherwise indicated.

m.            NEW PRONOUNCEMENTS

In September 2006, the Financial Accounting StandardsBoard (FASB) issued SFAS No. 157, “Fair Value Measurement”,or SFAS 157.  SFAS 157 definesfair value, establishes a framework for measuring fair value under accountingprinciples generally accepted in the United States, and expands disclosuresabout fair value measurements.  SFAS 157does not require any new fair value measurements.  We will be required to adopt SFAS 157 as ofAugust 1, 2007.  We are currentlyassessing the effect of SFAS 157 on our financial condition and results ofoperations.

In September 2006, the SEC issued Staff AccountingBulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements whenQualifying Misstatements in Current Year Financial Statements”, or SAB 108, which providesinterpretive guidance on the consideration of the effects of prior yearmisstatements in quantifying current year misstatements for the purpose of amateriality assessment. SAB 108 is effective for companies with fiscal yearsending after November 15, 2006 and we were required to adopt itsprovisions in our fiscal year ending June 30, 2007. The adoption of SAB 108 didnot have a material effect on our financial condition and results ofoperations.

In July 2006, the FASB issued FASB InterpretationNo. 48, “Accountingfor Uncertainty in Income Taxes - an interpretation of FASB StatementNo. 109”, or FIN 48.  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in a company’s financialstatements.  FIN 48 prescribes a recognition threshold and measurementattribute for financial statement recognition and measurement of a tax positiontaken or expected to be taken in the tax return.  We are required to adopt the provisions ofFIN 48 beginning in fiscal 2008.  The adoption of FIN 48 will not have amaterial effect on our financial condition and results of operations.

**4.       TRADEACCOUNTS RECEIVABLES**

Trade accountsreceivables, net are comprised of the following (amounts in thousands):
|                                         | ** ** | **June 30,** | ** ** |
|-----------------------------------------|------------|--------------|------------|
| ** **                              | ** ** | **2007**     | ** ** | **2006** | ** ** |
| Trade accounts  receivables             |       | $            | 87,246     |   | $ | 85,972 |   |
| Less: Allowances for  professional fees |       | 10,461       |       | 9,782 |   |
| Allowances for  contractual adjustments |       | 21,454       |       | 22,712 |   |
| Allowances for  doubtful accounts       |       | 12,648       |       | 9,788 |   |
| Trade accounts  receivables, net        |       | $            | 42,683     |   | $ | 43,690 |   |

 

The allowances fordoubtful accounts and contractual adjustments include management’s estimate of the amounts expected tobe written off on specific accounts and for write-offs on otherunidentified accounts included in accounts receivables.  In estimating the write-offs andadjustments on specific accounts, management relies on a combination of in-houseanalysis and a review of contractual payment rates from private healthinsurance programs or under the federal Medicare program.  In estimating the allowance for unidentifiedwrite-offs and adjustments, management relies on historicalexperience.  The amounts we willultimately realize could differ materially in the near term from the amountsassumed in arriving at the allowances for doubtful accounts and contractual adjustmentsin the accompanying consolidated financial statements at June 30, 2007.

Wereserve a contractually agreed upon percentage at several of our fixed-sitecenters, averaging 20 percent of the accounts receivables balance from patientsand third-party payors for payments to radiologists representing 

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professionalfees for interpreting the results of the diagnostic imaging procedures.  Payments to radiologists are only due whenamounts are received.  At that time, thebalance is transferred from the allowance account to a professional fees payableaccount.

**5.       OTHER CURRENT ASSETS**

Other currentassets are comprised of the following (amounts in thousands):
|                                                   | ** ** | **June 30,** | ** ** |
|---------------------------------------------------|------------|--------------|------------|
| ** **                                        | ** ** | **2007**     | ** ** | **2006** | ** ** |
| Prepaid expenses                                  |       | $            | 6,234      |   | $ | 7,405 |   |
| Amounts due from our  unconsolidated partnerships |       | 2,101        |       | 984 |   |
|                                              |       | $            | 8,335      |   | $ | 8,389 |   |

 

**6.       PROPERTY AND EQUIPMENT**

Property and equipment,net are stated at cost and are comprised of the following (amounts inthousands):
|                                                  | ** ** | **June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|
| ** **                                       | ** ** | **2007**          | ** ** | **2006** | ** ** |
| Vehicles                                         |       | $                 | 5,066      |   | $ | 5,382 |   |
| Land, building  and leasehold improvements       |       | 35,045            |       | 30,706 |   |
| Computer and  office equipment                   |       | 49,674            |       | 48,517 |   |
| Diagnostic and  related equipment                |       | 245,576           |       | 249,801 |   |
| Equipment and  vehicles under capital leases     |       | 66,068            |       | 71,499 |   |
|                                             |       | 401,429           |       | 405,905 |   |
| Less:  Accumulated depreciation and amortization |       | 256,606           |       | 224,879 |   |
| Property and equipment,  net                     |       | $                 | 144,823    |   | $ | 181,026 |   |

 

Depreciation expense was approximately $55.7million, $61.1 million and $61.6 million for the years ended June 30, 2007,2006 and 2005, respectively.

**7.       GOODWILLAND OTHER INTANGIBLE ASSETS**

During the secondquarter of fiscal 2007, based on our continued declining financial performanceand deteriorating market conditions, management determined that a goodwillimpairment at our fixed reporting unit had occurred and we recorded a non-cashgoodwill impairment charge of approximately $29.6 million related to our fixedreporting unit.

During the fourth quarter of fiscal 2006, as a resultof (1) our negative financial trends and (2) the enactment of the Deficit ReductionAct of 2005 and its corresponding anticipated impact on our revenues, wedetermined that an interim impairment analysis of the fair value of our tworeporting units (mobile and fixed) should be performed in accordance with SFAS142 using a discounted cash flow model and a market multiples model.  We completed our analysis of the fair valueof our reporting units utilizing the assistance of an independent valuationfirm.  We concluded that impairments hadoccurred and we recorded a non-cash goodwill impairment charge of approximately$189.4 million related to our reporting units (approximately $126.8 million forour fixed reporting unit and approximately $62.6 million for our mobilereporting unit).  Additionally, inaccordance with SFAS 144, we recorded a non-cash impairment charge related toour other intangible assets of approximately $1.4 million related to wholesalecontracts in our mobile reporting unit.

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A reconciliation ofgoodwill for the years ended June 30, 2007 and 2006 is as follows (amounts inthousands):
| ** **                      | ** ** | **Mobile** | ** ** | **Fixed** | ** ** | **Consolidated** | ** ** |
|---------------------------------|------------|------------|------------|-----------|------------|------------------|------------|
| Goodwill, June 30, 2005         |       | $          | 104,264    |      | $          | 174,266          |       | $ | 278,530 |   |
| Acquired in  acquisitions       |       | —     |       | 2,404     | (1)        | 2,404            |       |
| Goodwill  impairment charge (2) |       | (62,564    | )          | (126,869  | )          | (189,433         | )          |
| Adjustments to  goodwill        |       | 2,472      | (3)        | 490       | (4)        | 2,962            |       |
| Goodwill, June 30, 2006         |       | 44,172     |       | 50,291    |       | 94,463           |       |
| Goodwill  impairment charge (2) |       | —     |       | (29,595   | )          | (29,595          | )          |
| Goodwill, June 30, 2007         |       | $          | 44,172     |      | $          | 20,696           |       | $ | 64,868 |   |

 

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(1)          In March 2006, wepurchased a majority ownership interest in a joint venture that operates an MRIfixed-site center in San Ramon, California. In connection with this purchase, we recorded a $2.4 million increase ingoodwill.

(2)          We recorded goodwillimpairment charges discussed above.

(3)          In December 2005, wedissolved a mobile lithotripsy partnership in Connecticut.  In connection with this dissolution, werecorded a $1.0 million reduction in associated goodwill.  In 2006, we increased the balance of goodwillby $3.5 million as a result of recording a deferred tax liability on theindefinite-lived intangible assets acquired in Holdings’ fiscal 2002 acquisition of InSight and its subsidiaries notpreviously recorded.

 (4)       In October 2005, we purchased the remainingownership interest in a joint venture in Buffalo, New York.  In connection with this purchase, we recordeda $0.5 million increase in goodwill.

The followingreconciliation of other intangible assets is as follows (amounts in thousands):
| ** **                      | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** |
|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **Gross**                   | ** ** | ** **                  | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Carrying**                | ** ** | **Accumulated**             | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                      | ** ** | **Value**                   | ** ** | **Amortization**            | ** ** | **Value** | ** ** | **Amortization** | ** ** |
| Amortized intangible  assets:   |       |                        |       |                        |       |   |   |   |   |
| Managed care  contracts         |       | $                           | 24,410     |                        | $          | 4,202 |   | $ | 24,410 |   | $ | 3,388 |   |
| Wholesale  contracts            |       | 14,006                      |       | 12,678                      |       | 14,006 |   | 12,235 |   |
|                            |       | 38,416                      |       | 16,880                      |       | 38,416 |   | 15,623 |   |
|                            |       |                        |       |                        |       |   |   |   |   |
| Unamortized intangible  assets: |       |                        |       |                        |       |   |   |   |   |
| Trademark                       |       | 8,680                       |       | —                      |       | 8,680 |   | — |   |
| Other intangible assets         |       | $                           | 47,096     |                        | $          | 16,880 |   | $ | 47,096 |   | $ | 15,623 |   |

 

Other intangibleassets are amortized on a straight-line method using the following estimateduseful lives:
| Managed care contracts |   | 30 years     |
|------------------------|--------|--------------|
| Wholesale  contracts   |   | 5 to 7 years |

 

Amortization ofintangible assets was approximately $1.3 million, $3.6 million and $3.8 millionfor the years ended June 30, 2007, 2006 and 2005, respectively.

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Estimatedamortization expense for the years ending June 30, are as follows (amounts inthousands):
| 2008 |   | $     | 1,257  |   |
|------|--------|-------|--------|--------|
| 2009 |   | 1,257 |   |
| 2010 |   | 1,257 |   |
| 2011 |   | 814   |   |
| 2012 |   | 814   |   |

 

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

Accounts payable andother accrued expenses are comprised of the following (amounts in thousands):
|                                    | ** ** | **June 30,** | ** ** |
|------------------------------------|------------|-------------------|------------|
| ** **                         | ** ** | **2007**          | ** ** | **2006** | ** ** |
| Accounts payable                   |       | $                 | 2,651      |   | $ | 3,723 |   |
| Accrued  equipment related costs   |       | 3,529             |       | 3,447 |   |
| Accrued payroll  and related costs |       | 12,744            |       | 12,977 |   |
| Accrued interest  expense          |       | 5,289             |       | 8,444 |   |
| Accrued  professional fees         |       | 2,020             |       | 2,206 |   |
| Accrued legal  fees                |       | 3,309             |       | 1,489 |   |
| Other accrued  expenses            |       | 9,077             |       | 7,791 |   |
|                               |       | $                 | 38,619     |   | $ | 40,077 |   |

 

**9.       LIABILITIESSUBJECT TO COMPROMISE**

Liabilities subject to compromise refers tounsecured obligations which will be accounted for under Holdings’ and InSight’s plan of reorganization. They represent theamount expected to be allowed on known claims to be resolved through thechapter 11 process.

At June 30, 2007, liabilities subject to compromiseare comprised of the following (amounts in thousands):
|                                              | ** ** | **June 30,** | ** ** |
|----------------------------------------------|------------|-------------------|------------|
| ** **                                   | ** ** | **2007**          | ** ** | **2006** | ** ** |
| Unsecured senior  subordinated notes payable |       | $                 | 194,500    |   | $ | — |   |
| Accrued interest  expense                    |       | 11,204            |       | — |   |
|                                         |       | $                 | 205,704    |   | $ | — |   |

 

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(1)  Includesaccrued interest from November 1, 2006 to May 29, 2007.

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**10.**    **NOTES PAYABLE**

Notes payable arecomprised of the following (amounts in thousands):
|                                                                                                                                                                                                                                                                                   | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                                                                                        | ** ** | **2007**          | ** ** | **2006** | ** ** |
|                                                                                                                                                                                                                                                                              |       |              |       |   |   |
| Senior secured  floating rate notes payable (floating rate notes), bearing interest at LIBOR  plus 5.25% (10.61% at June 30, 2007), interest payable quarterly, principal  due in November 2011. At June 30, 2007, the fair value of the notes was  approximately $292.5 million. |       | $                 | 300,000    |   | $ | 300,000 |   |
|                                                                                                                                                                                                                                                                              |       |              |       |   |   |
| Unsecured senior  subordinated notes payable (senior subordinated notes), bearing interest at  9.875%, interest payable semi-annually, principal due in November 2011. At  June 30, 2007, the fair value of the notes was approximately $62.2 million.                            |       | 194,500           |       | 194,500 |   |
|                                                                                                                                                                                                                                                                              |       |              |       |   |   |
| Revolving credit  facility, bearing interest at LIBOR plus 2.5% or prime rate (8.25% at June  30, 2007), interest payable monthly, principal due in November 2011.                                                                                                                |       | 5,000             |       | — |   |
|                                                                                                                                                                                                                                                                              |       |              |       |   |   |
| Other notes  payable                                                                                                                                                                                                                                                              |       | 1,777             |       | 1,614 |   |
|                                                                                                                                                                                                                                                                              |       |              |       |   |   |
| Total notes  payable                                                                                                                                                                                                                                                              |       | 501,277           |       | 496,114 |   |
| Less:  Unamortized discount on floating rate notes                                                                                                                                                                                                                                |       | 1,150             |       | 1,356 |   |
| Less: Amounts  classified as liabilities subject to compromise                                                                                                                                                                                                                    |       | 194,500           |       | — |   |
| Less: Current  portion                                                                                                                                                                                                                                                            |       | 5,737             |       | 555 |   |
| Long-term notes payable                                                                                                                                                                                                                                                           |       | $                 | 299,890    |   | $ | 494,203 |   |

 

In September 2005,through InSight, we issued $300 million aggregate principal amount of seniorsecured floating rate notes, or floating rate notes.  The proceeds from the issuance of thefloating rate notes were used to (1) repay all borrowings under our thenexisting credit facility (approximately $237.6 million); (2) repurchaseapproximately $55.5 million aggregate principal amount of our unsecured seniorsubordinated notes, or senior subordinated notes, in privately negotiatedtransactions; and (3) pay certain related fees and expenses (approximately $6.8million).  This transaction is considereda debt modification under accounting principles generally accepted in theUnited States.  In connection with the$55.5 million repurchase, we realized a gain of approximately $3.1 million, netof a write-off of deferred financing costs of approximately $2.5 million.  Holdings’ and InSight’s wholly owned subsidiariesunconditionally guarantee all of InSight’s obligations under the indenture forthe floating rate notes.   Thefloating rate notes are secured by a first priority lien on substantially allof InSight’s and the guarantors’ existing and future tangible and intangiblepersonal property including, without limitation, equipment, certain contractsand intellectual property, but are not secured by a lien on their accountsreceivables and related assets, cash accounts related to receivables andcertain other assets.  In addition, thefloating rate notes are secured by a portion of InSight’s stock and the stockor other equity interests of InSight’s subsidiaries.   We are prohibited from redeeming thefloating rate notes prior to January 1, 2008, and thereafter we are required topay certain redemption premiums if the floating rate notes are redeemed priorto maturity.  In July 2007, we issued anadditional $15 million aggregate principal amount of floating rate notes.  Such notes were issued at 85% of theirprincipal amount, or $12.75 million in cash, and are entitled to customaryregistration rights and other terms consistent with our original issuancefloating rate notes.

In January 2006, throughInSight, we purchased an interest rate cap contract.  The contract is for a term of two years, witha notional amount of $100 million and a LIBOR cap of 5.0% (Note 19).

Through InSight,we also had outstanding $194.5 million aggregate principal amount of seniorsubordinated notes.  On August 1, 2007,the senior subordinated notes were cancelled and exchanged for Holdings’ common stock as part of Holdings’ and InSight’s plan of reorganization and exchange offer (Note 2).

Throughcertain of InSight’s subsidiaries, we have an asset-based revolving creditfacility of up to $30 million. Holdings and InSight unconditionally guaranteeall obligations of InSight’s subsidiaries that are borrowers under the creditfacility.  All obligations under the credit facility and the obligationsof Holdings and InSight under the guarantees are secured, subject to certainexceptions, by a first priority security interest in all of Holdings’, InSight’sand the borrowers’: (i) accounts; (ii) instruments, chattel paper(including, without limitation, electronic chattel paper), documents,letter-of-credit rights and supporting obligations relating to any account;(iii) general intangibles that relate to any account; (iv) monies inthe possession or under the control of the lenders under the credit facility;(v) products and cash and non-cash proceeds of the foregoing;(vi) deposit accounts established for the collection of

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proceedsfrom the assets described above; and (vii) books and records pertaining toany of the foregoing.  Borrowings underthe revolving credit facility bear interest at LIBOR plus 2.5% per annum or, atour option, the prime rate (8.25% as of June 30, 2007).  At June 30, 2007 there was $5.0 million inborrowings outstanding under the revolving credit facility.  At June 30, 2007, there were letters ofcredit of approximately $2.6 million outstanding under the credit facility, ofwhich approximately $0.6 million were cash collateralized.

The agreementsgoverning our credit facility and floating rate notes contain restrictions on amongother things, our ability to incur additional liens and indebtedness, engage inmergers, consolidations and asset sales, make dividend payments, prepay otherindebtedness, make investments and engage in transactions with affiliates.  On and prior to May 29, 2007, we entered intoseveral amendments to our $30 million asset-based revolving credit facilitywith Bank of America, N.A., as collateral agent, administrative agent andlender thereunder. These amendments, among other things, permitted Holdings andInSight to file voluntary petitions for reorganization pursuant to chapter 11of the Bankruptcy Code (the “Chapter 11 Petitions”) and consummate their planof reorganization. On May 29, 2007, we entered into Waiver and Agreement No. 1to our floating rate notes indenture (the “Indenture Waiver”) and a SecondSupplemental Indenture to our floating rate notes indenture (the “IndentureSupplement”), in each case with U.S. Bank National Association, as indenturetrustee, and the holders of a majority of our floating rate notes. TheIndenture Waiver and Indenture Supplement provided for, among other things, (1)a waiver of compliance by Holdings and its subsidiaries with those provisionsof the floating rate notes indenture that the majority noteholders could waivethat would restrict the filing of the Chapter 11 Petitions and consummation ofthe plan of reorganization, (2) a prohibition on optional redemptions byInSight of the floating rate notes prior to January 1, 2008 and the payment ofredemption premiums to the extent the floating rate notes are redeemedthereafter, and (3) various amendments to the negative covenants in thefloating rate notes indenture, including removing the ability of Holdings andits subsidiaries (other than in certain limited circumstances) to paydividends, redeem stock and make investments and further restricting theability of Holdings and its subsidiaries to engage in asset sales and incurliens and additional indebtedness.

Scheduledmaturities of equipment and other notes payable at June 30, 2007, are asfollows for the years ending (amounts in thousands):
| 2008   |   | $       | 5,737   |   |
|--------|--------|---------|---------|--------|
| 2009   |   | 636     |    |
| 2010   |   | 167     |    |
| 2011   |   | 180     |    |
| 2012   |   | 300,057 |    |
|   |   | $       | 306,777 |   |

 

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**11.**    **LEASE OBLIGATIONS,COMMITMENTS AND CONTINGENCIES**

We lease diagnosticequipment, certain other equipment and our office and imaging facilities undervarious capital and operating leases. Future minimum scheduled rental payments required under thesenoncancelable leases at June 30, 2007 are as follows for the years ending(amounts in thousands):
|                                             | ** ** | **Capital** | ** ** | **Operating** | ** ** |
|---------------------------------------------|------------|-------------|------------|---------------|------------|
| 2008                                        |       | $           | 3,265      |          | $          | 14,070 |   |
| 2009                                        |       | 1,359       |       | 12,139        |       |
| 2010                                        |       | 1,083       |       | 10,262        |       |
| 2011                                        |       | 884         |       | 8,263         |       |
| 2012                                        |       | 379         |       | 5,684         |       |
| Thereafter                                  |       | —      |       | 4,470         |       |
| Total minimum  lease payments               |       | 6,970       |       | $             | 54,888     |   |
| Less: Amounts  representing interest        |       | 741         |       |          |       |
| Present value of  capital lease obligations |       | 6,229       |       |          |       |
| Less: Current  portion                      |       | 2,927       |       |          |       |
| Long-term capital lease  obligations        |       | $           | 3,302      |          |       |   |

 

Accumulateddepreciation on assets under capital leases was $11.3 million and $13.1 millionat June 30, 2007 and 2006, respectively.

Rental expense fordiagnostic equipment and other equipment for the years ended June 30, 2007,2006 and 2005 was $6.1 million, $3.3 million and $2.3 million, respectively.

We occupyfacilities under lease agreements expiring through October 2017.  Some of these lease agreements may includeprovisions for an increase in lease payments based on the Consumer Price Indexor scheduled increases based on a guaranteed minimum percentage or dollaramount.  Rental expense for thesefacilities for the years ended June 30, 2007, 2006 and 2005 was $8.8 million,$8.9 million and $9.2 million, respectively.

We are engaged from time to time in the defense oflawsuits arising out of the ordinary course and conduct of our business andhave insurance policies covering such potential insurable losses where suchcoverage is cost-effective.  We believethat the outcome of any such lawsuits will not have a material adverse impacton our financial condition and results of operations.

On February 3,2004, Southwest Outpatient Radiology, P.C, or SWOR, filed a Summons andComplaint against InSight Health Corp., one of InSight’s subsidiaries, or IHC, in theSuperior Court, Maricopa County, Arizona, for Declaratory Relief seeking a declarationas to the meaning and effect of a certain provision of the professionalservices agreement, or PSA, pursuant to which SWOR provided professionalservices at IHC’s facilities inPhoenix, Arizona.  SWOR claimed the PSAprovided a right of first refusal to provide professional services at anycenter IHC acquired in Maricopa County. IHC believes that the provision related only to “de novo” centerswhich IHC developed.  In April 2004, IHCacquired the stock of Comprehensive Medical Imaging, Inc., which owned andoperated 21 fixed-site centers, six of which were located in Maricopa County,pursuant to a stock purchase agreement.

Prior to signingthe stock purchase agreement, IHC gave SWOR 180 days notice to terminate thePSA in accordance with the PSA.  SWORclaimed that the PSA had already terminated due to IHC’s breach of the right of first refusalprovision.  IHC answered the Summons andComplaint and was cooperating with SWOR in expediting discovery and an earlytrial when SWOR decided to abandon the Declaratory Relief action and on April20, 2004, SWOR filed a First Amended Complaint claiming breach of contract,anticipatory breach of contract, negligent misrepresentation, breach ofcovenant of good faith and fair dealing, intentional interference withcontract, breach of fiduciary duty, declaratory relief and unspecifiedcompensatory and punitive damages, prejudgment interest, and attorneys fees. Wehave answered the First Amended Complaint and discovery has commenced and ison-going.   We are vigorously defendingthis lawsuit and believe that SWOR’sclaims are without merit.  We are unableto predict the outcome of this lawsuit.

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In August 2003,IHC entered into a series of agreements and acquired a joint venture interestthrough a limited liability company it formed called Kessler ImagingAssociates, LLC, or KIA, in a CT fixed-site center in Hammonton, NewJersey.  KIA is owned 55% by IHC and 45%by Bernard Neff, M.D., or Dr. Neff.  KIAmanaged Kessler CAT Scan Associates, LLC, which provided CT, and mobile MRI andPET (using IHC mobile facilities) services to inpatients of William B. KesslerMemorial Hospital, or Hospital, and community outpatients.

Dr. Neff providedradiology services at the Hospital and to the outpatients.  IHC did not control billing and collectionsto the Hospital for inpatients or to third-party payors for outpatients.  Dr. Neff performed that function.

Management at theHospital changed in 2005, and in late 2005 the Hospital notified the partiesthat it was “voiding” all the agreements because the priormanagement had no authority to execute the agreements and stopped paying forthe inpatient services.  Immediatelyafter the agreements were allegedly “voided,” Dr. Neff filed an arbitration claimagainst the Hospital, for among other things, collection of outstanding amountsowed by the Hospital for services previously rendered.  The Hospital has challenged Dr. Neff’s efforts to proceed with arbitrationefforts in the New Jersey courts.  Theappellate division granted a stay motion, so the arbitration has been stayedpending oral argument, which has not yet been held and no decision has yet beenrendered.  Until the appellate courtrules, matters in the arbitration cannot go forward.

On March 8,2006, IHC filed suit in the U.S. District Court for the District of New Jerseyagainst the Hospital.  By the Complaint,IHC has asserted claims for fraud and seeks in excess of $4 million incompensatory damages plus additional amounts for punitive damages.  The Hospital has denied the substantiveallegations against it.

The Hospital inturn filed a Counterclaim against IHC. Initially, we moved to dismiss that Counterclaim for failure to state aclaim and for failure to comply with pleading requirements.  Before that Motion could be ruled upon, theHospital filed an Amended Counterclaim. By the Amended Counterclaim, the Hospital asserts that IHC engaged infraud as to the Hospital, allegedly concealing aspects of the overalltransaction to the Hospital’sdisadvantage, that IHC aided and abetted Dr. Neff and his associates so theycould acquire certain allegedly valuable assets of the Hospital without fair,reasonable, and adequate consideration, and that IHC conspired with Dr. Neffand his associates to acquire certain allegedly valuable assets of the Hospitalwithout fair, reasonable, and adequate consideration.  By the Amended Counterclaim, the Hospitalseeks compensatory damages of not less than $5 million and punitive damages ofnot less than $10 million.  We have movedto dismiss, and the motion remains pending at the present time.  We have also answered the AmendedCounterclaim, denying all of the substantive allegations.  IHC intends to vigorously prosecute its caseagainst the Hospital and defend the Hospital’s claims.

On September 13,2006, the Hospital filed a voluntary bankruptcy petition under chapter 11 ofTitle 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court, District ofNew Jersey (Camden).  As a result, this case and the arbitration have beenstayed pursuant to 11 U.S.C. § 362.  IHCand KIA have both filed proofs of claim in the Hospital’s bankruptcy case.  IHC has asserted contingent unliquidatedclaims based upon the litigation currently stayed in the U.S. District Courtfor the District of New Jersey.  KIA hasfiled a claim based upon the lease between KIA and the Hospital.  The Hospital remains a debtor-in-possessionand is attempting to reorganize.  OnAugust 16, 2007, the Hospital filed its first amended plan of reorganizationand accompanying disclosure statement.

IHC no longerprovides any services to the Hospital and the lease has been terminated.

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

STOCKOPTIONS:  We originallyreserved 626,000 shares for the granting of nonstatutory stock options to keyemployees.  Options are issued with an exerciseprice of at least the fair market value, as determined by the board ofdirectors, of our common stock on the grant date.  During fiscal 2006, we increased the numberof shares reserved for such grants by 219,286 shares.  Typically, 50% of the options vestcumulatively over various periods up to five years from the grant date, and 50%vest cumulatively upon the achievement of certain performance targets on anexit event.  The options are exercisablein whole or in installments, and expire ten years from the grant date.  As of June 30, 2007, we had 175,500 sharesavailable for issuance.

We hadone stock option plan, which provided for the granting of nonstatutory stockoptions to four key employees (all of whom are no longer with the Company), allof which are fully vested.  Holders ofoptions for 175,990 shares of InSight common stock rolled over their optionsand received options for Holdings’ common stock with the same terms 

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underour stock option plan.  At June 30, 2007,options to purchase 123,490 shares of Holdings’ stock were outstanding underthis plan.

Thestock option plan was terminated and all outstanding options were cancelled onAugust 1, 2007 upon consummation of the plan of reorganization (Note 2).

Asummary of the status of Holdings’ stock options at June 30, 2007, 2006 and2005 and changes during the periods is presented below:
| ** **                    | ** ** | ** **         | ** ** | ** **              | ** ** | ** **          | ** ** | **Weighted**          | ** ** |
|-------------------------------|------------|--------------------|------------|-------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                    | ** ** | ** **         | ** ** | ** **              | ** ** | **Weighted**        | ** ** | **Average**           | ** ** |
| ** **                    | ** ** | ** **         | ** ** | **Weighted**            | ** ** | **Average**         | ** ** | **Remaining**         | ** ** |
| ** **                    | ** ** | **Number of** | ** ** | **Average**             | ** ** | **Grant Date** | ** ** | **Contractual**       | ** ** |
| ** **                    | ** ** | **Options**        | ** ** | **Exercise Price** | ** ** | **Fair Value** | ** ** | **Term (years)** | ** ** |
| Outstanding,  June 30, 2004   |       | 602,990            |       | $                       | 16.10      |                | $          | 6.57                  |       |   |   |
| Granted                       |       | 209,500            |       | 19.82                   |       | 6.80                |       |                  |       |
| Forfeited                     |       | (195,500           | )          | 18.07                   |       | 6.57                |       |                  |       |
| Outstanding,  June 30, 2005   |       | 616,990            |       | 16.74                   |       | 6.65                |       |                  |       |
| Granted                       |       | 338,236            |       | 19.82                   |       | 6.65                |       |                  |       |
| Forfeited                     |       | (105,500           | )          | 19.43                   |       | 6.58                |       |                  |       |
| Outstanding,  June 30, 2006   |       | 849,726            |       | 17.74                   |       | 6.66                |       |                  |       |
| Forfeited                     |       | (60,000            | )          | 18.58                   |       | 6.63                |       |                  |       |
| Outstanding,  June 30, 2007   |       | 789,726            |       | $                       | 17.68      |                | $          | 6.66                  |       |   |   |
|                          |       |               |       |                    |       |                |       |                  |       |
| Exercisable at  June 30, 2007 |       | 291,075            |       | $                       | 14.63      |                | $          | 6.65                  |       | 6.55 |   |
|                          |       |               |       |                    |       |                |       |                  |       |
| Non-vested, June  30, 2006    |       | 608,311            |       | $                       | 19.42      |                | $          | 6.66                  |       |   |   |
| Vested                        |       | (76,735            | )          | 19.36                   |       | 6.64                |       |                  |       |
| Forfeited                     |       | (32,925            | )          | 18.92                   |       | 6.66                |       |                  |       |
| Non-vested, June  30, 2007    |       | 498,651            |       | $                       | 19.46      |                | $          | 6.66                  |       |   |   |
|                          |       |               |       |                    |       |                |       |                  |       |
| Exercisable at:               |       |               |       |                    |       |                |       |                  |       |
| June 30, 2005                 |       | 204,565            |       | $                       | 12.56      |                |       |                  |       |   |
| June 30, 2006                 |       | 241,415            |       | $                       | 13.50      |                |       |                  |       |   |
| June 30, 2007                 |       | 291,075            |       | $                       | 14.63      |                |       |                  |       |   |

 

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Ofthe options outstanding at June 30, 2007, the characteristics are as follows:
| **Exercise Price** | ** ** | **Weighted Average** | ** ** | **Options**     | ** ** | **Total Options** | ** ** | **Remaining Contractual** | ** **  |
|-------------------------|------------|---------------------------|------------|-----------------|------------|------------------------|------------|--------------------------------|-------------|
| **Range**               | ** ** | **Exercise Price**   | ** ** | **Exercisable** | ** ** | **Outstanding**        | ** ** | **Life**                       | ** **  |
| $ 8.37             |       |                      | $          | 8.37            |       | 123,490                |       | 123,490                        |        | 4.33  years |   |
| 18.00 - 19.82           |       |                      | 19.40      |            | 167,585    |                   | 666,236    |                           | 6.71  years |   |
|                    |       |                      |       | 291,075         |       | 789,726                |       |                           |        |
|                         |            |                           |            |                 |            |                        |            |                                |             |  |  |

 

**13.    INCOMETAXES**

The provision forincome taxes includes income taxes currently payable and those deferred becauseof temporary differences between the financial statements and tax bases ofassets and liabilities.  For the yearended June 30, 2007, we have provided approximately $1.7 million for taxexposure related to prior years.  Theprovision for income taxes for the years ended June 30, 2007, 2006 and 2005 isas follows (amounts in thousands):
| ** **                                               | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                               | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Current  provision:                                      |       |                                    |       |   |   |   |   |
| Federal                                                  |       | $                                       | —     |   | $ | — |   | $ | — |   |
| State                                                    |       | 2,175                                   |       | 400 |   | (155 | ) |
|                                                     |       | 2,175                                   |       | 400 |   | (155 | ) |
| Deferred taxes  arising from temporary differences:      |       |                                    |       |   |   |   |   |
| State income taxes                                       |       | 88                                      |       | 9 |   | (9 | ) |
| Accrued expenses                                         |       | 335                                     |       | 181 |   | (741 | ) |
| Reserves                                                 |       | (631                                    | )          | 103 |   | (1,376 | ) |
| Depreciation                                             |       | (7,652                                  | )          | (7,114 | ) | 3,604 |   |
| Amortization                                             |       | (1,249                                  | )          | (38,625 | ) | 5,367 |   |
| Creation/utilization of net operating losses             |       | (14,758                                 | )          | (6,143 | ) | (11,758 | ) |
| Section 481 adjustment                                   |       | —                                  |       | — |   | 1,161 |   |
| Changes in valuation allowance                           |       | 23,811                                  |       | 39,855 |   | 20,694 |   |
| Non-goodwill intangible amortization                     |       | (89                                     | )          | (11 | ) | (1,001 | ) |
| (Loss) income from partnerships                          |       | 124                                     |       | (3,480 | ) | (536 | ) |
| Other                                                    |       | 21                                      |       | 1 |   | (181 | ) |
| Total deferred taxes arising from temporary  differences |       | —                                  |       | (15,224 | ) | 15,224 |   |
| Total provision  (benefit) for income taxes              |       | $                                       | 2,175      |   | $ | (14,824 | ) | $ | 15,069 |   |

 

A reconciliation between the statutory federal incometax rate and our effective income tax rate is as follows:
| ** **                                                           | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Federal  statutory tax rate                                          |       | 34.0                                    | %          | 34.0 | % | 34.0 | % |
| State income  taxes, net of federal benefit                          |       | (2.2                                    | )          | 0.6 |   | (11.8 | ) |
| Permanent items,  including goodwill and non-deductible merger costs |       | (0.2                                    | )          | (0.1 | ) | (1.5 | ) |
| Changes in  valuation allowance                                      |       | (29.7                                   | )          | (15.7 | ) | (138.9 | ) |
| Impairment of  goodwill and other intangible assets                  |       | (4.1                                    | )          | (9.7 | ) | — |   |
| Other, net                                                           |       | (0.1                                    | )          | (2.5 | ) | (5.8 | ) |
| Net effective tax rate                                               |       | (2.3                                    | )%         | 6.6 | % | (124.0 | )% |

 

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The components ofour net deferred tax liability (including current and non-current portions) asof June 30, 2007 and 2006, respectively, which arise due to timing differencesbetween financial and tax reporting and net operating loss (NOL) carryforwardsare as follows (amounts in thousands):
|                                       | ** ** | **June 30,** | ** ** |
|---------------------------------------|------------|-------------------|------------|
| ** **                            | ** ** | **2007**          | ** ** | **2006** | ** ** |
| Accrued expenses                      |       | $                 | 1,576      |   | $ | 1,911 |   |
| Depreciation                          |       | (13,283           | )          | (20,934 | ) |
| Amortization                          |       | 24,650            |       | 23,400 |   |
| Reserves                              |       | 2,718             |       | 2,087 |   |
| Income (loss)  from partnerships      |       | 3,348             |       | 3,472 |   |
| State income  taxes                   |       | (85               | )          | 3 |   |
| Non-goodwill  intangible amortization |       | (10,046           | )          | (10,135 | ) |
| NOL  carryforwards                    |       | 77,034            |       | 62,218 |   |
| Other                                 |       | 57                |       | 78 |   |
| Net deferred asset                    |       | 85,969            |       | 62,100 |   |
| Valuation  allowance                  |       | (89,441           | )          | (65,572 | ) |
|                                  |       | $                 | (3,472     | ) | $ | (3,472 | ) |

 

As of June 30,2007, we had federal NOL carryforwards of approximately $212.5 million andvarious state NOL carryforwards.  TheseNOL carryforwards expire between 2007 and 2026. The charitable contribution carryforwards of approximately $0.1 millionwill begin to expire in 2009 if not utilized.

A valuationallowance is provided against the net deferred tax asset when it is more likelythan not that the net deferred tax asset will not be realized.  Based upon (1) our losses in recent years,(2) the impairment charges recorded in 2007 and 2006 (Note 7) and (3) theavailable evidence, management determined that is more likely than not that thedeferred tax assets related to certain NOL carryforwards and other assets as ofJune 30, 2007 will not be realized. Consequently, we have a valuation allowance in the amount of $89.4million as of June 30, 2007.  Indetermining the net asset subject to a valuation allowance, we excluded adeferred tax liability related to our indefinite-lived other intangible assetsthat is not expected to reverse in the foreseeable future resulting in a netdeferred tax liability of approximately $3.5 million after application of thevaluation allowance.  The valuationallowance may be reduced in the future if we forecast and realize futuretaxable income or other tax planning strategies are implemented.  Importantly, the subsequent event, asdiscussed below, cannot be anticipated for purposes of the valuation allowancecalculation at June 30, 2007.

OnAugust 1, 2007, as discussed in Note 2, a plan of reorganization andcancellation of indebtedness became effective. The NOL carryforwards will be significantly reduced by the cancellationof indebtedness income.  Furthermore,future utilization of any remaining NOL carryforwards will be limited byInternal Revenue Code section 382 and related provisions.  We anticipate that the limitation will allowuse of approximately $3.0 million of attributes per year.

**14.   ****RETIREMENT SAVINGS PLAN**

InSight has a401(k) Savings Plan, or the Plan, which is available to all eligible employees,pursuant to which InSight matches a percentage of employee contributions to thePlan.  InSight contributions ofapproximately $1.5 million, $1.4 million and $1.3 million were made for theyears ended June 30, 2007, 2006 and 2005.

**15.    INVESTMENTSIN AND TRANSACTIONS WITH PARTNERSHIPS**

We have directownership in five Partnerships at June 30, 2007, four of which operatefixed-site centers and one of which operates a mobile PET/CT facility.  We own between 24% and 50% of thesePartnerships, and provide certain management services pursuant to contracts oras a managing general partner.  ThesePartnerships are accounted for under the equity method.

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Set forth below iscertain financial data of these Partnerships (amounts in thousands):
|                                 | ** ** | **June 30,** | ** ** |
|---------------------------------|------------|-------------------|------------|
| ** **                      | ** ** | **2007**          | ** ** | **2006** | ** ** |
| Combined  Financial Position:   |       |              |       |   |   |
| Current assets:                 |       |              |       |   |   |
| Cash                            |       | $                 | 3,334      |   | $ | 3,275 |   |
| Trade accounts receivables, net |       | 3,499             |       | 2,958 |   |
| Other                           |       | 218               |       | 66 |   |
| Property and  equipment, net    |       | 3,550             |       | 3,073 |   |
| Other assets                    |       | 400               |       | — |   |
| Intangible  assets, net         |       | 2                 |       | 34 |   |
| Total assets                    |       | 11,003            |       | 9,406 |   |
| Current  liabilities            |       | (1,723            | )          | (1,958 | ) |
| Due to the  Company             |       | (1,797            | )          | (873 | ) |
| Long-term  liabilities          |       | (130              | )          | (364 | ) |
| Net assets                      |       | $                 | 7,353      |   | $ | 6,211 |   |

 

Set forth beloware the combined operating results of the Partnerships and our equity inearnings of the Partnerships (amounts in thousands):
| ** **                                         | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                         | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Operating  Results:                                |       |                                    |       |   |   |   |   |
| Revenues                                           |       | $                                       | 28,505     |   | $ | 27,430 |   | $ | 25,935 |   |
| Expenses                                           |       | 21,026                                  |       | 20,439 |   | 19,558 |   |
| Net income                                         |       | $                                       | 7,479      |   | $ | 6,991 |   | $ | 6,377 |   |
|                                               |       |                                    |       |   |   |   |   |
| Equity in  earnings of unconsolidated partnerships |       | $                                       | 3,030      |   | $ | 3,072 |   | $ | 2,613 |   |

 

**16.    RELATEDPARTY TRANSACTIONS**

We had a management agreement with J.W. ChildsAdvisors II, L.P., the general partner of J.W. Childs Equity Partners II, L.P.,and Halifax Genpar, L.P., the general partner of Halifax Capital Partners,L.P.  J.W. Childs Advisors II, L.P. andHalifax Genpar, L.P. provided business, management and financial advisory servicesto InSight and the Company in consideration of (i) an annual fee of $240,000 tobe paid to J.W. Childs Advisors II, L.P. and (ii) an annual fee of $60,000 tobe paid to Halifax Genpar, L.P.  Thismanagement agreement was terminated in connection with the consummation ofHoldings’ and InSight’s plan of reorganization.

#### **1****7.   ****SEGMENT INFORMATION**

We have tworeportable segments: mobile operations and fixed operations, which are businessunits defined primarily by the type of service provided. Mobile operationsconsist primarily of mobile facilities while fixed operations consist primarilyof fixed-site centers, although each segment generates contract services andpatient services revenues. We do not allocate corporate and billing relatedcosts, depreciation related to our billing system and amortization related toother intangible assets to the two segments. We also do not allocate incometaxes to the two segments.  We managecash flows and assets on a consolidated basis, and not by segment.

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#### The following tables summarize our operatingresults by segment (amounts in thousands):

Year ended June30, 2007:
| ** **                                                  | ** ** | **Mobile** | ** ** | **Fixed** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|------------------|------------|
| Contract  services revenues                                 |       | $          | 106,799    |      | $          | 21,894    |       | $                | —     |   | $ | 128,693 |   |
| Patient services  revenues                                  |       | —     |       | 158,221   |       | —    |       | 158,221          |       |
| Total revenues                                              |       | 106,799    |       | 180,115   |       | —    |       | 286,914          |       |
| Depreciation and  amortization                              |       | 25,674     |       | 24,898    |       | 6,468     |       | 57,040           |       |
| Total costs of  operations                                  |       | 91,345     |       | 151,447   |       | 18,634    |       | 261,426          |       |
| Corporate  operating expenses                               |       | —     |       | —    |       | (25,496   | )          | (25,496          | )          |
| Equity in earnings  of unconsolidated partnerships          |       | —     |       | 3,030     |       | —    |       | 3,030            |       |
| Interest  expense, net                                      |       | (4,014     | )          | (4,227    | )          | (44,539   | )          | (52,780          | )          |
| Impairment of  goodwill and other intangible assets         |       | —     |       | (29,595   | )          | —    |       | (29,595          | )          |
| Income (loss)  before reorganization items and income taxes |       | 11,440     |       | (2,124    | )          | (88,669   | )          | (79,353          | )          |
|                                                        |       |       |       |      |       |      |       |             |       |
| Additions to  property and equipment                        |       | 2,918      |       | 10,767    |       | 2,478     |       | 16,163           |       |
|                                                             |            |            |            |           |            |           |            |                  |            |  |  |  |  |

 

Year ended June30, 2006:
| ** **                                          | ** ** | **Mobile** | ** ** | **Fixed** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|------------------|------------|
| Contract  services revenues                         |       | $          | 113,757    |      | $          | 20,649    |       | $                | —     |   | $ | 134,406 |   |
| Patient services  revenues                          |       | 904        |       | 170,988   |       | —    |       | 171,892          |       |
| Total revenues                                      |       | 114,661    |       | 191,637   |       | —    |       | 306,298          |       |
| Depreciation and  amortization                      |       | 30,565     |       | 25,280    |       | 9,007     |       | 64,852           |       |
| Total costs of  operations                          |       | 97,586     |       | 154,377   |       | 19,309    |       | 271,272          |       |
| Corporate  operating expenses                       |       | —     |       | —    |       | (23,655   | )          | (23,655          | )          |
| Equity in  earnings of unconsolidated partnerships  |       | —     |       | 3,072     |       | —    |       | 3,072            |       |
| Interest  expense, net                              |       | (6,131     | )          | (5,748    | )          | (38,875   | )          | (50,754          | )          |
| Gain on  repurchase of notes payable                |       | —     |       | —    |       | 3,076     |       | 3,076            |       |
| Loss on dissolution  of partnership                 |       | (1,000     | )          | —    |       | —    |       | (1,000           | )          |
| Impairment of  goodwill and other intangible assets |       | (63,938    | )          | (126,869  | )          | —    |       | (190,807         | )          |
| Loss before  income taxes                           |       | (53,994    | )          | (92,285   | )          | (78,763   | )          | (225,042         | )          |
|                                                |       |       |       |      |       |      |       |             |       |
| Additions to property  and equipment                |       | 12,517     |       | 12,798    |       | 5,612     |       | 30,927           |       |
|                                                     |            |            |            |           |            |           |            |                  |            |  |  |  |  |

 

Year ended June30, 2005:
| ** **                                        | ** ** | **Mobile** | ** ** | **Fixed** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|------------------|------------|
| Contract services revenues                        |       | $          | 118,891    |      | $          | 17,646    |       | $                | —     |   | $ | 136,537 |   |
| Patient services revenues                         |       | 1,500      |       | 178,836   |       | —    |       | 180,336          |       |
| Total revenues                                    |       | 120,391    |       | 196,482   |       | —    |       | 316,873          |       |
| Depreciation and amortization                     |       | 31,176     |       | 25,301    |       | 9,124     |       | 65,601           |       |
| Total costs of operations                         |       | 98,147     |       | 150,105   |       | 19,905    |       | 268,157          |       |
| Corporate operating expenses                      |       | —     |       | —    |       | (18,447   | )          | (18,447          | )          |
| Loss on sales of centers                          |       | —     |       | (170      | )          | —    |       | (170             | )          |
| Equity in earnings of unconsolidated partnerships |       | —     |       | 2,613     |       | —    |       | 2,613            |       |
| Interest expense, net                             |       | (8,572     | )          | (7,058    | )          | (29,230   | )          | (44,860          | )          |
| Income (loss) before income taxes                 |       | 13,672     |       | 41,762    |       | (67,582   | )          | (12,148          | )          |
|                                              |       |       |       |      |       |      |       |             |       |
| Additions to  property and equipment              |       | 14,361     |       | 14,974    |       | 1,124     |       | 30,459           |       |
|                                                   |            |            |            |           |            |           |            |                  |            |  |  |  |  |

 

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**18.    RESULTS OF QUARTERLY OPERATIONS(unaudited)**
| ** **   | ** ** | **First**                            | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** | ** ** | ** ** |
|--------------|------------|--------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| ** **   | ** ** | **Quarter**                          | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Total**  | ** ** |
| ** **   | ** ** | **(amounts in thousands)** | ** ** |
|         |       |                                 |       |        |       |        |       |        |       |       |       |
| 2007:        |       |                                 |       |        |       |        |       |        |       |       |       |
| Revenues     |       | $                                    | 73,672     |        | $          | 71,966      |       | $           | 70,065     |       | $          | 71,211 |   | $ | 286,914 |   |
| Gross profit |       | 6,583                                |       | 4,543       |       | 6,890       |       | 7,472       |       | 25,488     |       |
| Net loss     |       | (12,132                              | )          | (43,546     | )          | (11,474     | )          | (31,889     | )          | (99,041    | )          |
|         |       |                                 |       |        |       |        |       |        |       |       |       |
| 2006:        |       |                                 |       |        |       |        |       |        |       |       |       |
| Revenues     |       | $                                    | 78,708     |        | $          | 75,639      |       | $           | 76,560     |       | $          | 75,391 |   | $ | 306,298 |   |
| Gross profit |       | 12,463                               |       | 9,333       |       | 7,533       |       | 5,697       |       | 35,026     |       |
| Net loss     |       | (2,447                               | )          | (9,819      | )          | (11,205     | )          | (186,747    | )          | (210,218   | )          |

 

**19.    HEDGINGACTIVITIES**

We account forhedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, or SFAS 133.  In accordance with SFAS 133, we formallydocument our hedge relationships, including identification of the hedginginstruments and the hedged items, as well as our risk management objectives andstrategies for undertaking the hedge.  Wealso formally assess, both at inception and at least quarterly thereafter,whether the derivative instruments that are used in hedging transactions arehighly effective in offsetting the changes in either the fair value or cashflows of the hedged item.

In January 2006,through InSight, we purchased an interest rate cap contract for a cost ofapproximately $0.3 million.  The contractis for a term of two years, with a notional amount of $100 million and a LIBORcap of 5.0%.  We have designated thisinterest cap contract as a highly effective cash flow hedge of our floatingrate notes under SFAS 133.  Accordingly,the value of the contract is marked-to-market quarterly, with changes in thefair value of the contract included as a separate component of othercomprehensive income (loss).  The premiumpaid for the contract will be amortized over the life of the contract asrequired under SFAS 133.  The fair valueof the interest rate cap contract was approximately $0.3 million as of June 30,2007.

**20.    PROFORMA FRESH-START BALANCE SHEET (Unaudited)**

In connection with Holdings’ and InSight’s emergence from chapter 11 protection, we adopted fresh-startreporting as of August 1, 2007 in accordance with SOP 90-7.  Upon the adoption of fresh-start reportingour consolidated financial statements will not be comparable, in variousmaterial respects, to any of our previously issued consolidated financialstatements.  The consolidated financialstatements as of August 1, 2007, and for periods subsequent to the fresh-starteffective date, reflect that of a new reporting entity.  Fresh-start reporting results in the creationof a new reporting entity having no retained earnings or accumulated deficit.

Fresh-start reporting reflects our value as determinedin the plan of reorganization.  Underfresh-start reporting, our asset values are remeasured using fair value, andare allocated in conformity with Statement of Financial Accounting StandardsNo. 141, “BusinessCombinations”, or SFAS 141.  Fresh-start reporting also requires that allliabilities, other than deferred taxes, should be stated at fair value or atthe present values of the amounts to be paid using appropriate market interestrates.  Deferred taxes are determined inconformity with Statement of Financial Accounting Standards No, 109 “Accounting for Income Taxes”.

The following unaudited Pro Forma Fresh-Start BalanceSheet illustrates the presently-estimated financial effects of theimplementation of the plan of reorganization and the adoption of fresh-startreporting.  This Pro Forma Fresh- StartBalance Sheet reflects the assumed effect of the consummation of thetransactions contemplated in the plan of reorganization, including thecancellation and exchange of InSight’s senior subordinated notes for Holdings’ common stock.  This ProForma Fresh-Start Balance Sheet is presented as if the effectiveness of theplan of reorganization had occurred, and we had adopted fresh-start reporting,as of June 30, 2007.

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This pro forma data is unaudited.   Asset appraisals for fresh-start reportinghave not yet been entirely completed, and comparable interest rate and otherdata required for evaluation of liability values are still being compiled andfinalized.  Changes in the values ofassets and liabilities and changes in assumptions from those reflected in thePro Forma Fresh-Start Balance Sheet could significantly impact the reportedvalue of goodwill.  Accordingly, theamounts shown are not final, and are subject to changes and revisions,including differences between the estimates used to develop this Pro FormaFresh-Start Balance Sheet and the actual amounts ultimately determined.  Balances also will differ due to the resultsof operations and other transactions occurring between June 30, 2007 and August1, 2007, which is the adoption date of fresh-start reporting.

The pro forma effects of the plan of reorganizationand fresh-start reporting on our Pro Forma Fresh-Start Balance Sheet as of June30, 2007 are as follows (amounts in thousands):
| ** **                                                                  | ** ** | **Fresh-Start Adjustments** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                  | ** ** | ** **                       | ** ** | **(a)** | ** ** | **(b)** | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** | **Revaluation** | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | ** **                       | ** ** | **Settlement** | ** ** | **of Assets** | ** ** | **Pro Forma** | ** ** |
| ** **                                                                  | ** ** | **June 30,**                | ** ** | **of Unsecured** | ** ** | **and** | ** ** | **June 30,** | ** ** |
| ** **                                                                  | ** ** | **2007**                         | ** ** | **Claims** | ** ** | **Liabilities** | ** ** | **2007** | ** ** |
| ** **                                                                  | ** ** | **(unaudited)**                  | ** ** |
| ASSETS                                                                      |       |                             |       |   |   |   |   |   |   |
| Current assets:                                                             |       |                             |       |   |   |   |   |   |   |
| Cash and cash equivalents                                                   |       | $                                | 20,832     |   | $ | — |   | $ | 7,750 |   | $ | 28,582 |   |
| Trade accounts receivables, net                                             |       | 42,683                           |       | — |   | — |   | 42,683 |   |
| Other current assets                                                        |       | 8,335                            |       | — |   | — |   | 8,335 |   |
| Total current assets                                                        |       | 71,850                           |       | — |   | 7,750 |   | 79,600 |   |
|                                                                        |       |                             |       |   |   |   |   |   |   |
| Property and  equipment, net                                                |       | 144,823                          |       | — |   | — |   | 144,823 |   |
| Investments in  partnerships                                                |       | 3,413                            |       | — |   | 2,607 |   | 6,020 |   |
| Other assets                                                                |       | 7,881                            |       | — |   | (7,881 | ) | — |   |
| Reorganization  value in excess of amounts allocable to identifiable assets |       | —                           |       | 108,972 |   | 58,786 |   | 167,758 |   |
| Other intangible  assets, net                                               |       | 30,216                           |       |   |   | (4,208 | ) | 26,008 |   |
| Goodwill                                                                    |       | 64,868                           |       | — |   | (64,868 | ) | — |   |
|                                                                        |       | $                                | 323,051    |   | $ | 108,972 |   | $ | (7,814 | ) | $ | 424,209 |   |
|                                                                        |       |                             |       |   |   |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                  |       |                             |       |   |   |   |   |   |   |
| Current  liabilities:                                                       |       |                             |       |   |   |   |   |   |   |
| Current portion of notes payable and capital lease  obligations             |       | $                                | 8,664      |   | $ | — |   | $ | (5,000 | ) | $ | 3,664 |   |
| Accounts payable and other accrued expenses                                 |       | 38,619                           |       | — |   | 7,286 |   | 45,905 |   |
| Total current liabilities                                                   |       | 47,283                           |       | — |   | 2,286 |   | 49,569 |   |
|                                                                        |       |                             |       |   |   |   |   |   |   |
| Long-term  liabilities:                                                     |       |                             |       |   |   |   |   |   |   |
| Notes payable and capital lease obligations, less  current portion          |       | 303,192                          |       | — |   | (10,100 | ) | 293,092 |   |
| Liabilities subject to compromise                                           |       | 205,704                          |       | (205,704 | ) | — |   | — |   |
| Other long-term liabilities                                                 |       | 8,304                            |       | — |   | — |   | 8,304 |   |
| Total long-term liabilities                                                 |       | 517,200                          |       | (205,704 | ) | (10,100 | ) | 301,396 |   |
|                                                                        |       |                             |       |   |   |   |   |   |   |
| Stockholders’  equity (deficit)                                        |       |                             |       |   |   |   |   |   |   |
| Common stock                                                                |       | 5                                |       | 4 |   | — |   | 9 |   |
| Additional paid-in capital                                                  |       | 87,081                           |       | (13,846 | ) | — |   | 73,235 |   |
| Accumulated other comprehensive income                                      |       | 103                              |       | (103 | ) | — |   | — |   |
| Accumulated deficit                                                         |       | (328,621                         | )          | 328,621 |   | — |   | — |   |
| Total stockholders’ equity (deficit)                                   |       | (241,432                         | )          | 314,676 |   | — |   | 73,244 |   |
|                                                                        |       | $                                | 323,051    |   | $ | 108,972 |   | $ | (7,814 | ) | $ | 424,209 |   |

 

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(a)                Settlement of Unsecured Claims.  This reflects the cancellation ofapproximately $205.7 million of liabilities subject to compromise pursuant tothe terms of the plan of reorganization. The unsecured creditors received 7,780,000 shares of Holdings’ common stock in satisfaction of such claims.

(b)               Revaluation of Assets and Liabilities.  Fresh-start adjustments are made to reflectasset values at their estimated fair value and liabilities at estimated fairvalue, based on an estimated total reorganization value of approximately $370.0million:

·                  Adjustments to cash and cash equivalents andnotes payable to reflect the issuance of $15.0 million aggregate principalamount of floating rate notes in exchange for approximately $12.8 million ofcash.

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·                  Adjustments to cash and cash equivalents andnotes payable to reflect the repayment of approximately $5.0 million on thecredit facility.

·                  Adjustments of approximately $2.6 million toincrease the fair value of investments in partnerships.

·                  Adjustments of approximately $7.9 million toreduce the value of deferred loan fees.

·                  Adjustments of approximately $4.2 million toreduce the value of other intangible assets.

·                  Adjustments of approximately $64.9 million toreduce the value of goodwill.

·                  Adjustment of approximately $7.3 million toaccounts payable and other accrued expenses to reflect the remaining fees andexpenses related to the chapter 11 proceedings.

·                  Adjustments of approximately $22.9 million toreduce the value of floating rate notes.

·                  The elimination of the Holdings’ existing equity accounts.

·                  Additionally, goodwill of approximately$167.8 million is recorded to reflect the excess of the estimated fair value ofidentifiable assets over liabilities and equity.

**21.    SUPPLEMENTALCONDENSED CONSOLIDATED FINANCIAL INFORMATION**

Holdings’ and all of InSight’s wholly owned subsidiaries, or guarantorsubsidiaries, guarantee InSight’s payment obligations under the floating rate notesand senior subordinated notes (Note 10). These guarantees are full, unconditional and joint and several.  The following condensed consolidatingfinancial information has been prepared and presented pursuant to SECRegulation S-X Rule 3-10 “Financial statements of guarantors and issuers ofguaranteed securities registered or being registered.”  We account for investment in InSight and itssubsidiaries under the equity method of accounting.  Dividends from InSight to Holdings arerestricted under the agreements governing our material indebtedness.  This information is not intended to presentthe financial position, results of operations and cash flows of the individualcompanies or groups of companies in accordance with accounting principlesgenerally accepted in the United States.

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**SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET**

**JUNE 30, 2007**

**(Amounts in thousands)**
| ** **                                                         | ** ** | ** **   | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **NON-GUARANTOR** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------|------------|--------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                         | ** ** | **HOLDINGS** | ** ** | **INSIGHT** | ** ** | **SUBSIDIARIES** | ** ** | **SUBSIDIARIES**  | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| ASSETS                                                             |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Current assets:                                                    |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash equivalents                                          |       | $            | —     |        | $          | —           |       | $                 | 17,960     |             | $          | 2,872            |       | $ | — |   | $ | 20,832 |   |
| Trade accounts receivables, net                                    |       | —       |       | —      |       | 36,525           |       | 6,158             |       | —           |       | 42,683           |       |
| Other current assets                                               |       | —       |       | —      |       | 8,072            |       | 263               |       | —           |       | 8,335            |       |
| Intercompany accounts receivable                                   |       | 87,086       |       | 501,435     |       | 10,207           |       | —            |       | (598,728         | )          | —           |       |
| Total current assets                                               |       | 87,086       |       | 501,435     |       | 72,764           |       | 9,293             |       | (598,728         | )          | 71,850           |       |
| Property and  equipment, net                                       |       | —       |       | —      |       | 125,737          |       | 19,086            |       | —           |       | 144,823          |       |
| Investments in  partnerships                                       |       | —       |       | —      |       | 3,413            |       | —            |       | —           |       | 3,413            |       |
| Investments in  consolidated subsidiaries                          |       | (328,518     | )          | (331,697    | )          | 13,984           |       | —            |       | 646,231          |       | —           |       |
| Other assets                                                       |       | —       |       | 260         |       | 7,621            |       | —            |       | —           |       | 7,881            |       |
| Goodwill and  other intangible assets, net                         |       | —       |       | —      |       | 89,224           |       | 5,860             |       | —           |       | 95,084           |       |
|                                                               |       | $            | (241,432   | )           | $          | 169,998          |       | $                 | 312,743    |             | $          | 34,239           |       | $ | 47,503 |   | $ | 323,051 |   |
|                                                               |       |         |       |        |       |             |       |              |       |             |       |             |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                          |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Current  liabilities:                                              |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Current portion of notes payable and capital lease  obligations    |       | $            | —     |        | $          | —           |       | $                 | 6,861      |             | $          | 1,803            |       | $ | — |   | $ | 8,664 |   |
| Accounts payable and other accrued expenses                        |       | —       |       | —      |       | 37,406           |       | 1,213             |       | —           |       | 38,619           |       |
| Intercompany accounts payable                                      |       | —       |       | —      |       | 588,521          |       | 10,207            |       | (598,728         | )          | —           |       |
| Total current liabilities                                          |       | —       |       | —      |       | 632,788          |       | 13,223            |       | (598,728         | )          | 47,283           |       |
| Notes payable and  capital lease obligations, less current portion |       | —       |       | 303,850     |       | (5,000           | )          | 4,342             |       | —           |       | 303,192          |       |
| Liabilities  subject to compromise                                 |       | —       |       | 194,500     |       | 11,204           |       | —            |       | —           |       | 205,704          |       |
| Other long-term  liabilities                                       |       | —       |       | 166         |       | 5,448            |       | 2,690             |       | —           |       | 8,304            |       |
| Stockholders’  (deficit) equity                               |       | (241,432     | )          | (328,518    | )          | (331,697         | )          | 13,984            |       | 646,231          |       | (241,432         | )          |
|                                                               |       | $            | (241,432   | )           | $          | 169,998          |       | $                 | 312,743    |             | $          | 34,239           |       | $ | 47,503 |   | $ | 323,051 |   |

 

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**SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET**

**JUNE 30, 2006**

**(Amounts in thousands)**
| ** **                                                         | ** ** | ** **   | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **NON-GUARANTOR** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------|------------|--------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                         | ** ** | **HOLDINGS** | ** ** | **INSIGHT** | ** ** | **SUBSIDIARIES** | ** ** | **SUBSIDIARIES**  | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| ASSETS                                                             |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Current assets:                                                    |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash equivalents                                          |       | $            | —     |        | $          | —           |       | $                 | 25,944     |             | $          | 2,264            |       | $ | — |   | $ | 28,208 |   |
| Trade accounts receivables, net                                    |       | —       |       | —      |       | 37,540           |       | 6,150             |       | —           |       | 43,690           |       |
| Other current assets                                               |       | —       |       | —      |       | 7,960            |       | 429               |       | —           |       | 8,389            |       |
| Intercompany accounts receivable                                   |       | 87,086       |       | 496,110     |       | 15,452           |       | —            |       | (598,648         | )          | —           |       |
| Total current assets                                               |       | 87,086       |       | 496,110     |       | 86,896           |       | 8,843             |       | (598,648         | )          | 80,287           |       |
| Property and  equipment, net                                       |       | —       |       | —      |       | 164,637          |       | 16,389            |       | —           |       | 181,026          |       |
| Investments in  partnerships                                       |       | —       |       | —      |       | 3,051            |       | —            |       | —           |       | 3,051            |       |
| Investments in  consolidated subsidiaries                          |       | (228,979     | )          | (232,656    | )          | 7,046            |       | —            |       | 454,589          |       | —           |       |
| Other assets                                                       |       | —       |       | 905         |       | 16,989           |       | 10                |       | —           |       | 17,904           |       |
| Goodwill and  other intangible assets, net                         |       | —       |       | —      |       | 121,433          |       | 4,503             |       | —           |       | 125,936          |       |
|                                                               |       | $            | (141,893   | )           | $          | 264,359          |       | $                 | 400,052    |             | $          | 29,745           |       | $ | (144,059 | ) | $ | 408,204 |   |
|                                                               |       |         |       |        |       |             |       |              |       |             |       |             |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                          |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Current  liabilities:                                              |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Current portion of notes payable and capital lease  obligations    |       | $            | —     |        | $          | —           |       | $                 | 4,730      |             | $          | 930              |       | $ | — |   | $ | 5,660 |   |
| Accounts payable and other accrued expenses                        |       | —       |       | —      |       | 38,613           |       | 1,464             |       | —           |       | 40,077           |       |
| Intercompany accounts payable                                      |       | —       |       | —      |       | 583,196          |       | 15,452            |       | (598,648         | )          | —           |       |
| Total current liabilities                                          |       | —       |       | —      |       | 626,539          |       | 17,846            |       | (598,648         | )          | 45,737           |       |
| Notes payable and  capital lease obligations, less current portion |       | —       |       | 493,143     |       | 2,479            |       | 2,100             |       | —           |       | 497,722          |       |
| Other long-term  liabilities                                       |       | —       |       | 195         |       | 3,690            |       | 2,753             |       | —           |       | 6,638            |       |
| Stockholders’  (deficit) equity                               |       | (141,893     | )          | (228,979    | )          | (232,656         | )          | 7,046             |       | 454,589          |       | (141,893         | )          |
|                                                               |       | $            | (141,893   | )           | $          | 264,359          |       | $                 | 400,052    |             | $          | 29,745           |       | $ | (144,059 | ) | $ | 408,204 |   |

 

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**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**FOR THE YEAR ENDED JUNE 30, 2007**

**(Amounts in thousands)**
| ** **                                                                 | ** ** | ** **   | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **NON-GUARANTOR** | ** ** | ** **      | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|------------------|------------|-------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                 | ** ** | **HOLDINGS** | ** ** | **INSIGHT** | ** ** | **SUBSIDIARIES** | ** ** | **SUBSIDIARIES**  | ** ** | **ELIMINATION** | ** ** | **CONSOLIDATED** | ** ** |
|                                                                       |       |         |       |        |       |             |       |              |       |            |       |             |       |
| Revenues:                                                                  |       |         |       |        |       |             |       |              |       |            |       |             |       |
| Contract services                                                          |       | $            | —     |        | $          | —           |       | $                 | 120,765    |            | $          | 7,928            |       | $ | — |   | $ | 128,693 |   |
| Patient services                                                           |       | —       |       | —      |       | 132,391          |       | 25,830            |       | —          |       | 158,221          |       |
| Total revenues                                                             |       | —       |       | —      |       | 253,156          |       | 33,758            |       | —          |       | 286,914          |       |
|                                                                       |       |         |       |        |       |             |       |              |       |            |       |             |       |
| Costs of  operations                                                       |       | —       |       | —      |       | 228,583          |       | 32,843            |       | —          |       | 261,426          |       |
| Gross profit                                                               |       | —       |       | —      |       | 24,573           |       | 915               |       | —          |       | 25,488           |       |
|                                                                       |       |         |       |        |       |             |       |              |       |            |       |             |       |
| Corporate  operating expenses                                              |       | —       |       | —      |       | (25,496          | )          | —            |       | —          |       | (25,496          | )          |
|                                                                       |       |         |       |        |       |             |       |              |       |            |       |             |       |
| Equity in  earnings of unconsolidated partnerships                         |       | —       |       | —      |       | 3,030            |       | —            |       | —          |       | 3,030            |       |
|                                                                       |       |         |       |        |       |             |       |              |       |            |       |             |       |
| Interest expense,  net                                                     |       | —       |       | —      |       | (51,960          | )          | (820              | )          | —          |       | (52,780          | )          |
|                                                                       |       |         |       |        |       |             |       |              |       |            |       |             |       |
| Impairment of  goodwill                                                    |       | —       |       | —      |       | (29,595          | )          | —            |       | —          |       | (29,595          | )          |
| (Loss) income before reorganization items and income  taxes                |       | —       |       | —      |       | (79,448          | )          | 95                |       | —          |       | (79,353          | )          |
|                                                                       |       |         |       |        |       |             |       |              |       |            |       |             |       |
| Reorganization  items                                                      |       | —       |       | —      |       | (17,513          | )          | —            |       | —          |       | (17,513          | )          |
|                                                                       |       |         |       |        |       |             |       |              |       |            |       |             |       |
| (Loss) income before income taxes                                          |       | —       |       | —      |       | (96,961          | )          | 95                |       | —          |       | (96,866          | )          |
|                                                                       |       |         |       |        |       |             |       |              |       |            |       |             |       |
| Provision for  income taxes                                                |       | —       |       | —      |       | 2,175            |       | —            |       | —          |       | 2,175            |       |
| (Loss) income before equity in (loss) income of consolidated  subsidiaries |       | —       |       | —      |       | (99,136          | )          | 95                |       | —          |       | (99,041          | )          |
|                                                                       |       |         |       |        |       |             |       |              |       |            |       |             |       |
| Equity in (loss)  income of consolidated subsidiaries                      |       | (99,041      | )          | (99,041     | )          | 95               |       | —            |       | 197,987         |       | —           |       |
| Net (loss) income                                                          |       | $            | (99,041    | )           | $          | (99,041          | )          | $                 | (99,041    | )               | $          | 95               |       | $ | 197,987 |   | $ | (99,041 | ) |

 

77

----

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**FOR THE YEAR ENDED JUNE 30, 2006**

**(Amounts in thousands)**
| ** **                                                                 | ** ** | **HOLDINGS ** | ** ** | **INSIGHT** | ** ** | **GUARANTOR  SUBSIDIARIES ** | ** ** | **NON-GUARANTOR  SUBSIDIARIES** | ** ** | **ELIMINATION ** | ** ** | **CONSOLIDATED ** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------|------------|-------------|------------|-----------------------------------|------------|---------------------------------|------------|-----------------------|------------|------------------------|------------|
| Revenues:                                                                  |       |               |       |        |       |                              |       |                            |       |                  |       |                   |       |
| Contract services                                                          |       | $                  | —     |        | $          | —                            |       | $                               | 127,092    |                  | $          | 7,314                  |       | $ | — |   | $ | 134,406 |   |
| Patient services                                                           |       | —             |       | —      |       | 142,755                           |       | 29,137                          |       | —                |       | 171,892                |       |
| Total revenues                                                             |       | —             |       | —      |       | 269,847                           |       | 36,451                          |       | —                |       | 306,298                |       |
| Costs of operations                                                        |       | —             |       | —      |       | 237,060                           |       | 34,212                          |       | —                |       | 271,272                |       |
| Gross profit                                                               |       | —             |       |        |       | 32,787                            |       | 2,239                           |       | —                |       | 35,026                 |       |
| Corporate operating  expenses                                              |       | —             |       | —      |       | (23,655                           | )          | —                          |       | —                |       | (23,655                | )          |
| Equity in earnings of  unconsolidated partnerships                         |       | —             |       | —      |       | 3,072                             |       | —                          |       | —                |       | 3,072                  |       |
| Interest expense, net                                                      |       | —             |       | —      |       | (49,756                           | )          | (998                            | )          | —                |       | (50,754                | )          |
| Gain on repurchase of  notes payable                                       |       | —             |       | 3,076       |       | —                            |       | —                          |       | —                |       | 3,076                  |       |
| Loss on dissolution of  partnership                                        |       | —             |       | —      |       | (1,000                            | )          | —                          |       | —                |       | (1,000                 | )          |
| Impairment of goodwill  and other intangible assets                        |       | —             |       | —      |       | (190,807                          | )          | —                          |       | —                |       | (190,807               | )          |
| Income (loss)  before income taxes                                         |       | —             |       | 3,076       |       | (229,359                          | )          | 1,241                           |       | —                |       | (225,042               | )          |
| Benefit for income taxes                                                   |       | —             |       | —      |       | (14,824                           | )          | —                          |       | —                |       | (14,824                | )          |
| Income (loss)  before equity in (loss) income of consolidated subsidiaries |       | —             |       | 3,076       |       | (214,535                          | )          | 1,241                           |       | —                |       | (210,218               | )          |
| Equity in (loss) income  of consolidated subsidiaries                      |       | (210,218           | )          | (213,294    | )          | 1,241                             |       | —                          |       | 422,271               |       |                   |       |
| Net (loss) income                                                          |       | $                  | (210,218   | )           | $          | (210,218                          | )          | $                               | (213,294   | )                     | $          | 1,241                  |       | $ | 422,271 |   | $ | (210,218 | ) |

 

78

----

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**FOR THE YEAR ENDED JUNE 30, 2005**

**(Amounts in thousands)**
| ** **                                                                 | ** ** | **HOLDINGS** | ** ** | **INSIGHT ** | ** ** | **GUARANTOR  SUBSIDIARIES ** | ** ** | **NON-GUARANTOR  SUBSIDIARIES ** | ** ** | **ELIMINATION ** | ** ** | **CONSOLIDATED ** | ** ** |
|----------------------------------------------------------------------------|------------|--------------|------------|-------------------|------------|-----------------------------------|------------|---------------------------------------|------------|-----------------------|------------|------------------------|------------|
|                                                                       |       |         |       |              |       |                              |       |                                  |       |                  |       |                   |       |
| Revenues:                                                                  |       |         |       |              |       |                              |       |                                  |       |                  |       |                   |       |
| Contract services                                                          |       | $            | —     |              | $          | —                            |       | $                                     | 128,619    |                  | $          | 7,918                  |       | $ | — |   | $ | 136,537 |   |
| Patient services                                                           |       | —       |       | —            |       | 146,953                           |       | 33,383                                |       | —                |       | 180,336                |       |
| Total revenues                                                             |       | —       |       | —            |       | 275,572                           |       | 41,301                                |       | —                |       | 316,873                |       |
|                                                                       |       |         |       |              |       |                              |       |                                  |       |                  |       |                   |       |
| Costs of operations                                                        |       | —       |       | —            |       | 231,144                           |       | 37,013                                |       | —                |       | 268,157                |       |
| Gross profit                                                               |       | —       |       | —            |       | 44,428                            |       | 4,288                                 |       | —                |       | 48,716                 |       |
|                                                                       |       |         |       |              |       |                              |       |                                  |       |                  |       |                   |       |
| Corporate operating  expenses                                              |       | —       |       | —            |       | (18,447                           | )          | —                                |       | —                |       | (18,447                | )          |
|                                                                       |       |         |       |              |       |                              |       |                                  |       |                  |       |                   |       |
| Loss on sales of centers                                                   |       | —       |       | —            |       | (170                              | )          | —                                |       | —                |       | (170                   | )          |
|                                                                       |       |         |       |              |       |                              |       |                                  |       |                  |       |                   |       |
| Equity in earnings of  unconsolidated partnerships                         |       | —       |       | —            |       | 2,613                             |       | —                                |       | —                |       | 2,613                  |       |
|                                                                       |       |         |       |              |       |                              |       |                                  |       |                  |       |                   |       |
| Interest expense, net                                                      |       | —       |       | —            |       | (43,615                           | )          | (1,245                                | )          | —                |       | (44,860                | )          |
| (Loss) income  before income taxes                                         |       | —       |       | —            |       | (15,191                           | )          | 3,043                                 |       | —                |       | (12,148                | )          |
|                                                                       |       |         |       |              |       |                              |       |                                  |       |                  |       |                   |       |
| Provision for income  taxes                                                |       | —       |       | —            |       | 15,069                            |       | —                                |       | —                |       | 15,069                 |       |
| (Loss)  income before equity in (loss) income of consolidated subsidiaries |       | —       |       | —            |       | (30,260                           | )          | 3,043                                 |       | —                |       | (27,217                | )          |
|                                                                       |       |         |       |              |       |                              |       |                                  |       |                  |       |                   |       |
| Equity in (loss) income  of consolidated subsidiaries                      |       | (27,217      | )          | (27,217           | )          | 3,043                             |       | —                                |       | 51,391                |       | —                 |       |
| Net (loss) income                                                          |       | $            | (27,217    | )                 | $          | (27,217                           | )          | $                                     | (27,217    | )                     | $          | 3,043                  |       | $ | 51,391 |   | $ | (27,217 | ) |

 

79

----

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**FOR THEYEAR ENDED JUNE 30, 2007**

**(Amounts in thousands)**
| ** **                                                                                          | ** ** | **HOLDINGS** | ** ** | **INSIGHT** | ** **                                                        | **GUARANTOR  SUBSIDIARIES** | ** ** | **NON-GUARANTOR  SUBSIDIARIES** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------|------------|-------------|-------------------------------------------------------------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| OPERATING  ACTIVITIES:                                                                              |       |         |       |        |                                                              |                        |       |                            |       |             |       |             |       |
| Net (loss) income                                                                                   |       | $            | (99,041    | )           | $                                                                 | (99,041                     | )          | $                               | (99,041    | )                | $          | 95               |       | $ | 197,987 |   | $ | (99,041 | ) |
| Adjustments to reconcile net (loss) income to net  cash (used in) provided by operating activities: |       |         |       |        |                                                              |                        |       |                            |       |             |       |             |       |
| Cash used for reorganization items                                                                  |       | —       |       | —      |                                                              | 11,367                      |       |                            |       |             |       | 11,367           |       |
| Write-off of deferred financing costs, included in  reorganization items                            |       | —       |       | —      |                                                              | 6,146                       |       |                            |       |             |       | 6,146            |       |
| Depreciation and amortization                                                                       |       | —       |       | —      |                                                              | 51,308                      |       | 5,732                           |       | —           |       | 57,040           |       |
| Amortization of deferred financing costs                                                            |       | —       |       | —      |                                                              | 3,158                       |       | —                          |       | —           |       | 3,158            |       |
| Equity in earnings of unconsolidated partnerships                                                   |       | —       |       | —      |                                                              | (3,030                      | )          | —                          |       | —           |       | (3,030           | )          |
| Distributions from unconsolidated partnerships                                                      |       | —       |       | —      |                                                              | 3,008                       |       | —                          |       | —           |       | 3,008            |       |
| Impairment of goodwill                                                                              |       | —       |       | —      |                                                              | 29,595                      |       | —                          |       | —           |       | 29,595           |       |
| Equity in (loss) income of consolidated subsidiaries                                                |       | 99,041       |       | 99,041      |                                                              | (95                         | )          | —                          |       | (197,987         | )          | —           |       |
| Changes in  operating assets and liabilities:                                                       |       |         |       |        |                                                              |                        |       |                            |       |             |       |             |       |
| Trade accounts receivables, net                                                                     |       | —       |       | —      |                                                              | 1,015                       |       | (8                              | )          | —           |       | 1,007            |       |
| Intercompany receivables, net                                                                       |       | —       |       | (5,325      | )                                                                 | 5,084                       |       | 241                             |       | —           |       | —           |       |
| Other current assets                                                                                |       | —       |       | —      |                                                              | (112                        | )          | 193                             |       | —           |       | 81               |       |
| Accounts payable, other accrued expenses and accrued  interest                                      |       |         |       |        |                                                              |                        |       |                            |       |             |       |             |       |
| subject to compromise                                                                               |       | —       |       | —      |                                                              | 11,352                      |       | (251                            | )          | —           |       | 11,101           |       |
| Net cash (used in) provided by operating activities  before                                         |       |         |       |        |                                                              |                        |       |                            |       |             |       |             |       |
| reorganization items                                                                                |       | —       |       | (5,325      | )                                                                 | 19,755                      |       | 6,002                           |       | —           |       | 20,432           |       |
| Cash used for reorganization items                                                                  |       | —       |       | —      |                                                              | (11,367                     | )          | —                          |       | —           |       | (11,367          | )          |
| Net cash (used in) provided by operating activities                                                 |       | —       |       | (5,325      | )                                                                 | 8,388                       |       | 6,002                           |       | —           |       | 9,065            |       |
|                                                                                                |       |         |       |        |                                                              |                        |       |                            |       |             |       |             |       |
| INVESTING  ACTIVITIES:                                                                              |       |         |       |        |                                                              |                        |       |                            |       |             |       |             |       |
| Additions to property and equipment                                                                 |       | —       |       | —      |                                                              | (11,074                     | )          | (5,089                          | )          | —           |       | (16,163          | )          |
| Other                                                                                               |       | —       |       | 118         |                                                              | 63                          |       | (63                             | )          | —           |       | 118              |       |
| Net cash provided by (used in) investing activities                                                 |       | —       |       | 118         |                                                              | (11,011                     | )          | (5,152                          | )          | —           |       | (16,045          | )          |
|                                                                                                |       |         |       |        |                                                              |                        |       |                            |       |             |       |             |       |
| FINANCING  ACTIVITIES:                                                                              |       |         |       |        |                                                              |                        |       |                            |       |             |       |             |       |
| Principal payments of notes payable and capital lease  obligations                                  |       | —       |       | 207         |                                                              | (5,348                      | )          | (1,388                          | )          | —           |       | (6,529           | )          |
| Proceeds from issuance of notes payable                                                             |       | —       |       | —      |                                                              | —                      |       | 1,145                           |       | —           |       | 1,145            |       |
| Borrowings on revolving credit facility                                                             |       | —       |       | 5,000       |                                                              | —                      |       | —                          |       | —           |       | 5,000            |       |
| Other                                                                                               |       | —       |       | —      |                                                              | (13                         | )          | 1                               |       | —           |       | (12              | )          |
| Net cash provided by (used in) financing activities                                                 |       | —       |       | 5,207       |                                                              | (5,361                      | )          | (242                            | )          | —           |       | (396             | )          |
|                                                                                                |       |         |       |        |                                                              |                        |       |                            |       |             |       |             |       |
| INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                                   |       | —       |       | —      |                                                              | (7,984                      | )          | 608                             |       | —           |       | (7,376           | )          |
| Cash, beginning of year                                                                             |       | —       |       | **—**  |                                                              | 25,944                      |       | 2,264                           |       | —           |       | 28,208           |       |
| Cash, end of year                                                                                   |       | $            | —     |        | **$         —** |                        | $          | 17,960                          |       | $                | 2,872      |             | $          | — |   | $ | 20,832 |   |
|                                                                                                     |            |              |            |             |                                                                   |                             |            |                                 |            |                  |            |                  |            |  |  |  |  |  |  |

80

----

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**FOR THEYEAR ENDED JUNE 30, 2006**

**(Amountsin thousands)**
| ** **                                                                                          | ** ** | **HOLDINGS** | ** ** | **INSIGHT** | ** ** | **GUARANTOR  SUBSIDIARIES** | ** ** | **NON-GUARANTOR  SUBSIDIARIES** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| OPERATING  ACTIVITIES:                                                                              |       |         |       |        |       |                        |       |                            |       |             |       |             |       |
| Net (loss) income                                                                                   |       | $            | (210,218   | )           | $          | (210,218                    | )          | $                               | (213,294   | )                | $          | 1,241            |       | $ | 422,271 |   | $ | (210,218 | ) |
| Adjustments to reconcile net income (loss) to net  cash (used in) provided by operating activities: |       |         |       |        |       |                        |       |                            |       |             |       |             |       |
| Depreciation and amortization                                                                       |       | —       |       | —      |       | 59,716                      |       | 5,136                           |       | —           |       | 64,852           |       |
| Amortization of deferred financing costs                                                            |       | —       |       | —      |       | 3,051                       |       | —                          |       | —           |       | 3,051            |       |
| Equity in earnings of unconsolidated partnerships                                                   |       | —       |       | —      |       | (3,072                      | )          | —                          |       | —           |       | (3,072           | )          |
| Distributions from unconsolidated partnerships                                                      |       | —       |       | —      |       | 3,387                       |       | —                          |       | —           |       | 3,387            | )          |
| Gain on repurchase of notes payable                                                                 |       | —       |       | (3,076      | )          | —                      |       | —                          |       | —           |       | (3,076           | )          |
| Loss on dissolution of partnership                                                                  |       | —       |       | —      |       | 1,000                       |       | —                          |       | —           |       | 1,000            |       |
| Impairment of goodwill and other intangible assets                                                  |       | —       |       | —      |       | 190,807                     |       | —                          |       | —           |       | 190,807          | )          |
| Deferred income taxes                                                                               |       | —       |       | —      |       | (15,224                     | )          | —                          |       | —           |       | (15,224          | )          |
| Equity in (loss) income of consolidated subsidiaries                                                |       | 210,218      |       | 213,294     |       | (1,241                      | )          | —                          |       | (422,271         | )          | —           |       |
| Changes in operating assets and liabilities:                                                        |       |         |       |        |       |                        |       |                            |       |             |       |             |       |
| Trade accounts receivables, net                                                                     |       | —       |       | —      |       | 2,731                       |       | 285                             |       | —           |       | 3,016            |       |
| Intercompany receivables, net                                                                       |       | —       |       | (3,920      | )          | 8,191                       |       | (4,271                          | )          | —           |       | —           |       |
| Other current assets                                                                                |       | —       |       | —      |       | (473                        | )          | 66                              |       | —           |       | (407             | )          |
| Accounts payable and other accrued expenses                                                         |       | —       |       | —      |       | 3,698                       |       | (186                            | )          | —           |       | 3,512            |       |
| Net cash (used in) provided by operating activities                                                 |       | —       |       | (3,920      | )          | 39,277                      |       | 2,271                           |       | —           |       | 37,628           |       |
|                                                                                                |       |         |       |        |       |                        |       |                            |       |             |       |             |       |
| INVESTING ACTIVITIES:                                                                               |       |         |       |        |       |                        |       |                            |       |             |       |             |       |
| Acquisition of fixed-site center                                                                    |       | —       |       | —      |       | (2,345                      | )          | —                          |       | —           |       | (2,345           | )          |
| Additions to property and equipment                                                                 |       | —       |       | —      |       | (29,603                     | )          | (1,324                          | )          | —           |       | (30,927          | )          |
| Sale of short-term investments                                                                      |       | —       |       | —      |       | 5,000                       |       | —                          |       | —           |       | 5,000            | )          |
| Other                                                                                               |       | —       |       | (22         | )          | 647                         |       | (860                            | )          | —           |       | (235             | )          |
| Net cash used in investing activities                                                               |       | —       |       | (22         | )          | (26,301                     | )          | (2,184                          | )          | —           |       | (28,507          | )          |
|                                                                                                |       |         |       |        |       |                        |       |                            |       |             |       |             |       |
| FINANCING ACTIVITIES:                                                                               |       |         |       |        |       |                        |       |                            |       |             |       |             |       |
| Principal payments of notes payable and capital lease  obligations                                  |       | —       |       | (287,415    | )          | (5,003                      | )          | (691                            | )          | —           |       | (293,109         | )          |
| Proceeds from issuance of notes payable                                                             |       | —       |       | 298,500     |       | —                      |       | —                          |       | —           |       | 298,500          |       |
| Payments made in connection with refinancing notes  payable                                         |       | —       |       | (6,836      | )          | —                      |       | —                          |       | —           |       | (6,836           | )          |
| Payment for interest rate cap contract                                                              |       | —       |       | (307        | )          | —                      |       | —                          |       | —           |       | (307             | )          |
| Net cash provided by (used in) financing activities                                                 |       | —       |       | 3,942       |       | (5,003                      | )          | (691                            | )          | —           |       | (1,752           | )          |
|                                                                                                |       |         |       |        |       |                        |       |                            |       |             |       |             |       |
| INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                                   |       | —       |       | —      |       | 7,973                       |       | (604                            | )          | —           |       | 7,369            |       |
| Cash, beginning of year                                                                             |       | —       |       | —      |       | 17,971                      |       | 2,868                           |       | —           |       | 20,839           |       |
| Cash, end of year                                                                                   |       | $            | —     |        | $          | —                      |       | $                               | 25,944     |             | $          | 2,264            |       | $ | — |   | $ | 28,208 |   |

 

81

----

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**FOR THE YEAR ENDED JUNE 30, 2005**

**(Amounts in thousands)**
| ** **                                                                                | ** ** | ** **   | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **NON-GUARANTOR** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                | ** ** | **HOLDINGS** | ** ** | **INSIGHT** | ** ** | **SUBSIDIARIES** | ** ** | **SUBSIDIARIES**  | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                                                      |       |         |       |        |       |             |       |              |       |             |       |             |       |
|  OPERATING ACTIVITIES:                                                               |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Net (loss) income                                                                         |       | $            | (27,217    | )           | $          | (27,217          | )          | $                 | (27,217    | )                | $          | 3,043            |       | $ | 51,391 |   | $ | (27,217 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Loss on sales of centers                                                                  |       | —       |       | —      |       | 170              |       | —            |       | —           |       | 170              |       |
| Depreciation and amortization                                                             |       | —       |       | —      |       | 60,261           |       | 5,340             |       | —           |       | 65,601           |       |
| Amortization of deferred financing costs                                                  |       | —       |       | —      |       | 3,173            |       | —            |       | —           |       | 3,173            |       |
| Equity in earnings of unconsolidated partnerships                                         |       | —       |       | —      |       | (2,613           | )          | —            |       | —           |       | (2,613           | )          |
| Distributions from unconsolidated partnerships                                            |       | —       |       | —      |       | 2,621            |       | —            |       | —           |       | 2,621            |       |
| Deferred income taxes                                                                     |       | —       |       | —      |       | 15,224           |       | —            |       | —           |       | 15,224           |       |
| Equity in (loss) income of consolidated subsidiaries                                      |       | 27,217       |       | 27,217      |       | (3,043           | )          | —            |       | (51,391          | )          | —           |       |
| Changes in operating assets and liabilities:                                              |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Trade accounts receivables, net                                                           |       | —       |       | —      |       | 6,634            |       | 1,462             |       | —           |       | 8,096            |       |
| Intercompany receivables, net                                                             |       | —       |       | 32,219      |       | (24,931          | )          | (7,288            | )          | —           |       | —           |       |
| Other current assets                                                                      |       | —       |       | —      |       | (1,397           | )          | (339              | )          | —           |       | (1,736           | )          |
| Accounts payable and other accrued expenses                                               |       | —       |       | —      |       | 539              |       | 187               |       | —           |       | 726              |       |
| Net cash provided by operating activities                                                 |       | —       |       | 32,219      |       | 29,421           |       | 2,405             |       | —           |       | 64,045           |       |
|  INVESTING ACTIVITIES:                                                               |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Proceeds from sales of centers                                                            |       | —       |       | —      |       | 2,810            |       | —            |       | —           |       | 2,810            |       |
| Additions to property and equipment                                                       |       | —       |       | —      |       | (28,449          | )          | (2,010            | )          | —           |       | (30,459          | )          |
| Net purchases of short-term investments                                                   |       | —       |       | —      |       | (5,000           | )          | —            |       | —           |       | (5,000           | )          |
| Other                                                                                     |       | —       |       | —      |       | (1,627           | )          | (1,483            | )          | —           |       | (3,110           | )          |
| Net cash used in investing activities                                                     |       | —       |       | —      |       | (32,266          | )          | (3,493            | )          | —           |       | (35,759          | )          |
|  INVESTING ACTIVITIES:                                                               |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Principal payments of notes payable and capital lease  obligations                        |       | —       |       | (32,195     | )          | (4,950           | )          | (636              | )          | —           |       | (37,781          | )          |
| Other                                                                                     |       | —       |       | (24         | )          | (54              | )          | —            |       | —           |       | (78              | )          |
| Net cash used in financing activities                                                     |       | —       |       | (32,219     | )          | (5,004           | )          | (636              | )          | —           |       | (37,859          | )          |
|  DECREASE IN CASH AND CASH EQUIVALENTS                                               |       | —       |       | —      |       | (7,849           | )          | (1,724            | )          | —           |       | (9,573           | )          |
| Cash, beginning of year                                                                   |       | —       |       | —      |       | 25,820           |       | 4,592             |       | —           |       | 30,412           |       |
| Cash, end of year                                                                         |       | $            | —     |        | $          | —           |       | $                 | 17,971     |             | $          | 2,868            |       | $ | — |   | $ | 20,839 |   |

 

 

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

None.

**ITEM9A.       CONTROLS AND PROCEDURES**

We carried out an evaluation, with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of our disclosure controls andprocedures (pursuant to Rule 15d-15 under the Securities Exchange Act of 1934,as amended (the “Exchange Act”)) as of the end of theperiod covered by this Form 10-K.  Basedupon that evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures are effective in timelyalerting them to material information relating to us (including ourconsolidated subsidiaries) required to be included in our periodic SECfilings.  There has been no change in ourinternal control over financial reporting during the quarter ended June 30,2007 that has materially affected, or is reasonably likely to materially affect,our internal control over financial reporting.

**ITEM 9B.       OTHERINFORMATION**

## None.

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## **PART III**

**ITEM 10.       DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

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 Exchange Act),as of August 31, 2007:
| Wayne B. Lowell           |   | 52     |   | Chairman of the Board and Director                                        |
|---------------------------|--------|--------|--------|---------------------------------------------------------------------------|
|                      |   |   |   |                                                                      |
| Bret W. Jorgensen         |   | 48     |   | President and Chief Executive Officer and Director                        |
|                      |   |   |   |                                                                      |
| Patricia R. Blank         |   | 57     |   | Executive Vice President — Clinical Services and  Support of InSight |
|                      |   |   |   |                                                                      |
| Louis E. Hallman, III     |   | 48     |   | Executive Vice President and Chief Strategy Officer  of InSight      |
|                      |   |   |   |                                                                      |
| Donald F. Hankus          |   | 53     |   | Executive Vice President and Chief Information  Officer of InSight   |
|                      |   |   |   |                                                                      |
| Mitch C. Hill             |   | 48     |   | Executive Vice President and Chief Financial Officer                      |
|                      |   |   |   |                                                                      |
| Eugene Linden             |   | 60     |   | Director                                                                  |
|                      |   |   |   |                                                                      |
| Marilyn U. MacNiven-Young |   | 56     |   | Executive Vice President, General Counsel and  Secretary                  |
|                      |   |   |   |                                                                      |
| Richard Nevins            |   | 60     |   | Director                                                                  |
|                      |   |   |   |                                                                      |
| James A. Ovenden          |   | 44     |   | Director                                                                  |
|                      |   |   |   |                                                                      |
| Keith E. Rechner          |   | 49     |   | Director                                                                  |
|                      |   |   |   |                                                                      |
| Steven G. Segal           |   | 47     |   | Director                                                                  |

 

*Wayne B. Lowell* has been a member of our board of directors since August 1, 2007 andour Chairman since August 7, 2007.  He establishedJonchra Associates, LLC, which provides strategic and operating advice tosenior management of venture capital-funded and publicly held entities, in1998. Mr. Lowell worked at PacifiCare Health Systems from 1986 to 1998,most recently holding the positions of Executive Vice President, ChiefFinancial Officer and Chief Administrative Officer. Mr. Lowell currentlyserves as a director of Molina Healthcare, Inc., a multi-state managed careorganization, and of IPC The Hospitalist Company, Inc., a provider ofhospitalist services.

*Bret W. Jorgensen* has been amember of our board of directors and our President and Chief Executive Officersince July 1, 2005. Prior to this appointment, Mr. Jorgensen was the ChiefExecutive Officer of AdvoLife, a provider of senior care services, from June2004 until the sale of the company in October 2004.  Prior to AdvoLife hewas Chairman and Chief Executive Officer of Directfit, a web-centric recruitingsolutions provider, from April 1999 to October 2003.  In 1989, Jorgensenco-founded TheraTx, which became a diversified healthcare services companylisted on NASDAQ.  While at TheraTx, he served on the board of directorsand held several executive leadership positions, including President of TheraTxHealth Services, and was instrumental in TheraTx’s initial public offering in1994 and sale in April 1997.  He currently serves on the board ofdirectors of AllianceCare, a provider of senior healthcare services,rehabilitation therapy and home health services.

*Patricia R. Blank*has been InSight’s Executive Vice President-Clinical Services andSupport since March 28, 2006.  She wasInSight’s ExecutiveVice President-Enterprise Operations from October 22, 2004 to March 28,2006.  She was InSight’s Executive Vice President and ChiefInformation Officer from September 1, 1999 to October 22, 2004.

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Prior tojoining InSight, Ms. Blank was the principal of Blank & Company,a consulting firm specializing in healthcare consulting. From 1995 to 1998,Ms. Blank served as Executive Vice President and Chief Operating Officerof HealthHelp, Inc., a Houston, Texas-based radiology services organizationmanaging radiology provider networks in multiple states. From 1988 to 1995, shewas corporate director of radiology of FHP, a California insurance company.

*Louis E. Hallman, III,* has beenInSight’s Executive Vice President and Chief Strategy Officer since August 10,2005.  Prior to this appointment, Mr. Hallman was the President of RightManufacturing LLC, a specialty manufacturer, from January 2003 through January2005.  From January 2002 until January 2003, Mr. Hallman was a privateinvestor and reviewed various business opportunities.  From August 1999through January 2002, he was President and CEO of Homesquared Inc., asupplier of web-based software applications to production homebuilders. In July 1989, Mr. Hallman co-founded TheraTx, Inc., which became a diversifiedhealthcare services company listed on NASDAQ.  While at TheraTx, he servedas Vice President Corporate Development until its sale in April 1997.

*DonaldF. Hankus*has been InSight’s Executive Vice President and Chief Information Officer sinceSeptember 26, 2005. Prior to this appointment, Mr. Hankus was theDirector of Sales Operations of Quest Software, Inc., a provider ofapplication, database and infrastructure software, from January 2004 throughSeptember 2005. From January 2000 through January 2004, he was ChiefInformation Officer of Directfit. From December 1996 to January 2000, he servedas Director of Software Development for Cendant Corporation, a real estatebrokerage and hotel franchisor.

*MitchC. Hill* has been our Executive Vice President and ChiefFinancial Officer since January 10, 2005.  Prior to this appointment, Mr.Hill was President and Chief Executive Officer of BMS Reimbursement Management,a provider of outsourced billing and collection, accounts receivable andpractice management services, from April 2001 to December 2004. Prior to that, he held the following positions with Buy.Com Inc., amulti-category Internet superstore, Chief Financial Officer fromNovember 1999 to April 2000 and President and Chief Financial Officer fromApril 2000 to February 2001.

*Eugene Linden* has been a member of ourboard of directors since August 1, 2007. He is the Chief Investment Strategist of Bennett Management Corporation,a hedge fund, and has also been a contributor at TIME Magazine since 1995. From1987 to 1995, Mr. Linden was a senior writer at TIME Magazine.Mr. Linden currently serves as a director of Polymer Group, Inc., CibusGenetics LLC and Syratech Corporation.

*MarilynU. MacNiven-Young*has been our Executive Vice President,General Counsel and Secretary since February 11, 2002 and Executive VicePresident, General Counsel and Secretary of InSight since August 1998.  From February 1996 through July 1998, she wasan independent consultant to InSight. From September 1994 through June 1995,she was Senior Vice President and General Counsel of Abbey Healthcare Group,Inc., a home healthcare company. From 1991 through 1994,Ms. MacNiven-Young served as General Counsel of American HealthServices Corp., a predecessor of InSight.

*Richard Nevins*has been a member of ourboard of directors since August 1, 2007. Since July 2007, he has served as the interim chief executive officerfor US Energy Services, Inc.  He hasworked as an independent advisor since 2007. From 1998 until his retirement in2007, Mr. Nevins was a managing director and co-head of therecapitalization and restructuring group at Jefferies & Company, Inc.Mr. Nevins currently serves as a director of Aurora Trailer Holdings andSPELL C LLC.

*James A. Ovenden* has been a member of our board of directors since August 1,2007.  He**is the Chief Financial Officer and a founding principal of OTODevelopment, LLC, a hospitality development company established in 2004.Mr. Ovenden has also served as a principal consultant with CFO Solutionsof SC, LLC since 2002. Mr. Ovenden was the Chief Financial Officer ofExtended Stay America, Inc. from January 2004 to May 2004 and held variouspositions at CMI Industries, Inc. from 1987 to 2002.  Mr. Ovenden currently serves as adirector, and as chairman of the audit committee of the board of directors, ofPolymer Group, Inc.

*Keith E. Rechner*has been a member of ourboard of directors since August 1, 2007. He has been Chief Executive Officer and President of Benefit Advisors,Inc., an employee benefits consulting firm, since 1997. Mr. Rechner is alsocurrently a financial advisor with AXA Advisors, a position he has held since2005.  He also is a member of the

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operatingcommittee of United Wealth Strategies LLC, a financial and consulting servicescompany.  Mr. Rechner served as theRegional Vice President of Tax Sheltered Markets for AXA Advisors from 2002 to2005 and Vice President of Traditional Markets for AXA Advisors from 2000 to2002. From 1993 to 1996, Mr. Rechner held various positions with VHA GreatRivers, Inc./Great Rivers Network, including President and Chief ExecutiveOfficer, Great Rivers Network, Chief Operating Officer, Integrated BenefitServices (IBS) and Vice President, Managed Care.

*Steven G. Segal*has been a member of our board of directors sinceOctober 17, 2001.  He is a SpecialLimited 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.  Since 2006, Mr. Segal is alsoan Executive-in-Residence/Lecturer at Boston University’s Graduate School ofManagement.  He is also a director ofMAAX, Inc., The NutraSweet Company, Fitness Quest Inc., WS Packaging Group,Inc. and Round Grille, Inc. (d/b/a FIRE + iCE).

Each of our executive officers was an executiveofficer on May 29, 2007, the date Holdings and InSight filed voluntarypetitions to reorganize their business under chapter 11 of the Bankruptcy Code.

**Audit Committee**

Theaudit committee of Holdings’ board of directors is in the process of reviewing andformalizing a written charter.  Thewritten charter will be consistent with the following authority granted byHoldings’ board ofdirectors to the audit committee:

·                  Prepare the audit committee reportrequired by SEC rules to be included in Holdings’ annual proxy statement.

·                  Assist the board of directors infulfilling its responsibility to oversee management regarding:

·                  the conduct and integrity of Holdings’ financial reporting to any governmentalor regulatory body, stockholders, other users of Holdings’ financial reports, and the public;

·                  Holdings’ legal and regulatory compliance;

·                  the qualifications, engagement,compensation, independence, and performance of Holdings’ independent registered public accountingfirm, its conduct of the annual audit of Holdings’ consolidated financial statements, and its engagementto provide any other services; and

·                  the performance of Holdings’ internal audit function and systems ofinternal control over financial reporting and disclosure controls and procedures.

·                  Maintain through regularly scheduledmeetings, a line of communication between the board of directors and Holdings’ management, internal auditor and theindependent registered public accounting firm.

Messrs.Ovenden (Chairman), Lowell and Nevins are the current members of the auditcommittee of Holdings’ board of directors. Holdings’ board of directors has determined that each of Messrs. Ovendenand Lowell is an “audit committee financial expert” as defined by the SEC andis independent as defined in the rules of the NASDAQ Stock Market. See Item 13.“Certain Relationships and Related Transactions, and Director Independence”,below.  Holdings’ board of directors hasdetermined that each of the members of the audit committee is financiallyliterate and has accounting or related financial management expertise, as suchterms are interpreted by Holdings’ board of directors.

**Compensation Committee**

Thecompensation committee assists Holdings’ board of directors by ensuring thatour executives are compensated in accordance with our total compensationobjectives and executive compensation policy. Holdings’ board of directors has established a charter for thecompensation committee, which is available on our website at the following internetaddress http://www.insighthealth.com/executives.asp?link=executives. Thewritten charter provides that the compensation committee will:

·                  review the compensation of the ChiefExecutive Officer;

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·                  administer Holdings’ stock option or otherequity-based compensation plans and programs; and

·                  oversee Holdings’ management compensation andbenefits policies, including both qualified and non-qualified plans.

See Item 11. “Executive Compensation — CompensationDiscussion and Analysis” below for a discussion of the process and procedurefor consideration and determination of executive and director compensation.

**Nomination of Directors**

Holdings’ bylaws were amended on July 26, 2007 toprovide, among other things, a procedure by which holders of Holdings’ commonstock may nominate candidates for election to the board of directors.

**Code of Ethical Conduct**

We have adopted acode of ethical conduct that applies to all of our and our subsidiaries’ employees, including, our principalexecutive officer, principal financial officer and principal accountingofficer.  A copy of the code of ethicalconduct is posted on our website, www.insighthealth.com, under “About Us.”  We intend to satisfy the disclosurerequirement under Item 5.05 of Form 8-K relating to amendments to or waiversfrom any provision of the code of ethical conduct applicable to our principalexecutive officer, principal financial officer, principal accountingofficer or controller (or persons performing similar functions) by postingsuch information on our internet website, www.insighthealth.com, under “AboutUs”.

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**ITEM 11.       EXECUTIVECOMPENSATION**

**COMPENSATIONDISCUSSION AND ANALYSIS**

**Overviewand Objectives**

Following Holdings’ and InSight’s emergence from bankruptcy, the reconfigured board of Holdingsestablished a compensation committee.  Priorto the consummation of Holdings’and InSight’s plan ofreorganization, our compensation structure was overseen by the compensationcommittee of InSight’s board of directors (Holdings’ board of directors did not have committees).  In connection with the establishment of thecompensation committee, Holdings’board directed the committee to:

·                  review the compensation of the ChiefExecutive Officer;

·                  administer Holdings’ stock option or otherequity-based compensation plans and programs; and

·                  oversee Holdings’ management compensation andbenefits policies, including both qualified and non-qualified plans.

Holdings’ compensation committee has retained athird-party compensation advisor to assist the committee in developing acompensation program for our key executives. Though the structure is still in development, the committee intends thecompensation for the executive officers named in the Summary Compensation Tablebelow, whom we refer to as named executive officers, will be significantlyperformance-based.  More generally, thestructure will be intended to achieve the following objectives:

·                  attract and retain individuals of superior ability andmanagerial talent;

·                  ensure executive compensation is aligned with ourcorporate strategies, business objectives and the long-term interests of ourstockholders;

·                  create the incentive to achieve key strategic andfinancial performance measures by linking incentive award opportunities to theachievement of performance goals in these areas; and

·                  enhance the executives’ incentive to increase stockholder value, as well aspromote retention of key people, by providing an equity interest in Holdings.

Generally,these objectives are consistent with the historical objectives of InSight’s compensation committee.

Executivecompensation for the named executive officers includes the following:

·                  annual base salary;

·                  cash incentive awards;

·                  equity awards; and

·                  perquisites.

Eachelement is further described below.

**Base Salary**

Basesalary is designed to compensate our named executive officers competitivelybased on industry and marketplace standards. Historically, InSight’s compensation committee:

·                  considered marketplace data for comparable positionsand the relative performance and contribution of each executive to thebusiness;

·                  did not rely solely on predetermined formulas or alimited set of criteria when it evaluated the performance of the namedexecutive officers;

·                  reviewed base salary levels annually to ensurecompetitiveness; and

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·                  based on annual review and individual performance ofeach executive, implemented base salary increases, if appropriate.

Forfiscal year 2007, InSight’s compensation committee determined that base salarylevels should be increased by 2.25%. Historically, we have gathered information from other companies in theindustry or similar size companies; however, we have not designated a specificpeer group for establishing compensation comparisons.

**Cash Incentive Awards**

Cashincentive awards provide a direct link between executive compensation and ouroverall performance. All executive officers, including the President and ChiefExecutive Officer, are eligible for cash incentive awards, which are intendedto focus management attention and effort on the attainment of establishedperformance goals. Specific performance goals and weightings are established atthe corporate level and encompass goals for overall performance for each fiscalyear.

InSight’s compensation committee tied individualcash incentive awards to an executive’s contribution to our achievement of establishedperformance goals, as well as the successful achievement of individuallytailored annual objectives.  InSight’s compensation committee designed thecash incentive award component of our compensation program to align executivepay with our annual (short-term) performance. Cash incentive awards are generally paid in August or September of eachyear for the prior fiscal year’s performance.

Pursuant to theirrespective employment agreement, each named executive officer is eligible for acash incentive award of up to a certain percentage of the executive’s annual base salary.  For fiscal 2007, Mr. Jorgensen’s targetedcash incentive award was equal to 100% of his annual base salary, and thetargeted cash incentive award for each of the other named executive officerswas equal to 40% of his or her respective annual base salary.   75% of the targeted cash incentive award wasbased on our achievement of budgetary goals, and 25% of the targeted cashincentive award was based upon the achievement of other goals (i.e., personalmanagement objectives) mutually agreed upon by each executive and our Presidentand Chief Executive Officer and approved by our board of directors (except in thecase of Mr. Jorgensen, whose goals were agreed upon by our board of directorsand himself).  Annual targets for thedetermination of the cash incentive awards are based on budgeted profitabilitylevels, which have been approved by the compensation committee and aregenerally considered by the compensation committee to be reasonably attainable.

The budgetary goalfor fiscal year 2007 was tied to Adjusted EBITDA (see our reconciliation of netcash provided by operating activities to Adjusted EBITDA in Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Financial Condition, Liquidity and Capital Resources”) after taking intoaccount certain lease expenses associated with diagnostic imaging equipment acquiredpursuant to operating leases.  For fiscalyear 2007, we were required to exceed 90% of the budgeted amount ($72.5million) in order for the named executive officers to become eligible for the75% of the cash incentive award tied to a budgetary goal.  For fiscal year 2007, we achievedapproximately 95% of the budgetary amount. Based on our performance, the named executive officers received theannual cash incentive awards described in the Summary Compensation Table below.

InNovember 2006, InSight’s board of directors adopted a management incentive plan to ensure theretention of certain employees in light of our decision to explore strategicalternatives.  The management incentiveplan was modeled after similar plans for other companies that had pursuedstrategic alternatives, including reorganizations.  The plan provided for (i) a progress paymentupon the occurrence of a specified date, and (ii) full payment upon theachievement of a strategic milestone (i.e., sufficient agreements to completethe balance sheet reorganization). Certain named executive officers receivedthe payments under the management incentive plan described in the SummaryCompensation Table below.  No furtherpayments will be made under such management incentive plan.

**Equity Awards**

Webelieve that equity awards encourage executive officers to manage from theperspective of a stockholder with an equity stake in the business.  If the value of Holdings’ common stock increases over time, thevalue of the equity awards granted to each of the executive officers increases,providing a strong incentive for executive officers to enhance stockholdervalue.  Historically, equity awardsconsisted of stock option awards, which were not limited to executive officers,but were granted to a broad range of key employees. Stock options providedrecipients with the opportunity to purchase Holdings’ common stock at a price fixed on the grant dateregardless of future price.

InSight’s compensation committee typicallyprovided that (i) 50% of stock options would vest cumulatively over variousperiods up to five years from the grant date, and (ii) 50% of stock optionswould vest cumulatively upon the 

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achievementof certain performance targets on an equity exit or liquidity event. The stockoptions were exercisable in whole or in installments, and would have expiredten years from the grant date.

Therewere no grants of stock options in fiscal year 2007.  Upon consummation of the plan ofreorganization, the stock option plan was terminated and all outstanding stockoptions were cancelled on August 1, 2007. Holdings’ compensation committee, with the assistance of a third-partycompensation advisor, is evaluating a new equity award structure.

**Perquisites**

Namedexecutive officers, and certain other officers, are provided with the followingbenefits as a supplement to their other compensation:

·                  Medical Insurance. At our sole cost, we provide toeach named executive officer and the named executive officer’s eligible dependents such health, dentaland vision insurance as we may from time to time make available.

·                  Life and Disability Insurance. At our sole cost, weprovide each named executive officer such disability and/or life insurance aswe in our sole discretion may from time to time make available.

·                  401(k) Savings Plan. We currently make matching contributions to our 401(k) Savings Planin an amount equal to fifty cents for each dollar of participant contributions,up to a maximum of six percent of the participant’s compensation for each pay period and subject tocertain other limits. Participation is not limited to named executive officers,and all full-time employees are eligible to participate in the 401(k) SavingsPlan.

·                  Automobile Allowance and Operating Expenses.  Mr. Jorgensen receives an automobileallowance of $1,000 per month, and the other named executive officers receivean automobile allowance of $750 per month. We pay the named executive officers’ expenses incidental to the operation of anautomobile.

**EmploymentAgreements**

We haveentered into an employment agreement with each of our named executive officersand certain other executives.  Eachemployment agreement with our named executive officers provides for a term of12 months on a continuing basis, subject to certain termination rights.These employment agreements provide for an annual salary as well as a cashincentive award of up to a certain percentage. 75% of the cash incentive award is based on our achievement of budgetarygoals, and 25% of the cash incentive award is based upon the achievement ofother goals (i.e., personal management objectives) mutually agreed upon by eachexecutive and our President and Chief Executive Officer and approved by ourboard of directors (except in the case of Mr. Jorgensen, whose goals are agreedupon by our board of directors and himself).

Each executive is provided with a life insurancepolicy of three times the amount of his or her annual base salary and is entitledto participate in InSight’s life insurance, medical, health and accident anddisability plan or program, pension plan or other similar benefit plan and anystock option plans (as noted above the stock option plan was terminated and alloutstanding stock options were cancelled on August 1, 2007).

Each executive is subject to a noncompetitioncovenant and nonsolicitation provisions (relating to InSight’s employees andcustomers) during the term of his or her respective employment agreement andcontinuing for a period of 12 months after the termination of his or herrespective employment.

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**SUMMARYCOMPENSATION TABLE**

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 year ended June 30, 2007 of the persons who served as(1) our principal executive officer, (2) our principal financial officer,and (3) the other three most highly compensated executive officers for theyear ended June 30, 2007. We refer to these officers collectively as the namedexecutive officers.
|                                                | ** ** | **Fiscal**        | ** ** | ** ** | ** ** | **Non-Equity**          | ** ** | ** **                | ** ** | ** **       | ** ** |
|------------------------------------------------|------------|-------------------|------------|------------|------------|-------------------------|------------|---------------------------|------------|------------------|------------|
| ** **                                     | ** ** | **Year**          | ** ** | ** ** | ** ** | **Incentive Plan** | ** ** | **All Other**        | ** ** | **Total**        | ** ** |
| ** **                                     | ** ** | **Ended**         | ** ** | **Salary** | ** ** | **Compensation(1)**     | ** ** | **Compensation (2)** | ** ** | **Compensation** | ** ** |
| **Name and Principal Position** | ** ** | **June 30,** | ** ** | **($)**    | ** ** | **($)**                 | ** ** | **($)**                   | ** ** | **($)**          | ** ** |
|                                           |       |              |       |       |       |                    |       |                      |       |             |       |
| Bret W. Jorgensen                              |       | 2007              |       | 406,231    |       | 773,050                 |       | 76,802                    |       | 1,256,083        |       |
| President and Chief  Executive                 |       |              |       |       |       |                    |       |                      |       |             |       |
| Officer                                        |       |              |       |       |       |                    |       |                      |       |             |       |
|                                           |       |              |       |       |       |                    |       |                      |       |             |       |
| Mitch C. Hill                                  |       | 2007              |       | 279,284    |       | 423,484                 |       | 56,470                    |       | 759,238          |       |
| Executive Vice President and                   |       |              |       |       |       |                    |       |                      |       |             |       |
| Chief Financial Officer                        |       |              |       |       |       |                    |       |                      |       |             |       |
|                                           |       |              |       |       |       |                    |       |                      |       |             |       |
| Marilyn U. MacNiven-Young                      |       | 2007              |       | 279,284    |       | 423,484                 |       | 29,443                    |       | 732,211          |       |
| Executive Vice President,                      |       |              |       |       |       |                    |       |                      |       |             |       |
| General Counsel and  Secretary                 |       |              |       |       |       |                    |       |                      |       |             |       |
|                                           |       |              |       |       |       |                    |       |                      |       |             |       |
| Louis E. Hallman, III                          |       | 2007              |       | 279,909    |       | 277,291                 |       | 29,253                    |       | 586,453          |       |
| Executive Vice President and                   |       |              |       |       |       |                    |       |                      |       |             |       |
| Chief Strategy Officer                         |       |              |       |       |       |                    |       |                      |       |             |       |
|                                           |       |              |       |       |       |                    |       |                      |       |             |       |
| Patricia R. Blank                              |       | 2007              |       | 279,284    |       | 82,000                  |       | 39,663                    |       | 400,947          |       |
| Executive Vice President -                     |       |              |       |       |       |                    |       |                      |       |             |       |
| Clinical Services and  Support                 |       |              |       |       |       |                    |       |                      |       |             |       |

 

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(1)          Cash incentive awards which are based onour performance are earned and accrued during the fiscal year and paidsubsequent to the end of each fiscal year. The amounts include payments under the management incentive plan toMessrs. Jorgensen, Hill and Hallman and Ms. MacNiven-Young.   The components of Non-Equity Incentive PlanCompensation are annual cash incentive awards and payments under the managementincentive plan (no further payments will be made under such managementincentive plan).  Set forth below are thedifferent components of non-equity incentive plan compensation paid to thenamed executive officers. 

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|                                       | ** ** | **Management** | ** ** | **Annual**    | ** ** | **Total**               | ** ** |
|---------------------------------------|------------|----------------|------------|---------------|------------|-------------------------|------------|
| ** **                            | ** ** | **Incentive**  | ** ** | **Cash**      | ** ** | **Non-Equity**          | ** ** |
| ** **                            | ** ** | **Plan**       | ** ** | **Incentive** | ** ** | **Incentive Plan** | ** ** |
| **Named Executive Officer** | ** ** | **Payments**   | ** ** | **Award**     | ** ** | **Compensation**        | ** ** |
|                                  |       |           |       |          |       |                    |       |
| Bret W.  Jorgensen                    |       | $              | 511,250    |          | $          | 261,800                 |       | $ | 773,050 |   |
|                                  |       |           |       |          |       |                    |       |
| Mitch C. Hill                         |       | 351,484        |       | 72,000        |       | 423,484                 |       |
|                                  |       |           |       |          |       |                    |       |
| Marilyn U.  MacNiven-Young            |       | 351,484        |       | 72,000        |       | 423,484                 |       |
|                                  |       |           |       |          |       |                    |       |
| Louis E.  Hallman, III                |       | 210,891        |       | 66,400        |       | 277,291                 |       |
|                                  |       |           |       |          |       |                    |       |
| Patricia R. Blank                     |       | —         |       | 82,000        |       | 82,000                  |       |
|                                       |            |                |            |               |            |                         |            |  |  |  |

 

(2)          Amounts of All OtherCompensation are comprised of the following perquisites:  (1) automobile allowances, (2) automobileoperating expenses, (3) the Company’scontributions to our 401(k) Savings Plan, (4) specified premiums on executivelife insurance arrangements, (5) specified premiums on executive health anddisability insurance arrangements and (6) certain professional membershipdues.  With respect to specified premiumson executive health and disability insurance arrangements, the Company paid$33,889 and $31,772, respectively, on behalf of Messrs. Jorgensen and Hill.

**GRANTSOF PLAN-BASED AWARDS**

The following table sets forth grants of plan-basedawards in fiscal year 2007 to the named executive officers:
|                              | ** ** | ** **             | ** ** | **Estimated Future  Payouts Under  Non-Equity  Incentive Plan Awards** | ** ** |
|------------------------------|------------|------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| **Named  Executive Officer** | ** ** | **Grant Date(1)** | ** ** | **Threshold**  ($)(2)                                                                      | ** ** | **Target/Maximum**  ($)(3) | ** ** |
| Bret W. Jorgensen            |       | July  1, 2006          |       | $                                                                                          | 30,675     |   | $ | 409,000 |   |
|                              |       | November  14, 2006     |       | 255,625                                                                                    |       | 511,250 |   |
| Mitch C. Hill                |       | July  1, 2006          |       | 8,436                                                                                      |       | 112,475 |   |
|                         |       | November  14, 2006     |       | 175,472                                                                                    |       | 351,484 |   |
| Marilyn U. MacNiven-Young    |       | July  1, 2006          |       | 8,436                                                                                      |       | 112,475 |   |
|                              |       | November  14, 2006     |       | 175,472                                                                                    |       | 351,484 |   |
| Louis E.  Hallman, III       |       | July  1, 2006          |       | 8,436                                                                                      |       | 112,475 |   |
|                         |       | November  14, 2006     |       | 105,145                                                                                    |       | 210,891 |   |
| Patricia R. Blank            |       | July  1, 2006          |       | 8,436                                                                                      |       | 112,475 |   |
|                              |            |                        |            |                                                                                            |            |  |  |  |  |

 

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(1)             Potential cash incentive awards weregranted as of July 1, 2006 and potential management incentive plan paymentswere granted as of November 14, 2006.   

(2)             The threshold amount assumes that (i) theminimum level of budgetary performance was met for the cash incentive award,but the personal management objectives were not achieved, and (ii) theoccurrence of a specified date for the management incentive plan. 

(3)             The target amount assumes (i) that thetargeted level of performance (both targeted budget and personal managementobjectives) was met for the cash incentive awards, and (ii) the achievement ofthe strategic milestone for the management incentive plan.  The maximum amount is equal to the targetamount because (a) with respect to the management incentive plan the targetamount is the maximum amount, and (b) with respect to cash incentive awards, iflevel of performance exceeds the targeted budget, the named executive officersmay receive a discretionary award, but the amount of any discretionary awardabove the target amount is subject to the discretion of the compensationcommittee.  Actual amounts earned under these grantedawards in fiscal year 2007 are reflected in the Non-Equity Incentive PlanCompensation column of the Summary Compensation Table above.

OPTIONGRANTS.  During the year ended June 30,2007, no stock options were granted.

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**2007 Outstanding Equity Awards at Fiscal Year EndTable**

The following table contains certain informationregarding equity awards held by the named executive officers as of June 30,2007:
| ** **                 | ** ** | **Number of**   | ** ** | **Number of**   | ** ** | ** **         | ** ** | ** **        | ** ** |
|----------------------------|------------|----------------------|------------|----------------------|------------|--------------------|------------|-------------------|------------|
| ** **                 | ** ** | **Securities**       | ** ** | **Securities**       | ** ** | ** **         | ** ** | ** **        | ** ** |
| ** **                 | ** ** | **Underlying**       | ** ** | **Underlying**       | ** ** | ** **         | ** ** | ** **        | ** ** |
| ** **                 | ** ** | **Unexercised**      | ** ** | **Unexercised**      | ** ** | **Option**         | ** ** | **Option**        | ** ** |
| ** **                 | ** ** | **Options (#)** | ** ** | **Options (#)** | ** ** | **Exercise**       | ** ** | **Expiration**    | ** ** |
| **Name**                   | ** ** | **Exercisable**      | ** ** | **Unexercisable**    | ** ** | **Price ($)** | ** ** | **Date (1)** | ** ** |
|                       |       |                 |       |                 |       |               |       |              |       |
| Bret W. Jorgensen          |       | 37,235               |       | 211,011              | (2)        | $                  | 19.82      |              | 7/1/2015   |   |
|                       |       |                 |       |                 |       |               |       |              |       |
| Mitch C. Hill              |       | 8,000                |       | 32,000               | (3)        | $                  | 19.82      |              | 1/10/2015  |   |
|                       |       |                 |       |                 |       |               |       |              |       |
| Marilyn U.  MacNiven-Young |       | 10,500               |       | 19,500               | (3)        | $                  | 18.00      |              | 10/17/2011 |   |
|                       |       | 2,000                |       | 8,000                | (3)        | $                  | 19.82      |              | 1/10/2015  |   |
|                       |       |                 |       |                 |       |               |       |              |       |
| Louis E. Hallman, III      |       | 4,000                |       | 36,000               | (3)        | $                  | 19.82      |              | 8/10/2015  |   |
|                       |       |                 |       |                 |       |               |       |              |       |
| Patricia R. Blank          |       | 10,500               |       | 19,500               | (3)        | $                  | 18.00      |              | 10/17/2011 |   |
|                       |       | 6,000                |       | 24,000               | (3)        | $                  | 19.82      |              | 1/10/2015  |   |

 

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(1)          The stockoption plan was terminated and all outstanding options were cancelled on August1, 2007 upon consummation of the plan of reorganization.

(2)          These optionswould have vested and become exercisable on the following vestingschedule:  15% upon each anniversary ofthe grant date on the second through sixth anniversary of the grant date, 25% uponthe achievement of certain performance targets on an equity exit or a liquidityevent.

(3)          These optionswould have vested and become exercisable on the following vestingschedule:  10% upon each anniversary ofthe grant date on the second through sixth anniversary of the grant date, 50% uponthe achievement of certain performance targets on an equity exit or a liquidityevent.

**Potential Payments on Terminationand Change of Control**

Under the terms of each executive’s employmentagreement, each executive’s employment will immediately terminate upon his orher 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. 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 upon the occurrence of the following:

(1)          Upon the executive’spermanent and total disability i.e., the executive is unable substantially toperform his or her services required by the employment agreement for three (3)consecutive months or shorter periods aggregating three (3) months during anytwelve (12) month period; provided, however that our obligation to makepayments of 12 months of compensation at the annual salary rate then in effect may be reduced by the amount which theexecutive is entitled to receive under the terms of our long-term disabilityinsurance policy.

(2)          Upon InSight’s 30 days’written notice to the executive of the termination of the executive’semployment without cause.  The employmentagreements generally define cause as the occurrence of one of the following:

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·                  the executive has been convicted or pled guilty or no contest to anycrime or offense (other than any crime or offense relating to the operation ofan automobile) which is likely to have a material adverse impact on thebusiness operations or financial or other condition of our business, or anyfelony offense;

·                  the executive has committed fraud or embezzlement;

·                  the executive has breached any of his or her obligationsunder the employment agreement and failed to cure the breach within 30 businessdays following receipt of written notice of such breach;

·                  we, after reasonable investigation, find that the executive hasviolated our material written policies and procedures, including but notnecessarily limited to, policies and procedures pertaining to harassment anddiscrimination;

·                  the executive has failed to obey a specific written direction fromthe board of directors (unless such specific written instruction represents anillegal act), provided that (i) such failure continues for a period of 30 businessdays after receipt of such specific written direction, and (ii) suchspecific written direction includes a statement that the failure to complytherewith will be a basis for termination hereunder; or

·                  any willful act or omission on the executive’s part which is materially injurious to the financialcondition or business reputation of InSight or any of its subsidiaries.

(3)          If the executive terminateshis or her employment with InSight for good reason.  The employment agreements generally define goodreason as:

·                  the relocation by InSight, without the executive’s consent, of the executive’s principal place of employment to a sitethat is more than a specified number of miles from executive’s principal residence;

·                  a reduction by InSight, without the executive’s consent, in the executive’s annual salary, duties andresponsibilities, and title, as they may exist from time to time; or

·                  a failure by InSight to comply with any material provision of theemployment agreement which is not cured within 30 days after notice of suchnoncompliance has been given by the executive,or if such failure is not capable of being cured insuch time, for which a cure shall not have been diligently initiated by InSightwithin the 30 day period.

(4)          If the executive’s employment isterminated by InSight without cause or he or she terminates his or heremployment for good reason within 12 months of a change in control.  The consummation of the exchange offer andthe plan of reorganization did not constitute a change in control under theemployment agreements with the named executive officers. A change in controlshall generally be deemed to have occurred if:

·                  any person, or any two or more persons acting as agroup, and all affiliates of such person or persons (a “Group”), who prior to such time beneficially owned less than50% of the then outstanding capital stock of InSight or Holdings, shall acquireshares of InSight’s or Holdings’ capital stockin one or more transactions or series of transactions, including bymerger, and after such transaction or transactions such person or group andaffiliates beneficially own 50% or more of InSight’s or Holdings’ outstanding capital stock, or

·                  InSight or Holdings shall sell all or substantiallyall of its assets to any Group which, immediately prior to the time of suchtransaction, beneficially owned less than 50% of the then outstanding capitalstock of InSight or Holdings.

In addition, if any employment agreement isterminated pursuant to the foregoing (1) – (4), 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-timeemployment with a new employer under such employer’s standard benefits program,all life insurance, medical, health and accident and disability plans orprograms, in which the executive was entitled to participate immediately priorto the date of termination.  If anemployment agreement is terminated with a named executive officer pursuant tothe foregoing (1) – (4) we estimate that the value of the payments and benefits would be asfollows:

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| Named Executive Officer | ** ** | **Salary** | ** ** | **Benefits (1)** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|------------|------------|-----------------------|------------|-----------|------------|
|                              |       |       |       |                  |       |      |       |
| Bret W.  Jorgensen                |       | $          | 409,000    |                  | $          | 28,265    |       | $ | 437,265 |   |
|                              |       |       |       |                  |       |      |       |
| Mitch C. Hill                     |       | 281,187    |       | 32,125                |       | 313,312   |       |
|                              |       |       |       |                  |       |      |       |
| Marilyn U.  MacNiven-Young        |       | 281,187    |       | 8,257                 |       | 289,444   |       |
|                              |       |       |       |                  |       |      |       |
| Louis E.  Hallman, III            |       | 281,187    |       | 15,514                |       | 296,701   |       |
|                              |       |       |       |                  |       |      |       |
| Patricia R.  Blank                |       | 281,187    |       | 18,220                |       | 299,407   |       |
|                                   |            |            |            |                       |            |           |            |  |  |  |

 

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(1)          For purposes of this tablewe have assumed that (i) the terminated executive would not commence receivingbenefits with a new employer until 12 months after the date of termination, and(ii) cost of benefits for the 12 month period following termination would beconsistent with the actual costs incurred during fiscal year 2007.  Benefits include all life insurance, medical,health and accident and disability plans or programs, in which the executivewas entitled to participate immediately prior to the date of termination.  We have not included in this table the valueof outstanding stock options as of June 30, 2007 because such stock optionswere out of the money as of that date and were cancelled on August 1, 2007 uponconsummation of the plan of reorganization.

**Compensation Committee Interlocks and Insider Participation**

During fiscal year2007, InSight’s compensation committee consisted of Michael N. Cannizzaro(Chairman), David W. Dupree and Messrs. Jorgensen and Segal.Mr. Cannizzaro served as our President and Chief Executive Officer fromAugust 9, 2004 to July 1, 2005. Mr. Jorgensen did notparticipate in decisions relating to his own compensation.  During fiscal year 2007, Messrs. Cannizzaroand Segal were affiliated with J.W. Childs Advisors, II, L.P. and Mr. Dupreewas affiliated with Halifax Genpar, L.P.

*Management Agreement. *We entered into a management agreement with J.W.Childs Advisors II, L.P., the general partner of J.W. Childs Equity PartnersII, L.P. and Halifax Genpar, L.P., the general partner of Halifax CapitalPartners, L.P.  Pursuant to themanagement agreement, J.W. Childs Advisors II, L.P. and Halifax Genpar, L.P.provided business, management and financial advisory services to us inconsideration of (i) an annual fee of $240,000 paid to J.W. Childs Advisors II,L.P. and (ii) an annual fee of $60,000 paid to Halifax Genpar, L.P.  We were required to reimburse such entitiesfor all travel and other out-of-pocket expenses incurred by such entities inconnection with their performance of the advisory services under the agreement.  Furthermore, we and InSight agreed toindemnify and hold harmless J.W. Childs Advisors II, L.P. and Halifax Genpar,L.P. and their affiliates, from and against any and all claims, losses, damagesand expenses arising out of the Holdings’ 2001 acquisition of InSight or theperformance by J.W. Childs Advisors II, L.P. and Halifax Genpar, L.P. of theirobligations under the management agreement.  This management agreement was terminated in connection with theconsummation of Holdings’ and InSight’s plan of reorganization.

*StockholdersAgreement*.  We, J.W.Childs Equity Partners II, L.P., JWC-InSight Co-invest LLC, Halifax CapitalPartners, L.P., Mr. Dupree, management of InSight and all other holders of ourcapital stock or stock options entered into a stockholders agreement.  Under the stockholders agreement, we and eachof our stockholders had a right of first refusal to purchase any stock proposedto be sold by all other stockholders, except J.W. Childs Equity Partners II,L.P. and JWC-InSight Co-invest LLC. Additionally, the stockholders agreement afforded: (1) stockholders,other than J.W. Childs Equity Partners II, L.P. and JWC-InSight Co-invest LLC,so-called “tag-along rights”, which gave these stockholders the right toparticipate with respect to proposed sales of our capital stock by J.W. ChildsEquity Partners II, L.P. and JWC - InSight Co-invest LLC; (2) J.W. ChildsEquity Partners II, L.P. and JWC-InSight Co-invest LLC, so-called “drag-alongrights”, which gave these stockholders the right to require other stockholdersto participate in proposed sales of a majority of our capital stock; and (3)all stockholders certain registration rights with respect to our capitalstock.  Furthermore, the stockholdersagreement contained put and call features on capital stock and stock optionsheld by InSight management which were triggered upon termination of suchindividual’s employment with InSight; however, these put and call features wereinapplicable to Mr. Jorgensen’s capital stock and stock options.  The stockholders agreement also obligated usand our stockholders to take all necessary action to

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appoint, as ourdirectors, up to eight nominees designated by J.W. Childs Equity Partners II,L.P. (as would constitute a majority of our entire board of directors) and twonominees designated by Halifax Capital Partners, L.P.  This stockholders agreement was terminated inconnection with the consummation of Holdings’ and InSight’s plan ofreorganization.

**Compensation of Directors**

Wereimburse our non-employee directors for all out-of-pocket expenses incurred inthe performance of their duties as directors. Prior to the consummation ofHoldings’ and InSight’s plan ofreorganization, we did not pay fees to directors for attendance at meetings orfor their services as members of the board of directors or committeesthereof.   Accordingly, we did not makeany compensation payments to our directors in fiscal 2007.  As a result of the appointment of the new boardmembers, the non-executive directors of Holdings will each receive an annualfee of $30,000, a fee of $2,000 for each in-person board of directors meetingand a fee of $1,000 for each telephonic board of directors meeting.  Inaddition, the chairman of the board, the chairman of the audit committee andthe chairman of the compensation committee, will each receive an additionalannual fee of $20,000, $10,000 and $5,000, respectively. Also, each audit andcompensation committee member will receive a fee of $1,000 for each in-personcommittee meeting and a fee of $500 for each telephonic committee meeting.Finally, it is also contemplated that Holdings will establish an equity planfor the non-executive directors in an amount of approximately 2% of Holdings’issued and outstanding common stock.

*The following Compensation Committee Report shall not bedeemed incorporated by reference into any filing under the Securities Act of1933, as amended, or under the Exchange Act, and shall not otherwise be deemedfiled under either of these acts.*

**Compensation Committee Report**

Thecompensation committee has reviewed and discussed the Compensation Discussionand Analysis with management and, based on such review and discussions, thecompensation committee recommended to the board of directors that theCompensation Discussion and Analysis be included in this Form 10-K.

THE COMPENSATION COMMITTEE

Keith E. Rechner(Chairman)

James A. Ovenden

Steven G. Segal

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**ITEM 12.**                      **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

Thefollowing table sets forth certain information regarding beneficial ownershipof our common stock as of August 31, 2007, by:  (i) each person orentity known to us owning beneficially 5% or more of our common stock; (ii)each member of our board of directors; (iii) each of the named executiveofficers; and (iv) all directors and executive officers (as defined by Rule3b-7), as a group.  At August 31, 2007, our outstanding securitiesconsisted of approximately 8,644,444 shares of common stock.  Beneficial ownership of the securities listedin the table has been determined in accordance with the applicable rules andregulations promulgated under the Exchange Act.

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| ** **                                                            | ** ** | **Amount and Nature** | ** ** | **Percent of**   | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------|------------|-----------------------|------------|
| ** **                                                            | ** ** | **of Beneficial**          | ** ** | **Common Stock** | ** ** |
| ** **                                                            | ** ** | **Ownership of**           | ** ** | **Beneficially**      | ** ** |
| **Names and Addresses of Beneficial Owners** | ** ** | **Common Stock (1)**  | ** ** | **Owned (1)**    | ** ** |
|                                                                  |       |                            |       |                  |       |
| James D.  Bennett(2)                                                  |       | 2,040,000                       |       | 23.6                  | %          |
| 2 Stamford  Plaza, Suite 1501                                         |       |                            |       |                  |       |
| Stamford,  Connecticut 06901                                          |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| Bennett  Restructuring Fund, L.P.(3)                                  |       | 1,206,000                       |       | 14.0                  | %          |
| 2 Stamford Plaza,  Suite 1501                                         |       |                            |       |                  |       |
| Stamford,  Connecticut 06901                                          |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| Bennett Offshore  Restructuring Fund, Inc.(4)                         |       | 730,000                         |       | 8.4                   | %          |
| 2 Stamford  Plaza, Suite 1501                                         |       |                            |       |                  |       |
| Stamford,  Connecticut 06901                                          |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| J.W. Childs  Equity Partners II, L.P.(5)                              |       | 687,641                         |       | 8.0                   | %          |
| 111 Huntington  Avenue, Suite 2900                                    |       |                            |       |                  |       |
| Boston,  Massachusetts 02199                                          |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| Morgan Asset  Management, Inc.(6)                                     |       | 1,223,200                       |       | 14.2                  | %          |
| 1100 Ridgeway  Loop Road, Suite 510                                   |       |                            |       |                  |       |
| Memphis,  Tennessee 38120                                             |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| RMK Select High  Income Fund, Inc.(7)                                 |       | 451,000                         |       | 5.2                   | %          |
| 1100 Ridgeway  Loop Road, Suite 510                                   |       |                            |       |                  |       |
| Memphis,  Tennessee 38120                                             |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| Wayne B. Lowell                                                       |       | —                          |       | —                |       |
| 26250 Enterprise  Court, Suite 100                                    |       |                            |       |                  |       |
| Lake Forest,  California 92630                                        |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| Eugene Linden(8)                                                      |       | —                          |       | —                |       |
| 2 Stamford  Plaza, Suite 1501                                         |       |                            |       |                  |       |
| Stamford,  Connecticut 06901                                          |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| Richard Nevins                                                        |       | —                          |       | —                |       |
| 26250 Enterprise  Court, Suite 100                                    |       |                            |       |                  |       |
| Lake Forest,  California 92630                                        |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| James A. Ovenden                                                      |       | —                          |       | —                |       |
| 26250 Enterprise  Court, Suite 100                                    |       |                            |       |                  |       |
| Lake Forest,  California 92630                                        |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| Keith E. Rechner                                                      |       | —                          |       | —                |       |
| 26250 Enterprise  Court, Suite 100                                    |       |                            |       |                  |       |
| Lake Forest,  California 92630                                        |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| Steven G.  Segal(9)                                                   |       | —                          |       | —                |       |
| 111 Huntington  Avenue, Suite 2900                                    |       |                            |       |                  |       |
| Boston,  Massachusetts 02199                                          |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| Bret W.  Jorgensen                                                    |       | —                          |       | —                |       |
| 26250 Enterprise  Court, Suite 100                                    |       |                            |       |                  |       |
| Lake Forest, California  92630                                        |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| Mitch C. Hill                                                         |       | —                          |       | —                |       |
| 26250 Enterprise  Court, Suite 100                                    |       |                            |       |                  |       |
| Lake Forest, California  92630                                        |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| Marilyn U.  MacNiven-Young                                            |       | —                          |       | —                |       |
| 26250 Enterprise  Court, Suite 100                                    |       |                            |       |                  |       |
| Lake Forest, California  92630                                        |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| Louis E.  Hallman, III                                                |       | —                          |       | —                |       |
| 26250 Enterprise  Court, Suite 100                                    |       |                            |       |                  |       |
| Lake Forest, California  92630                                        |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| Patricia R.  Blank                                                    |       | —                          |       | —                |       |
| 26250 Enterprise  Court, Suite 100                                    |       |                            |       |                  |       |
| Lake Forest, California  92630                                        |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| All executive  officers and directors, as a group (12 persons)        |       | —                          |       | —                |       |

 

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(1)   Forpurposes of this table, a person is deemed to have “beneficial ownership” ofany security that such person has the right to acquire within 60 daysafter August 31, 2007.

(2)          Includes 1,206,000 shares of common stockowned directly by Bennett Restructuring Fund, L.P., 104,000 shares of commonstock owned directly by affiliate BRF High Value, L.P. and 730,000 shares ofcommon stock owned directly by affiliate Bennett Offshore Restructuring Fund,Inc.  The general partner of BennettRestructuring Fund, L.P. and BRF High Value, L.P. is Restructuring CapitalAssociates, L.P., a Delaware limited partnership, and the general partner of RestructuringCapital Associates, L.P. is Bennett Capital Corporation, a Delawarecorporation, of which James D. Bennett is President and sole stockholder.  Mr. Bennett, Bennett Capital Corporation andRestructuring Capital Associates, L.P. may be deemed to beneficially own anaggregate of 1,310,000 shares of common stock held by Bennett RestructuringFund, L.P. and BRF High Value, L.P. together. The investment manager of Bennett Offshore Restructuring Fund, Inc. isBennett Offshore Investment Corporation, a Connecticut corporation, of whichJames D. Bennett is the President and, together with the BT Trust U/D12/9/2004, the owner.  Mr. Bennett, BTTrust U/D 12/9/2004 and Bennett Offshore Investment Corporation may be deemedto beneficially own the 730,000 shares of common stock held by Bennett OffshoreRestructuring Fund, Inc.  Each of Mr.Bennett, BT Trust, Restructuring Capital Associates, L.P., Bennett CapitalCorporation and Bennett Offshore Investment Corporation specifically disclaimbeneficial ownership of the shares of common stock deemed to be beneficiallyowned except to the extent of his or its pecuniary interest therein.

(3)          Includes 1,206,000 shares of common stockowned directly by Bennett Restructuring Fund, L.P. The general partner ofBennett Restructuring Fund, L.P. is Restructuring Capital Associates, L.P., aDelaware limited partnership, and the general partner of Restructuring CapitalAssociates, L.P. is Bennett Capital Corporation, a Delaware corporation, ofwhich James D. Bennett is President and sole stockholder.  Mr. Bennett, Bennett Capital Corporation andRestructuring Capital Associates, L.P. may be deemed to beneficially own an aggregate of 1,206,000 shares ofcommon stock held by Bennett Restructuring Fund, L.P.  Each of Mr. Bennett, Restructuring CapitalAssociates, L.P., and Bennett Capital Corporation specifically disclaimbeneficial ownership of the shares of common stock deemed to be beneficiallyowned except to the extent of his or its pecuniary interest therein.

(4)          Includes 730,000 shares of common stockowned directly by Bennett Offshore Restructuring Fund, Inc.  The investment manager of Bennett OffshoreRestructuring Fund, Inc. is Bennett Offshore Investment Corporation, aConnecticut corporation, of which James D. Bennett is the President and,together with the BT Trust U/D 12/9/2004, the owner.  Mr. Bennett, BT Trust U/D 12/9/2004 andBennett Offshore Investment Corporation may be deemed to beneficially own the730,000 shares of common stock held by Bennett Offshore Restructuring Fund,Inc.  Each of Mr. Bennett, BT Trust U/D12/9/2004 and Bennett Offshore Investment Corporation specifically disclaimbeneficial ownership of the shares of common stock deemed to be beneficiallyowned except to the extent of his or its pecuniary interest therein.

 (5)       Includes 634,130 shares of our common stockowned directly by J.W. Childs Equity Partners II, L.P. and53,511 shares of our common stock owned directly by JWC-InSight Co-investLLC, an affiliate of J.W. Childs Equity Partners II, L.P. The general partnerof J.W. Childs Equity Partners II, L.P. is J.W. Childs Advisors II,L.P., a Delaware limited partnership. The general partner of J.W. ChildsAdvisors II, L.P. is J.W. Childs Associates, L.P., a Delaware limitedpartnership. 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 tobeneficially own the 687,641 shares of our common stock held by J.W. ChildsEquity Partners II, L.P. and JWC-InSight Co-invest LLC. John W. Childs,Glenn A. Hopkins, Adam L. Suttin, William E. Watts, and David Fiorentino, aswell as Steven G. Segal (as indicated in footnote 9), share voting andinvestment control over, and therefore may be deemed to beneficially own, theshares of common stock held by these entities.

(6)           Includes 451,000 sharesof common stock owned directly by RMK Select High Income Fund, Inc., 160,000shares of common stock owned directly by RMK High Income Fund, Inc., 189,000shares of common stock owned directly by RMK Strategic Income Fund, Inc.,202,200 shares of common stock owned directly by RMK Advantage Income Fund,Inc., and 221,000 shares of common stock held by RMK Multi-Sector High IncomeFund, Inc. Morgan Asset Management, Inc. is the manager/investor of theforegoing fund entities.

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(7)          Includes 451,000 sharesof common stock owned directly by RMK Select High Income Fund, Inc. MorganAsset Management, Inc. is the manager/investor of RMK Select High Income Fund,Inc.

(8)          As the Chief Investment Strategist ofBennett Management Corporation, an affiliate of James D. Bennett, Mr. Lindenmay be deemed to beneficially own the shares of common stock beneficially heldby Mr. Bennett and his affiliated entities. Mr. Linden disclaims beneficial ownership of such shares.

(9)          As a Special LimitedPartner of J.W. Childs Associates, L.P., which manages J.W. Childs EquityPartners II, L.P., and a member of JWC-InSight Co-invest LLC,Mr. Segal may be deemed to beneficially own the 634,130 shares of ourcommon stock owned by J.W. Childs Equity Partners II, L.P. and the53,511 shares of our common stock held directly by JWC-InSight Co-investLLC. Mr. Segal disclaims beneficial ownership of such shares.

**EquityCompensation Plan Information**

Thefollowing table provides information as of June 30, 2007, with respect tocompensation plans under which our common stock is authorized forissuance.  These compensation plansinclude:  (i) the 2001 Stock Option Plan;and (ii) stock options granted pursuant to stock option agreements.  Our stockholders approved the 2001 StockOption Plan and the issuance of options to purchase up to 666,236 shares of ourcommon stock, pursuant to individual stock option agreements.
| ** **                                          | ** ** | ** **                                     | ** ** | ** **                      | ** ** | **Number of Shares**              | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------|------------|---------------------------------------------|------------|
| ** **                                          | ** ** | ** **                                     | ** ** | ** **                      | ** ** | **Remaining Available for**       | ** ** |
| ** **                                          | ** ** | ** **                                     | ** ** | ** **                      | ** ** | **Future Issuance Under**         | ** ** |
| ** **                                          | ** ** | **Number of Shares to be** | ** ** | **Weighted Average**       | ** ** | **Equity Compensation**                | ** ** |
| ** **                                          | ** ** | **Issued Upon Exercise of**     | ** ** | **Exercise Price of** | ** ** | **Plans (Excluding Shares**       | ** ** |
| **Plan Category**                              | ** ** | **Outstanding Options**                   | ** ** | **Outstanding Options**    | ** ** | **Reflected in Column (a))** | ** ** |
| ** **                                          | ** ** | **(a)**                                        | ** ** | **(b)**                         | ** ** | **(c)**                                     | ** ** |
|                                                |       |                                           |       |                            |       |                                        |       |
| Equity compensation  plans approved by stockholders |       | 789,726                                        |       | $                               | 17.68      |                                        | 175,500    |   |
|                                                     |            |                                                |            |                                 |            |                                             |            |  |

 

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(1)          The stock option planwas terminated and all outstanding options were cancelled on August 1, 2007upon consummation of the plan of reorganization.

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

**Management Agreement**

We entered into a management agreement with J.W. Childs Advisors II,L.P., the general partner of J.W. Childs Equity Partners II, L.P. and HalifaxGenpar, L.P., the general partner of Halifax Capital Partners, L.P.  Pursuant to the management agreement, J.W.Childs Advisors II, L.P. and Halifax Genpar, L.P. provided business, managementand financial advisory services to us in consideration of (i) an annual fee of$240,000 paid to J.W. Childs Advisors II, L.P. and (ii) an annual fee of$60,000 paid to Halifax Genpar, L.P. We were required to reimburse such entities for all travel and otherout-of-pocket expenses incurred by such entities in connection with theirperformance of the advisory services under the agreement.  Furthermore, we and InSight agreed toindemnify and hold harmless J.W. Childs Advisors II, L.P. and Halifax Genpar,L.P. and their affiliates, from and against any and all claims, losses, damagesand expenses arising out of Holdings’ 2001 acquisition of InSight or the performance by J.W. ChildsAdvisors II, L.P. and Halifax Genpar, L.P. of their obligations under themanagement agreement.  This managementagreement was terminated in connection with the consummation of Holdings’ and InSight’s plan of reorganization.

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**StockholdersAgreement**

We, J.W. ChildsEquity Partners II, L.P., JWC-InSight Co-invest LLC, Halifax Capital Partners,L.P., Mr. Dupree, management of InSight and all other holders of our capitalstock or stock options entered into a stockholders agreement.  Under the stockholders agreement, we and eachof our stockholders had a right of first refusal to purchase any stock proposedto be sold by all other stockholders, except J.W. Childs Equity Partners II,L.P. and JWC-InSight Co-invest LLC. Additionally, the stockholders agreement afforded: (1) stockholders,other than J.W. Childs Equity Partners II, L.P. and JWC-InSight Co-invest LLC,so-called “tag-along rights”, which gave these stockholders the right toparticipate with respect to proposed sales of our capital stock by J.W. ChildsEquity Partners II, L.P. and JWC - InSight Co-invest LLC; (2) J.W. ChildsEquity Partners II, L.P. and JWC-InSight Co-invest LLC, so-called “drag-alongrights”, which gave these stockholders the right to require other stockholdersto participate in proposed sales of a majority of our capital stock; and (3)all stockholders certain registration rights with respect to our capitalstock.  Furthermore, the stockholdersagreement contained put and call features on capital stock and stock optionsheld by InSight management which were triggered upon termination of suchindividual’semployment with InSight; however, these put and call features were inapplicableto Mr. Jorgensen’s capital stock and stock options.  The stockholders agreement also obligated 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. This stockholders agreement was terminated in connection with theconsummation of Holdings’ andInSight’s plan of reorganization.

**Family-MemberRelationship**

Patricia K.Kincaid, M.D. is a sister-in-law of Donald F. Hankus, InSight’s Executive Vice President and ChiefInformation Officer, and a principal or partner of West Rad Medical Group, Inc.(“WRMG”), a professional radiology medical group.  During the years ended June 30, 2007 and2006, we paid WRMG approximately $0.4 million and $0.5 million, respectively,in connection with its provision of certain professional services to threefixed-site centers in California.  Inaddition, an affiliated company of WRMG’shas economic interest in the joint venture that owns one of these fixed-sitecenters.  WRMG’s provision of professional services to us began more than twoyears prior to our employment of Mr. Hankus.

**Policies and Procedures Regarding Related Persons**

Wehave a written policy that requires all employees to avoid any activity thatconflicts or appears to conflict with our interest. This policy extends to thefamily members of our employees. Each employee is instructed to report anyactual or potential conflict of interest to their immediate supervisor.Conflicts of interest are only permitted upon the prior written consent of ourgeneral counsel. Conflicts of interest that would involve an employee takingfor himself or herself an opportunity discovered in connection with theiremployment require the written consent of our board of directors. This policyis part of our Code of Ethical Conduct. Moreover, at least annually eachdirector and executive officer completes a detailed questionnaire regardingrelationships or arrangements that require disclosure under the SEC’s rules and regulations.

The priormanagement and stockholders agreements that were terminated upon consummationof the plan of reorganization were not subject to this policy. The familyrelationship involving Mr. Hankus was disclosed in 2006 through our annualquestionnaire process and our general counsel granted permission.

**Director Independence**

For thefiscal year ended June 30, 2007, none of our directors was independent.  Mr. Jorgensen was the President and ChiefExecutive Officer of Holdings and InSight, and the remaining six directors(Michael N. Cannizzaro, Kenneth M. Doyle, David W. Dupree, Steven G. Segal,Mark J. Tricolli and Edward D. Yun) were employees and or affiliates of twostockholders who beneficially owned substantially all of Holdings’ outstandingcommon stock.

Pursuantto the plan of reorganization, the boards of directors of Holdings and InSightwere reconfigured, and five of the directors of each board were designated byan ad hoc committee of holders of senior subordinated notes

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(Messrs.Linden, Lowell, Nevins, Ovenden and Rechner), one was designated by the holdersof Holdings’ common stock prior to the effective date (Mr. Segal), and Mr.Jorgensen remained a director.

Holdings’ common stock does not trade on anynational securities exchange or any inter-dealer quotation system which hasrequirements as to the independence of directors.  In accordance with the rules of the SEC, thefollowing statements regarding director independence are based on therequirements of the NASDAQ Stock Market. Based on these independence requirements, we believe that our directorsare independent, except for Mr. Jorgensen, our President and Chief ExecutiveOfficer, and Mr. Linden.  Mr. Linden isthe Chief InvestmentStrategist of Bennett Management Corporation, which is an affiliate of James D.Bennett, who through affiliates, is the largest beneficial holder of Holdings’common stock.  See Item 12. “SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.”  As noted above, Mr. Segal would not have qualified as anindependent director as of June 30, 2007 because he is a Special LimitedPartner of J.W. Childs Associates, L.P. However, as a result of theconsummation of the plan of reorganization, the management services agreementwith J.W. Childs Advisors II, L.P. was terminated, and J.W. Childs EquityPartners II, L.P.’s beneficial ownership of Holdings’ common stock was reducedfrom approximately 79.5% to 8.0%.

**ITEM 14.       PRINCIPALACCOUNTING FEES AND SERVICES**

***Independent Registered Public AccountingFirm***

Thefollowing table presents information about fees that PricewaterhouseCoopers LLPcharged us (1) to audit our annual consolidated financial statements for theyears ended June 30, 2007 and 2006, and (2) for other services rendered inthose years.
|                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |
| Audit Fees (1)      |       | $        | 720,000    |     | $          | 566,000 |   |
|                |       |     |       |     |       |
| Audit Related  Fees |       | —   |       | —   |       |
|                |       |     |       |     |       |
| Tax Fees (2)        |       | 206,884  |       | 110,000  |       |
|                |       |     |       |     |       |
| Subtotal            |       | $        | 926,884    |     | $          | 676,000 |   |
|                |       |     |       |     |       |
| All Other Fees      |       | —   |       | —   |       |
|                |       |     |       |     |       |
| Total Fees          |       | $        | 926,884    |     | $          | 676,000 |   |

 

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(1)          Audit Fees – fees for auditing our annualconsolidated financial statements, reviewing the condensed consolidatedfinancial statements included in our quarterly reports on Form 10-Q, theoffering memorandum and registration statement related to the exchange offerand other SEC filings.

(2)       TaxFees – fees for reviewing federal, state, and local income and franchise taxreturns, tax research and other tax planning services.

InSight’s audit committee hadimplemented a policy that required the audit committee’s pre-approvalfor all audit and non-audit services performed by our independent registeredpublic accounting firm.  Consistent withthis policy, for the years ended June 30, 2007 and 2006 all audit and non-auditservices initiated by PricewaterhouseCoopers LLP were pre-approved by InSight’s auditcommittee.  Holdings’ recentlyconstituted audit committee implemented a similar policy.

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**PARTIV**

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

ITEM 15 (a) (1).  FINANCIAL STATEMENTS

Included in PartII of this report:

Report of IndependentRegistered Public Accounting Firm

ConsolidatedBalance Sheets

ConsolidatedStatements of Operations

ConsolidatedStatements of Stockholders’Equity

ConsolidatedStatements of Cash Flows

Notes to ConsolidatedFinancial Statements

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

Schedule II -Valuation and Qualifying Accounts

All otherschedules have been omitted because they are either not required or notapplicable, or the information is presented in the consolidated financialstatements or notes thereto.

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ITEM 15 (a)(3).    EXHIBITS
| EXHIBIT NUMBER | ** ** | **DESCRIPTION AND REFERENCES**                                                                                                                                                                                                                                                                                                                                                                                                                                |
|----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1            |       | Second Amended Joint Prepackaged Plan of  Reorganization of InSight Health Services Holdings Corp. (the “Company”), et al. dated May 29, 2007, filed herewith.                                                                                                                                                                                                                                                                                      |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 2.2            |       | Amended Plan Supplement of the Company, et al. dated  July 7, 2007, filed herewith.                                                                                                                                                                                                                                                                                                                                                                           |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.1            |       | Amended and Restated Certificate of Incorporation of  the Company, filed herewith.                                                                                                                                                                                                                                                                                                                                                                            |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.2            |       | Second Amended and Restated Bylaws of the Company,  filed herewith.                                                                                                                                                                                                                                                                                                                                                                                           |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *4.1           |       | Indenture, dated September 22, 2005, by and  among InSight Health Services Corp. (“InSight”), the  Company, the subsidiary guarantors (named therein) and U.S. Bank  National Association, (“the  Trustee”), with respect to  Senior Secured Floating Rate Notes due 2011, previously filed and  incorporated herein by reference from InSight’s Registration Statement on Form S-4, filed on  October 28, 2005. |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *4..2          |       | First Supplemental Indenture, dated as of May 18,  2006, to the Indenture dated September 22, 2005, previously filed and  incorporated herein by reference from the Company’s Annual Report on Form 10-K, filed  on September 27, 2006.                                                                                                                                                                                                                  |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *4..3          |       | Second Supplemental Indenture, dated as of May 29,  2007, to the Indenture dated September 22, 2005, previously filed and  incorporated herein by reference from the Company’s Current Report on Form 8-K, filed  on June 4, 2007.                                                                                                                                                                                                                       |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.4            |       | Third Supplemental Indenture, dated as of July 9,  2007, to the Indenture dated September 22, 2005, filed herewith.                                                                                                                                                                                                                                                                                                                                           |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *4.5           |       | Security Agreement, dated September 22, 2005,  by and among the Loan Parties (as defined therein) and U.S. Bank  National Association, as Collateral Agent, previously filed and incorporated  herein by reference from InSight’s Registration Statement on Form S-4, filed on  October 28, 2005.                                                                                                                                    |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *4.6           |       | Pledge Agreement, dated September 22, 2005, by  and among the Loan Parties (as defined therein) and U.S. Bank National  Association, as Collateral Agent, previously filed and incorporated herein by  reference from InSight’s  Registration Statement on Form S-4, filed on October 28, 2005.                                                                                                                                      |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *4.7           |       | Collateral Agency Agreement, dated  September 22, 2005, among the Loan Parties (as defined therein) and  U.S. Bank National Association, as Trustee and Collateral Agent,  previously filed and incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on October 28, 2005.                                                                                                                      |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4..8           |       | Registration Rights Agreement, dated as of August 1,  2007, by and among the Company and certain holders of the Company’s common stock, filed herewith.                                                                                                                                                                                                                                                                                                  |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4..9           |       | Registration Rights Agreement, dated as of July 9,  2007, by and among InSight, the Company, the Subsidiary Guarantors (named  therein) and the Purchasers (named therein), filed herewith.                                                                                                                                                                                                                                                                   |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *10.1          |       | Second Amended and Restated Loan and Security  Agreement, dated August 31, 2007, by and among InSight’s subsidiaries listed therein, the  lenders named therein and Bank of America, N.A. as collateral and  administrative agent, previously filed and incorporated herein by reference  from the Company’s Current  Report on Form 8-K, filed on August 7, 2007.                                                                                  |

 

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| *10.2  |   | Executive Employment Agreement, dated July 1,  2005, among InSight, the Company and Bret W. Jorgensen, previously filed and  incorporated herein by reference from the Company’s Current Report on Form 8-K,  filed on July 8, 2005.            |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                |
| *10.3  |   | Executive Employment Agreement, dated  October 22, 2004, among InSight, the Company and Patricia R. Blank,  previously filed and incorporated herein by reference from the Company’s Current Report on Form 8-K,  filed on January 26, 2005.    |
|   |   |                                                                                                                                                                                                                                                                |
| *10.4  |   | Executive Employment Agreement, dated  January 10, 2005, among InSight, the Company and Mitch C. Hill,  previously filed and incorporated herein by reference from the Company’s Current Report on Form 8-K,  filed on January 14, 2005.        |
|   |   |                                                                                                                                                                                                                                                                |
| *10.5  |   | Executive Employment Agreement, dated  August 10, 2005, among InSight, the Company and Louis E. Hallman,  previously filed and incorporated herein by reference from the Company’s Current Report on Form 8-K,  filed on August 15, 2005.       |
|   |   |                                                                                                                                                                                                                                                                |
| *10.6  |   | 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. |
|   |   |                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                |
| *10.7  |   | Executive Employment Agreement, dated August 10,  2005, among InSight, the Company and Donald F. Hankus, previously filed and  incorporated herein by reference from the Company’s Current Report on Form  8-K, filed on September 30, 2005.                   |
|   |   |                                                                                                                                                                                                                                                                |
| *10.8  |   | Form of Amended and Restated Indemnification  Agreement, previously filed and incorporated herein by reference from the  Company’s Annual Report on Form 10-K, filed on September 22, 2005.                                                          |
|   |   |                                                                                                                                                                                                                                                                |
| 10.9   |   | Form of the Company’s and InSight’s Indemnification  Agreement, filed herewith.                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                |
| 21.1   |   | Subsidiaries of Company, filed herewith.                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                |
| 31.1   |   | Certification of Bret W. Jorgensen, the Company’s Chief Executive Officer, pursuant  to Rule 15d-14 of the Securities Exchange Act of 1934, filed herewith.                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                |
| 31.2   |   | Certification of Mitch C. Hill, the Company’s Chief Financial Officer, pursuant  to Rule 15d-14 of the Securities Exchange Act of 1934, filed herewith.                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                |
| 32.1   |   | Certification of Bret W. Jorgensen, 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 Mitch C. Hill, 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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| * Previously filed |
|--------------------|
| 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. |

 

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|   | INSIGHT HEALTH SERVICES HOLDINGS CORP. |
|--------|----------------------------------------|
|   |                                   |   |   |
|   | By                                     | /s/ Bret W. Jorgensen |   |
|   | Bret W. Jorgensen, President and       |   |
|   | Chief Executive Officer                |   |
|   |                                   |   |
|   | Date: September 21, 2007               |   |

 

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/ Bret W.  Jorgensen |                           | President                 | September 21 ,  2007 |
| Bret W.  Jorgensen     | and Chief  Executive Officer   |                      |
|                   | and Director                   |                      |
|                   | (Principal  Executive Officer) |                      |
|                   |                           |                      |
| /s/ Mitch C.  Hill     |                           | Executive Vice  President | September 21,  2007  |
| Mitch C. Hill          | and Chief  Financial Officer   |                      |
|                   | (Principal  Financial and      |                      |
|                   | Accounting  Officer)           |                      |
|                   |                           |                      |
| /s/ Wayne B.  Lowell   |                           | Chairman of the  Board    | September 21,  2007  |
| Wayne B. Lowell        | and Director                   |                      |
|                   |                           |                      |
| /s/ Eugene  Linden     |                           | Director                  | September 21,  2007  |
| Eugene Linden          |                           |                      |
|                   |                           |                      |
| /s/ Richard  Nevins    |                           | Director                  | September 21,  2007  |
| Richard Nevins         |                           |                      |
|                   |                           |                      |
| /s/ James A.  Ovenden  |                           | Director                  | September 21,  2007  |
| James A. Ovenden       |                           |                      |
|                   |                           |                      |
| /s/ Keith E.  Rechner  |                           | Director                  | September 21,  2007  |
| Keith E. Rechner       |                           |                      |
|                   |                           |                      |
| /s/ Steven G.  Segal   |                           | Director                  | September 21,  2007  |
| Steven G. Segal        |                           |                      |
|                        |                                |                           |                      |          |            |        |  |  |  |  |

 

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**SUPPLEMENTALINFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TOSECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTEREDSECURITIES PURSUANT TO SECTION 12 OF THE ACT.**

No annual reportto security holders of InSight Health Services Holdings Corp. or proxystatement, form of proxy or other proxy soliciting material has been sent to securityholders relating to fiscal year 2007.

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**SCHEDULE II**

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**VALUATIONAND QUALIFYING ACCOUNTS**

**FOR THEYEARS ENDED JUNE 30, 2007, 2006, AND 2005**

(amounts in thousands)

 
| ** **                             | ** ** | **Balance at**   | ** ** | ** **          | ** ** | ** **          | ** ** | ** ** | ** ** | **Balance at** | ** ** |
|----------------------------------------|------------|-----------------------|------------|---------------------|------------|---------------------|------------|------------|------------|---------------------|------------|
| ** **                             | ** ** | **Beginning of** | ** ** | **Charges to** | ** ** | **Charges to** | ** ** | ** ** | ** ** | **End of**     | ** ** |
| ** **                             | ** ** | **Year**              | ** ** | **Expenses**        | ** ** | **Revenues**        | ** ** | **Other**  | ** ** | **Year**            | ** ** |
| June 30, 2005:                         |       |                  |       |                |       |                |       |       |       |                |       |
| Allowance for  doubtful accounts       |       | $                     | 8,097      |                | $          | 5,723               |       | $          | —     |                | $          | (4,933 | )(A) | $ | 8,887 |   |
| Allowance for  contractual adjustments |       | 37,209                |       | —              |       | 194,928             |       | (202,725   | )(B)       | 29,412              |       |
|                                   |       | $                     | 45,306     |                | $          | 5,723               |       | $          | 194,928    |                | $          | (207,658 | ) | $ | 38,299 |   |
|                                   |       |                  |       |                |       |                |       |       |       |                |       |
| June 30, 2006:                         |       |                  |       |                |       |                |       |       |       |                |       |
| Allowance for  doubtful accounts       |       | $                     | 8,887      |                | $          | 5,351               |       | $          | —     |                | $          | (4,450 | )(A) | $ | 9,788 |   |
| Allowance for  contractual adjustments |       | 29,412                |       | —              |       | 183,751             |       | (190,451   | )(B)       | 22,712              |       |
|                                   |       | $                     | 38,299     |                | $          | 5,351               |       | $          | 183,751    |                | $          | (194,901 | ) | $ | 32,500 |   |
|                                   |       |                  |       |                |       |                |       |       |       |                |       |
| June 30, 2007:                         |       |                  |       |                |       |                |       |       |       |                |       |
| Allowance for  doubtful accounts       |       | $                     | 9,788      |                | $          | 5,643               |       | $          | —     |                | $          | (2,783 | )(A) | $ | 12,648 |   |
| Allowance for  contractual adjustments |       | 22,712                |       | —              |       | 175,085             |       | (176,343   | )(B)       | 21,454              |       |
|                                   |       | $                     | 32,500     |                | $          | 5,643               |       | $          | 175,085    |                | $          | (179,126 | ) | $ | 34,102 |   |

 

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| (A) Write-off of  uncollectible accounts.                                                                              |   |
|------------------------------------------------------------------------------------------------------------------------|--------|
| (B) Write-off of  contractual adjustments, representing the difference between our charge for a  procedure and what we |   |
| receive from  payors.                                                                                                  |   |

 

108

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EXHIBIT INDEX
| EXHIBIT NUMBER | ** ** | **DESCRIPTION AND REFERENCES**                                                                                                                                                                                                                                                                                                                                                                                                                               |
|----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1            |       | Second Amended Joint Prepackaged Plan of  Reorganization of InSight Health Services Holdings Corp. (the “Company”), et al. dated May 29, 2007, filed herewith.                                                                                                                                                                                                                                                                                     |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.2            |       | Amended Plan Supplement of the Company, et al. dated  July 7, 2007, filed herewith.                                                                                                                                                                                                                                                                                                                                                                          |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.1            |       | Amended and Restated Certificate of Incorporation of  the Company, filed herewith.                                                                                                                                                                                                                                                                                                                                                                           |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.2            |       | Second Amended and Restated Bylaws of the Company,  filed herewith.                                                                                                                                                                                                                                                                                                                                                                                          |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *4.1           |       | Indenture, dated September 22, 2005, by and  among InSight Health Services Corp. (“InSight”), the  Company, the subsidiary guarantors (named therein) and U.S. Bank  National Association, (“the Trustee”), with respect to Senior Secured  Floating Rate Notes due 2011, previously filed and incorporated herein by  reference from InSight’s  Registration Statement on Form S-4, filed on October 28, 2005. |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *4..2          |       | First Supplemental Indenture, dated as of May 18,  2006, to the Indenture dated September 22, 2005, previously filed and  incorporated herein by reference from the Company’s Annual Report on Form 10-K, filed  on September 27, 2006.                                                                                                                                                                                                                 |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *4..3          |       | Second Supplemental Indenture, dated as of May 29,  2007, to the Indenture dated September 22, 2005, previously filed and  incorporated herein by reference from the Company’s Current Report on Form 8-K, filed  on June 4, 2007.                                                                                                                                                                                                                      |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.4            |       | Third Supplemental Indenture, dated as of July 9,  2007, to the Indenture dated September 22, 2005, filed herewith.                                                                                                                                                                                                                                                                                                                                          |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *4.5           |       | Security Agreement, dated September 22, 2005,  by and among the Loan Parties (as defined therein) and U.S. Bank  National Association, as Collateral Agent, previously filed and incorporated  herein by reference from InSight’s Registration Statement on Form S-4, filed on  October 28, 2005.                                                                                                                                   |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *4.6           |       | Pledge Agreement, dated September 22, 2005, by  and among the Loan Parties (as defined therein) and U.S. Bank National  Association, as Collateral Agent, previously filed and incorporated herein by  reference from InSight’s  Registration Statement on Form S-4, filed on October 28, 2005.                                                                                                                                     |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *4.7           |       | Collateral Agency Agreement, dated  September 22, 2005, among the Loan Parties (as defined therein) and  U.S. Bank National Association, as Trustee and Collateral Agent,  previously filed and incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on October 28, 2005.                                                                                                                     |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4..8           |       | Registration Rights Agreement, dated as of August 1,  2007, by and among the Company and certain holders of the Company’s common stock, filed herewith.                                                                                                                                                                                                                                                                                                 |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4..9           |       | Registration Rights Agreement, dated as of July 9,  2007, by and among InSight, the Company, the Subsidiary Guarantors (named  therein) and the Purchasers (named therein), filed herewith.                                                                                                                                                                                                                                                                  |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.1          |       | Second Amended and Restated Loan and Security  Agreement, dated August 31, 2007, by and among InSight’s subsidiaries listed therein, the  lenders named therein and Bank of America, N.A. as collateral and  administrative agent, previously filed and incorporated herein by reference  from the Company’s Current  Report on Form 8-K, filed on August 7, 2007.                                                                                 |

 

109

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| *10.2  |   | Executive Employment Agreement, dated July 1,  2005, among InSight, the Company and Bret W. Jorgensen, previously filed and  incorporated herein by reference from the Company’s Current Report on Form 8-K,  filed on July 8, 2005.            |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                |
| *10.3  |   | Executive Employment Agreement, dated  October 22, 2004, among InSight, the Company and Patricia R. Blank,  previously filed and incorporated herein by reference from the Company’s Current Report on Form 8-K,  filed on January 26, 2005.    |
|   |   |                                                                                                                                                                                                                                                                |
| *10.4  |   | Executive Employment Agreement, dated  January 10, 2005, among InSight, the Company and Mitch C. Hill,  previously filed and incorporated herein by reference from the Company’s Current Report on Form 8-K,  filed on January 14, 2005.        |
|   |   |                                                                                                                                                                                                                                                                |
| *10.5  |   | Executive Employment Agreement, dated  August 10, 2005, among InSight, the Company and Louis E. Hallman,  previously filed and incorporated herein by reference from the Company’s Current Report on Form 8-K,  filed on August 15, 2005.       |
|   |   |                                                                                                                                                                                                                                                                |
| *10.6  |   | 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. |
|   |   |                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                |
| *10.7  |   | Executive Employment Agreement, dated August 10,  2005, among InSight, the Company and Donald F. Hankus, previously filed and  incorporated herein by reference from the Company’s Current Report on Form  8-K, filed on September 30, 2005.                   |
|   |   |                                                                                                                                                                                                                                                                |
| *10.8  |   | Form of Amended and Restated Indemnification  Agreement, previously filed and incorporated herein by reference from the  Company’s Annual Report on Form 10-K, filed on September 22, 2005.                                                          |
|   |   |                                                                                                                                                                                                                                                                |
| 10.9   |   | Form of the Company’s and InSight’s Indemnification  Agreement, filed herewith.                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                |
| 21.1   |   | Subsidiaries of Company, filed herewith.                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                |
| 31.1   |   | Certification of Bret W. Jorgensen, the Company’s Chief Executive Officer, pursuant  to Rule 15d-14 of the Securities Exchange Act of 1934, filed herewith.                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                |
| 31.2   |   | Certification of Mitch C. Hill, the Company’s Chief Financial Officer, pursuant  to Rule 15d-14 of the Securities Exchange Act of 1934, filed herewith                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                |
| 32.1   |   | Certification of Bret W. Jorgensen, 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 Mitch C. Hill, 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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* Previously filed

110

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