**Tableof Contents**

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**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

** **

**FORM 10-K**

** **

**(Mark One)**

**x****ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

** **

**FOR THEFISCAL YEAR ENDED JUNE 30, 2008**

** **

**OR**

** **

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

** **

**FOR THE TRANSITION PERIODFROM          TO**

** **

**COMMISSIONFILE NUMBER 333-75984**

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**INSIGHTHEALTH SERVICES HOLDINGS CORP.**

(Exact name of Registrant asspecified in its charter)

 

| **DELAWARE**                 | ** ** | **04-3570028**   |
|------------------------------|------------|------------------|
| (State or other jurisdiction |       | (I.R.S. Employer |
| of incorporation or          |       | Identification   |
| organization)                |       | No.)             |

 

**26250ENTERPRISE COURT, SUITE 100, LAKE FOREST, CA 92630**

(Address of principalexecutive offices)                                       (Zipcode)

 

**(949) 282-6000**

(Registrant’s telephonenumber including area code)

 

**SECURITIESREGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE**

**SECURITIES REGISTERED PURSUANT TOSECTION 12(g) OF THE ACT: NONE**

(Title of Class)

 

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

 

Indicateby check mark if the Registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.  Yes  o   No  x

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes  x   No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein and will not be contained, to the bestof the Registrant’s knowledge, in definitive proxy or informative statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  x

 

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

 
| Large accelerated filer  o | Accelerated filer  o | Non-accelerated filer  o | Smaller reporting company  x |
|--------------------------------------|--------------------------------|------------------------------------|----------------------------------------|

 

Indicateby check mark whether the Registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes  o   No  x

 

The aggregate market value of the voting and non-voting common stockheld by non-affiliates of the Registrant as of September 15, 2008 (basedon the price at which the common stock was last sold on the Over-The-CounterBulletin Board on the last business day of the Registrant’s most recentcompleted second fiscal quarter) was $17,750,409.

 

Indicate by check mark whether the Registrant has filed all documentsand reports required to be filed by Section 12, 13 or 15(d) of theSecurities Exchange Act of 1934 subsequent to the distribution of securitiesunder a plan confirmed by a court.  Yes  x   No  o

 

The number of shares outstanding of the Registrant’s common stock as of September 15,2008 was 8,644,444.

 

 

 

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**INSIGHTHEALTH SERVICES HOLDINGS CORP.**

**ANNUALREPORT ON FORM 10-K**

**TABLE OF CONTENTS**

** **
| ** **        | ** **                                                                                                         | **Page**   |
|-------------------|--------------------------------------------------------------------------------------------------------------------|------------|
| **PART I**   | ** **                                                                                                         | ** ** |
| ** **        | ** **                                                                                                         | ** ** |
| Item 1.           | Business                                                                                                           | 3          |
| Item 1A.          | Risk  Factors                                                                                                      | 14         |
| Item 2.           | Properties                                                                                                         | 23         |
| Item 3.           | Legal Proceedings                                                                                                  | 23         |
| Item 4.           | Submission of Matters to a Vote of  Security Holders                                                               | 23         |
|              |                                                                                                               |       |
| **PART II**  | ** **                                                                                                         | ** ** |
| ** **        | ** **                                                                                                         | ** ** |
| Item 5.           | Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities | 24         |
| Item 6.           | Selected Financial Data                                                                                            | 24         |
| Item 7.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        | 25         |
| Item 7A.          | Quantitative and Qualitative Disclosures  About Market Risk                                                        | 46         |
| Item 8.           | Financial Statements and Supplementary  Data                                                                       | 48         |
| Item 9.           | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                              | 91         |
| Item 9A.          | Controls and Procedures                                                                                            | 91         |
| Item 9B.          | Other Information                                                                                                  | 92         |
|              |                                                                                                               |       |
| **PART III** | ** **                                                                                                         | ** ** |
| ** **        | ** **                                                                                                         | ** ** |
| Item 10.          | Directors, Executive Officers and  Corporate Governance                                                            | 93         |
| Item 11.          | Executive Compensation                                                                                             | 96         |
| Item 12.          | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                    | 108        |
| Item 13.          | Certain Relationships and Related  Transactions, and Director Independence                                         | 110        |
| Item 14.          | Principal Accounting Fees and Services                                                                             | 111        |
|              |                                                                                                               |       |
| **PART IV**  | ** **                                                                                                         | ** ** |
| ** **        | ** **                                                                                                         | ** ** |
| Item 15.          | Exhibits, Financial Statement Schedules                                                                            | 113        |
|              |                                                                                                               |       |
| **SIGNATURES**    |                                                                                                               | 117        |

 

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**PART I**

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**ITEM 1.          BUSINESS**

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**OVERVIEW**

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*Allreferences to*“*we,*”**“*us,*”**“*our,*”“*our company”* or*the*“*Company*”*in this annual report on Form 10-K, or Form 10-K,mean InSight Health Services Holdings Corp., a Delaware corporationincorporated in 2001, and all entities and subsidiaries owned or controlled byInSight Health Services Holdings Corp. **All references to*“*Holdings*”*in this Form 10-K mean InSight Health Services Holdings Corp. byitself.  All references to*“*InSight*”*in this Form 10-K meanInSight Health Services Corp., a Delaware corporation and a wholly ownedsubsidiary of Holdings, by itself.*

* *

We are a provider of diagnostic imaging servicesthrough a network of fixed-site centers and mobile facilities.  Our services are noninvasive procedures thatgenerate representations of internal anatomy on film or digital media, whichare 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 inmore than 30 states with a substantial presence in California, Arizona, NewEngland, the Carolinas, Florida and the Mid-Atlantic states.  While we generated approximately 68% of ourtotal revenues from MRI services during the year ended June 30, 2008, weprovide a comprehensive offering of diagnostic imaging services, including PET,PET/CT, CT, mammography, bone densitometry, ultrasound and x-ray.

 

As of June 30, 2008, our network consists of 82fixed-site centers and 110 mobile facilities. This combination allows us toprovide a full range of imaging services to better meet the varying needs ofour customers.  Our fixed-site centersinclude freestanding centers and joint ventures with hospitals and radiologygroups.  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 do notengage in the practice of medicine; instead we contract with radiologists toprovide professional services, including supervision, interpretation andquality assurance.  We have two reportablesegments: mobile operations and fixed operations.  Our 82 fixed-site centers include 12 parkedmobile facilities, each of which serves a single customer.  These parked mobile facilities are includedin our mobile operations.  Of our 110mobile facilities, four mobile facilities are included as part of our fixedoperations in Maine.

 

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

 

We file annual,quarterly and special reports and other information with the SEC.  You may read and copy materials that we havefiled with the SEC at the following SEC public reference room:

 

100 F Street, N.E.

Washington, D.C.20549

 

Please call theSEC at 1-800-SEC-0330 for further information on the public referenceroom.  Our SEC filings are also availableto the public on the SEC’sinternet website at http://www.sec.gov.

 

**Reorganization**

 

On May 29, 2007,Holdings and InSight filed voluntary petitions to reorganize their businessunder chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for theDistrict of Delaware (Case No. 07-10700). The filing was in connection with a prepackaged plan of reorganizationand related exchange offer.  The othersubsidiaries of Holdings were not included in the bankruptcy filing andcontinued to operate their business.  On July 10,2007, the bankruptcy court confirmed Holdings’ and InSight’s Second Amended JointPlan of Reorganization pursuant to 

 

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chapter 11 of theBankruptcy Code.  The plan ofreorganization became effective and Holdings and InSight emerged frombankruptcy protection on August 1, 2007, or the effective date. Pursuantto the confirmed plan of reorganization and the related exchange offer, (1) allof Holdings’ common stock, all options for Holdings’ common stock and all ofInSight’s 9.875% senior subordinated notes due 2011, or senior subordinatednotes, were cancelled, and (2) holders of InSight’s senior subordinatednotes and holders of Holdings’ common stock prior to the effective datereceived 7,780,000 and 864,444 shares of newly issued Holdings’ common stock,respectively, in each case after giving effect to a one for 6.326392 reversestock split of Holdings’ common stock.

 

This reorganizationsignificantly deleveraged our balance sheet and improved our projected cashflow after debt service. However, we still have a substantial amount of debt,which requires significant interest and principal payments.  As of June 30, 2008, we had totalindebtedness of approximately $322.4 million in aggregate principal amount,including InSight’s $315 million of senior secured floating rate notes due2011, or floating rate notes.  We believethat future net cash provided by operating and investing activities and ourcredit facility will be adequate to meet our operating cash and debt servicerequirements for at least the next twelve months.  Nevertheless, the floating rate notes maturein November 2011 and unless our financial performance significantlyimproves, we can give no assurance that we will be able to refinance thefloating rate notes on commercially reasonable terms, if at all.

 

**Segments**

** **

*Fixed Operations.*Our fixed-sitecenters provide a full range of diagnostic imaging services to patients,physicians, insurance payors and managed care organizations.  Of our 82 fixed-site centers, 46 offer MRIservices exclusively and one offers PET exclusively.  Our remaining 35 fixed-site centers aremulti-modality sites typically offering MRI and one or more of PET, CT, PET/CT,x-ray, mammography, ultrasound, nuclear medicine, bone densitometry and nuclearcardiology. Diagnostic services are provided to a patient upon referral by aphysician.  Physicians refer patients toour fixed-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 contracts with managed careorganizations for our fixed-site centers, which often last for a period ofmultiple years because (1) they do not have specific terms or specifictermination dates or (2) they contain annual “evergreen” provisions thatprovide for the contract to automatically renew unless either party terminatesthe contract.  In addition to ourindependent facilities, we enter into joint ventures with hospitals andradiology groups.  Our joint venturesallow us to charge a management and billing fee for supporting their day-to-dayoperations.

 

*Mobile Operations. *Hospitals, physician groupsand other healthcare providers can access our diagnostic imaging technologythrough our network of 110 mobile facilities. We currently have contracts withmore than 250 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 generallyprovided by the hospital’sradiologists or physician groups and not 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 operations provide 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 equipment or centers, and (2) testnew markets on a short-term basis prior to establishing new mobile routes oropening new fixed-site centers. Our goal is to enter into long-term jointventure relationships with our mobile customers once the local market maturesand sufficient patient volume is achieved to support a fixed-site center.

 

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*Additional Information*.  Financial information concerning our twosegments is set forth in Item 7.  “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” andin Note 17 of our consolidated financial statements, all of which areincorporated herein by reference.

 

**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 of imaging systems (otherthan x-ray) represents the marriage of computer technology and various medicalimaging modalities. The following highlights our primary 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, and without exposing patients to ionizingradiation.  MRI systems are classifiedinto two classes, conventional MRI systems and Open MRI systems.  The structure of conventional MRI systemsallows for higher magnet field strengths, better image quality and faster scanningtimes than Open MRI systems.  However,Open MRI systems are able to service patients who have access difficulties withconventional MRI systems, including pediatric patients and patients sufferingfrom post-traumatic stress, claustrophobia or significant obesity.  A typical conventional MRI examination takesfrom 20 to 45 minutes.  A typical OpenMRI examination takes from 30 to 60 minutes. MRI generally reduces the cost and amount of care needed and ofteneliminates the need for invasive diagnostic procedures.  MRI systems are typically priced in the rangeof $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 aretypically priced in the range of $0.4 million to $1.5 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. 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/CTexamination takes from 20 to 60 minutes. PET/CT systems are typically priced in the range of $1.6 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, primarily for detecting lesions in thebreast that may be too small or deeply buried to be felt in a regular breastexamination.

 

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

 

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**STRATEGY**

** **

We are implementing astrategy based on core markets.  Webelieve that such a strategy will allow us more operating efficiencies andsynergies than are available in a nationwide strategy.  A core market may be based on many factors,including, without limitation, the number of fixed-site centers or mobilefacilities in an area, 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 or establishingnew markets, which may be accomplished through business or asset sales, swaps,purchases, closures and the development of new fixed-site centers and mobileroutes.  In implementing our core marketstrategy, we have taken the following actions:

 

·                  BetweenApril and August 2008, we sold ten fixed-site centers in California,our majority ownership interest in a joint venture that operates a fixed-sitecenter in Ohio and our majority ownership interest in a joint venture thatoperates a fixed-site center in New York. In addition, in July 2008, we closed a fixed-site center inCalifornia.

 

·                  Weare currently engaged, at various stages, in a number of transactions, for thesale of certain underperforming assets and/or assets in non-core markets.

 

·                  Weexpect to utilize proceeds from such transactions to acquire assets and/orupgrade imaging equipment in our core markets and/or purchase portions of thefloating rate notes.

 

There can be no assurancethat we can complete sales and/or purchases of assets on terms favorable to usin a timely manner to replace the loss of Adjusted EBITDA related to the assetswe sell.  See our definition of AdjustedEBITDA and reconciliation of net cash provided by operating activities toAdjusted EBITDA in Item 7.  “Management’s Discussion and Analysisof Financial Condition and Results of Operations – Financial Condition,Liquidity and Capital Resources”.

 

**BUSINESS DEVELOPMENT**

** **

Our objective is to be a leading provider of diagnostic imagingservices in our core markets.  Ourefforts are focused on two components.

 

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

 

·                  broadening ourphysician 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 underperforming assets/or assets in non-core markets andredeploying such capital to achieve more attractive returns.

 

Generally, theseactivities are aimed at increasing revenues and gross profit, maximizingutilization of existing capacity and increasing economies of scale. Incremental gross profit resulting from such activities will vary depending ongeographic area, 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.

 

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During the fiscal yearended June 30, 2008, we closed three fixed-site centers and sold sevenfixed-site centers in Southern California and our majority ownership interestin a joint venture that operates a fixed-site center in Ohio.

 

During the fiscal year ended June 30, 2007, we closed threefixed-site centers and sold one fixed-site center.  During the fiscal year ended June 30,2006, we closed four fixed-site centers and dissolved a mobile lithotripsypartnership.

 

In March 2006, wepurchased a majority ownership interest in a joint venture that operates afixed-site center in California.

 

**GOVERNMENT REGULATION**

 

The healthcare industry is highly regulatedand changes in laws and regulations can be significant. Changes in the law ornew interpretation of existing laws can have a material effect on ourpermissible activities, the relative costs associated with doing business andthe amount of reimbursement by government and other third-party payors. Thefederal government and all states in which we currently operate regulatevarious aspects of our business. Failure to comply with these laws couldadversely affect our ability to receive reimbursement for our services andsubject 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 the number of suits broughtagainst healthcare providers by government regulators and private individualshas increased dramatically. In addition, various states are considering or haveenacted laws modeled after the federal False Claims Act, penalizing falseclaims against state funds. If a whistleblower action is brought against us,even if it is dismissed with no judgment or settlement, we may incur substantiallegal fees and other costs relating to an investigation.  Actions brought under the False Claims Actmay result in significant fines and legal 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 the federal False ClaimsAct, it must pay three times the actual damages sustained by the government,plus mandatory civil penalties of between $5,500 to $11,000 for each separatefalse 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.

 

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·                  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 billing requirements.However, the costs of defending claims under the False Claims Act, as well assanctions imposed under the Act, could significantly affect our business,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 of financialarrangements between healthcare providers and potential sources of referrals toensure that such arrangements do not violate the anti-kickback provisions. HHSand 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 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 federal crime:  healthcare fraud and false statementsrelating to healthcare matters. The healthcare fraud statute prohibitsknowingly and willfully executing a scheme to defraud any healthcare benefitprogram, including private payors. A violation of this statute is a felony andmay result in fines, imprisonment or exclusion from government sponsoredprograms such as the Medicare and Medicaid programs. The false statementsstatute prohibits knowingly and willfully falsifying, concealing or covering upa material fact or making any materially false, fictitious or fraudulentstatement in connection with the delivery of or payment for healthcarebenefits, items or services, including those provided by private payors. Aviolation of this statute is a felony and may result in fines or imprisonment.

 

We believe that our operations materiallycomply with the CMP law and the healthcare fraud and false statements statutes.These prohibitions, however, are broadly worded and there is limited authorityinterpreting their parameters. Therefore, we can give no assurance that thegovernment will not pursue a claim against us based on 

 

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these statutes. Such a claim would divert theattention of management and could result in substantial penalties which couldadversely affect our financial 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 on April 14,2003, the electronic standards for transactions went into effect on October 16,2003 and the security standards went into effect on April 20, 2005.  A violation of HIPAA’s standard transactions, privacy andsecurity provisions may result in criminal and civil penalties, which couldadversely affect our financial condition and results of operations.

 

*Stark and State Physician Self-ReferralLaws:* The federalPhysician Self-Referral or “Stark” Law prohibits a physician from referring Medicarepatients for certain “designated health services” to an entity with which the physician (or an immediatefamily member of the physician) has a financial relationship unless anexception applies. In addition, the receiving entity is prohibited from billingfor services provided pursuant to the prohibited referral.

 

Designated health services under Stark include radiology services (MRI,CT, x-ray, ultrasound and others), radiation therapy, inpatient and outpatienthospital services and several other services. A violation of the Stark Law doesnot require a showing of intent. If a physician has a financial relationshipwith an entity that does not qualify for an exception, the referral of Medicarepatients to that entity for designated health services is prohibited and, ifthe entity bills for such services, the Stark sanctions apply.

 

Sanctions for violating Stark include denial of payment, mandatoryrefunds, civil money penalties and/or exclusion from the Medicare program. Inaddition, some courts have allowed federal False Claims Act lawsuits premisedon Stark Law violations.

 

The federal Stark Law prohibition is expansive, and its statutorylanguage and implementing regulations are ambiguous. Consequently, the statutehas been difficult to interpret.  Since1995, the Centers for Medicare and Medicaid Services, or CMS, has publishednumerous sets of regulations implementing the Stark Law with more to come.  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 not directly prohibitreferral of Medicaid patients, but rather denies federal financialparticipation to state Medicaid programs for services provided pursuant to atainted referral. Thus, Medicaid referrals are subject to whatever sanctionsthe relevant state has adopted.  Severalstates in which we operate have enacted or are considering legislation thatprohibits “self-referral” arrangements or requires physicians or other healthcareproviders to disclose to patients any financial interest they have in ahealthcare provider to whom they refer patients. Possible sanctions forviolating these state statutes include loss of participation, civil fines andcriminal penalties. The laws vary from state to state and seldom have beeninterpreted by the courts or regulatory agencies. Nonetheless, strictenforcement of these requirements is likely.

 

We believe our operations materially comply with the federal and statephysician self-referral laws. However, given the ambiguity of these statutes,the uncertainty of the regulations and the lack of judicial guidance on manykey issues, we can give no assurance that the Stark Law or other physicianself-referral regulations will not be interpreted in a manner that couldadversely affect our financial condition and results of operations.

 

*FDA:* The Food and Drug Administration, or FDA, has issuedthe requisite premarket approval for all of our MRI, PET, PET/CT and CTsystems. 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 

 

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to the accreditation process, each facility providing mammographyservices must comply with certain standards including annual inspection.

 

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

 

*Radiologistand Facility Licensing:* The radiologists with whom we contract 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.

 

*LiabilityInsurance:* The hospitals, physician groups and otherhealthcare providers who use our diagnostic imaging systems are involved in thedelivery of healthcare services to the public and, therefore, are exposed tothe risk of liability claims. Our position is that we do not engage in thepractice of medicine. We provide only the equipment and technical components ofdiagnostic imaging, including certain limited nursing services, and we have notexperienced any material losses due to claims for malpractice. Nevertheless, claimsfor 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, which must comply with certain certification standards.  In addition, Congress recently passed theMedicare Improvements for Patients and Providers Act of 2008, which requiresimaging centers to be accredited by 2012. Although we expect our IDTFs to meet these certification andaccreditation standards, increased oversight by CMS could adversely affect ourfinancial condition and results of operations.

 

*Certificates of Need**:* Some states requirehospitals and certain other healthcare facilities and providers to obtain acertificate 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 andlicensing statutes may be modified in the future in a manner that could adverselyeffect 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 believethat environmental, health and safety laws and regulations will not (1) causeus to incur any material capital expenditures in our current year or thesucceeding year, including costs for environmental control facilities or (2) materiallyimpact our revenues or our competitive position.

 

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**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 marketing activitiesfor our fixed operations include educating physicians on new applications anduses of the technology and customer service programs. In addition, we seek toleverage our core market concentration to develop contractual relationshipswith managed care payors to increase patient volume.  Sales and marketing activities for our mobilebusiness include direct marketing to hospitals and developing leads throughcurrent customers, equipment manufacturers, and other vendors. In addition,marketing activities for our mobile operations include contacting referringphysicians associated with hospital customers and educating physicians.

 

**COMPETITION**

 

The healthcare industryin general, and the market for diagnostic imaging services in particular, ishighly competitive and fragmented, with only a few national providers. Wecompete principally on the basis of our service reputation, equipment, breadthof managed care contracts and convenient locations. Our operations must competewith hospitals, physician groups and certain other independent organizations,including equipment manufacturers and leasing companies that own and operateimaging equipment. We will continue to encounter substantial competition fromhospitals and independent organizations, including Alliance Imaging, Inc.,Radnet, Inc., Diagnostic Health Corporation, MedQuest, Inc., SharedImaging and Otter Tail Corporation doing business as DMS Imaging.  Some of our direct competitors may haveaccess to greater financial resources than we 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. Historically, smaller hospitals have been reluctant to purchase imagingequipment, but some have chosen to do so with attractive financing offered byequipment manufacturers.  Some physicianpractices have also established diagnostic imaging centers or purchased imagingequipment for their own offices, and we anticipate that others will aswell.  In addition, attractive financingfrom equipment manufacturers, as well as attractive gross margins have causedhospitals and physician groups who have utilized mobile services from ourcompany and our competitors to purchase and operate their own equipment. Although reimbursement reductions may dissuade physician groups from operatingtheir own equipment, we expect that some high volume customer accounts willcontinue to elect not to renew their contracts with us and instead acquiretheir own diagnostic imaging equipment.

 

**CUSTOMERS AND CONTRACTS**

 

Our revenues areprimarily generated from patient services and contract services. Patientservices revenues are generally earned from services billed directly to patientsor third-party payors (such as managed care organizations, Medicare, Medicaid,commercial insurance carriers and workers’ compensation funds) on a fee-for-service basis.   Patient services revenues and managementfees are primarily earned through fixed-site centers. Contract servicesrevenues are generally earned from services billed to a hospital, physiciangroup or other healthcare provider, which include fee-for-service arrangementsin which revenues are based upon a contractual rate per procedure and fixed feecontracts.  Contract services revenuesare primarily earned through mobile facilities pursuant to contracts with aterm from one to five years.  Asignificant number of our mobile contracts will expire each year.  We expect that some high volume customeraccounts will elect not to renew their contracts and instead will purchase orlease their own diagnostic imaging equipment and some customers may choose analternative services provider.

 

During the year ended June 30,2008, approximately 55% of our revenues were generated from patient servicesand approximately 45% were generated from contract services.

 

**DIAGNOSTIC IMAGING AND OTHEREQUIPMENT**

 

As of June 30, 2008,we owned or leased 242 diagnostic imaging systems, with the followingclassifications: 3.0 Tesla MRI, 1.5 Tesla MRI, 1.0 Tesla MRI, Open MRI, PET,PET/CT, CT and other technology. Magnetic field strength is the measurement of the magnet used inside anMRI system.  If the magnetic fieldstrength is increased the image quality of scans is improved and the timerequired to complete scans is decreased. Magnetic 

 

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field strength on our MRIsystems currently ranges from 0.2 to 3.0 Tesla. Of our 157 conventional MRI systems, 150 have a magnet field strength of1.5 Tesla, which is the industry standard magnet strength for conventionalfixed and mobile MRI systems.  Other thanultra-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 Healthcare, 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/CT systems thatwere manufactured by General Electric Healthcare and Siemens MedicalSystems.  We enter into individualpurchase orders for each system that we acquire, and we do not have long-termpurchase arrangements with any equipment manufacturer.  We maintain good working relationships withmany of the major manufacturers to better ensure adequate supply as well asaccess to those types of diagnostic imaging systems which appear mostappropriate for the specific imaging facility to be established.

 

**INFORMATIONSYSTEMS**

** **

Our internal informationtechnology systems allow us to manage our operations, accounting and finance,human resources, payroll, document imaging, and data warehousing. Our primaryoperating system is the InSight Radiology Information System, or IRIS, ourproprietary information system. IRIS provides front-office support forscheduling and administration of imaging procedures and back office support forbilling and collections. Additional functionality includes workflow,transcription, and image management.  Weuse picture archiving and communication systems, or PACS, at certain of ourfixed-site centers for the digital management of diagnostic images.

 

**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, whichincludes a code of ethical conduct for our employees and affiliates and aprocess for reporting regulatory or ethical concerns to our compliance officer,including a toll-free telephone hotline. We believe that our compliance programmeets the relevant standards provided by the Office of Inspector General of theHHS. An important part of our compliance program consists of conductingperiodic reviews of various aspects of our operations. Our compliance programalso contemplates mandatory education programs designed to familiarize ouremployees with the regulatory requirements and specific elements of ourcompliance program.

 

**EMPLOYEES**

 

As of September 15,2008, we had approximately 1,350 full-time, 85 part-time and 400 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 asset dispositions, acquisitions and new fixed-site developments,competitive strengths and weaknesses, business strategy and the trends that weanticipate in the industry and economies in which we operate and otherinformation that is not historical information. When used in 

 

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this Form 10-Kthe words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,”“believes,” and variations of such words or similar expressions are intended toidentify forward-looking statements.  Allforward-looking statements, including, without limitation, our examination ofhistorical operating trends, are based upon our current expectations andvarious assumptions.  Our expectations,beliefs and projections are expressed in good faith, and we believe there is areasonable basis for them, but we can give no assurance that our expectations,beliefs and projections will be realized.

 

There are a numberof risks and uncertainties that could cause our actual results to differmaterially from the forward-looking statements contained in this Form 10-K.  Important factors that could cause our actualresults to differ materially from the forward-looking statements made in this Form 10-Kare set forth in this Form 10-K, including the factors described in Item1A. “Risk Factors” below and the following:

 

·                  our ability to successfully implementour core market strategy;

 

·                  overcapacity andcompetition in our markets;

 

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

 

·                  contractrenewals and financial stability of customers;

 

·                  conditionswithin the healthcare environment;

 

·                  the potential forrapid and significant changes in technology and their effect on our operations;

 

·                  operating,legal, governmental and regulatory risks; and

 

·                  economic,political and competitive forces affecting our business.

 

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.

 

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**ITEM 1A.       RISK FACTORS**

** **

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

 

*RISKS RELATING TO OUR INDEBTEDNESS*

* *

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

 

We have a substantialamount of debt, which requires significant interest and principalpayments.  As of June 30, 2008, wehad total indebtedness of approximately $322.4 million in aggregateprincipal amount.  In addition, subjectto the restrictions contained in the indenture governing the floating ratenotes and our other debt instruments, we may be able to incur additionalindebtedness from time to time to finance working capital, capital projects,investments or acquisitions, or for other purposes. If we do so, the risksrelated to our high level of debt could intensify.   Specifically, our high level of debt couldhave 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 ourbusiness will generate sufficient cash flow from operations or that futureborrowings will be available to us in an amount sufficient to enable us toservice our debt, including, but not limited to, the floating rate notes, or tofund our other liquidity needs.

 

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.  The floating rate notes maturein November 2011 and unless our financial performance significantlyimproves, we can give no assurance that we will be able to refinance thefloating rate notes on commercially reasonable terms, if at all.

 

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***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;

 

·                  makecertain investments;

 

·                  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.  Uponthe occurrence of an event of default under our debt instruments, the lendersmay be able to elect to declare all amounts outstanding to be immediately dueand payable and terminate all commitments to extend further credit. If we areunable to repay those amounts, the lenders could proceed against the collateralgranted to them, if any, to secure the indebtedness.  If the lenders under our current or futureindebtedness accelerate the payment of the indebtedness, we can give noassurance  that our assets or cash flowwould be sufficient to repay in full our outstanding indebtedness. Substantially all of our assets, other than those assets consisting of accountsreceivables and related assets or cash accounts related to receivables, whichsecure our credit facility, and a portion of InSight’s stock and the stock ofits subsidiaries, are subject to the liens in favor of the holders of thefloating rate notes. This may further limit our flexibility in obtainingsecured or unsecured 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 and unpaidinterest.  Under the terms of indenturefor the floating rate notes, a change of control includes, among things, if aperson or group becomes directly or indirectly the beneficial owner of 35% ormore of Holdings’ common stock.  Webelieve that as of September 15, 2008, one person holds beneficialownership in excess of 20% of Holdings’ common stock and another holdsbeneficial ownership in excess of 10% of Holdings’ common stock.  We cannot assure you that we will have orwill be able to borrow sufficient funds at the time of any change of control tomake any required repurchases of such notes or our other debt. If we failed tomake a change of control offer and to purchase all of the tendered notes, itwould constitute an event of default under the indenture for the floating ratenotes, and potentially, other debt. Any future credit arrangements or otherdebt agreements to which we become party may contain similar agreements.

 

***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, 2008 ofapproximately $95.2 million.  The book value of these assets should not berelied on as a measure of realizable value for such assets.  Therealizable value of our assets may be greater or lower than such net bookvalue.  The value of our assets in the event of liquidation will dependupon market, credit and economic conditions, the availability of buyers andsimilar factors.  A sale of these assetsin a bankruptcy or similar proceeding would 

 

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likely be made underduress, which would reduce the amounts that could be recovered.  Furthermore,such a sale could occur when other companies in our industry also aredistressed, which might increase the supply of similar assets and thereforereduce the amounts that could be recovered.  Our intangible assets had anet book value as of June 30, 2008 of approximately $24.4 million.  As a result, in the event of a default underthe agreements governing our material indebtedness or any bankruptcy ordissolution of our company, the realizable value of these assets will likely besubstantially lower and may be insufficient to satisfy the claims of ourcreditors.

 

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.

 

***We may be unable to obtainnecessary capital to finance certain projects or refinance our existingindebtedness because of conditions in the financial markets and economicconditions generally.***

*** ***

Our ability to obtain necessary capital is affected by conditions inthe financial markets and economic conditions generally. Slowing growth,contraction of credit, increasing energy prices, declines in business orinvestor confidence or risk tolerance, increases in inflation, higherunemployment, outbreaks of hostilities or other geopolitical instability,corporate, political or other scandals that reduce investor confidence incapital markets and natural disasters, among other things, can affect thefinancial markets and economic conditions generally.  If we are unable to obtain sufficient capitalat commercially reasonable rates, we may be unable to fund certain capitalprojects or refinance our existing indebtedness, including the floating ratenotes.

 

***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 June 30, 2008, approximately 98% of our indebtedness wasvariable rate indebtedness.  In February 2008,we purchased an interest rate collar contract. The contract is for a term of two years, with a notional amount of $190million with a LIBOR cap of 3.25% and a LIBOR floor of 2.59%.  As a resultof this contract our exposure on variable rate indebtedness was reduced by $190million, or to approximately 39% as of June 30, 2008.  Increases ininterest rates could also impact the refinancing of our existing indebtedness,including the floating rate notes.  Ifprevailing interest rates or other factors result in higher interest rates, theincreased interest expense would adversely affect our cash flow and our abilityto service our indebtedness.  As a protection against rising interestrates, we may enter into agreements such as interest rate swaps, caps, floorsand other interest rate exchange contracts.  These agreements, however,subject us to the risk that the other parties to the agreements may not performtheir obligations thereunder or that the agreements could be unenforceable.

 

*RISKSRELATING TO OUR BUSINESS*

 

***Changes in the rates or methods of third-party reimbursementfor our services could result in reduced demand for our services or createdownward pricing pressure, which would result in a decline in our revenues andadversely affect our financial condition and results of operations.***

 

For the year ended June 30,2008, 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. Certain third-party payors have proposed and implemented changes in themethods and rates of reimbursement that have had the effect of substantiallydecreasing reimbursement for diagnostic imaging services that we provide.  Moreover, our healthcare provider customers,which provided approximately 45% of our revenues during the year ended June 30,2008, generally rely on reimbursement from third-party payors. To the extentour healthcare provider customers’ reimbursement from third-party payors isreduced, it will likely have an adverse impact on the rates they pay us as theywould seek to offset such decreased reimbursement rates.  We expect that any further changes to therates or methods of reimbursement for our services, whether directly throughbillings to third-party payors or indirectly through our healthcare providercustomers, will result in a further decline in our revenues and adverselyaffect our financial condition and results of operations.  See our discussion regarding reimbursementchanges in Item 7. “Management’s Discussion and Analysis of FinancialCondition and Results of Operations – Reimbursement”.

 

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***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 (see our definition of Adjusted EBITDA andreconciliation 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”). Our Adjusted EBITDA declined approximately 33.1% for the year ended June 30,2008 as compared to the year ended June 30, 2007.  The decline in Adjusted EBITDA as compared toprior year periods has become a historical trend based on our performance duringthe past four fiscal years.  Thisnegative trend in Adjusted EBITDA may continue and may be exacerbated by  reimbursement reductions.

 

***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 depend 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.  To the extent we do not renew a customer contract,it is not always possible to immediately obtain replacement customers. Historically, many replacement customers have been smaller, which have lowerprocedure volumes.  In addition, attractive financing from equipmentmanufacturers, as well as attractive gross margins have caused hospitals andphysician groups who have utilized mobile services from our company and ourcompetitors to purchase and operate their own equipment.  Althoughreimbursement reductions may dissuade physician groups from operating their ownequipment, we expect that some high volume customer accounts will continue toelect not to renew their contracts with us and instead acquire their owndiagnostic imaging equipment.  As a result of the age of our imagingequipment, we may not be able to renew contracts of existing customers orattract new customers on favorable terms. This would adversely affect our financial condition and results ofoperations.  Although the non-renewal of a single customer contract wouldnot have a material impact on our revenues, non-renewal of several contracts onfavorable terms, or at all, could have a significant negative impact on ourfinancial condition 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 hospitals, physician groups and certain other independentorganizations, including equipment manufacturers and leasing companies that ownand operate imaging equipment.  We have encountered and we will continueto encounter competition from hospitals and physician groups that purchasetheir own diagnostic imaging equipment. Some of our direct competitors may have access to greater financialresources than we do.  If we are unableto successfully compete, our customer base would decline and our financialcondition and results of operations would be adversely affected.

 

***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.  Acquisitions and joint venturesrequire substantial capital which may exceed the funds available to us frominternally generated funds and our available financing arrangements.  Wemay not be able to raise any necessary additional funds through bank orequipment vendor financing or through the issuance of equity or debt securitieson terms acceptable to us, if at all.

 

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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 daily operations to theintegration 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 successfullyidentify, complete and integrate our acquisitions, we may not realizeanticipated operating advantages, economies of scale and cost savings.  Also, we may not be able to maintain thelevels of operating efficiency that the acquired companies would have achievedor might have achieved separately.  Successful integration of acquisitionswill depend upon our ability to manage their operations and to eliminate excesscosts.

 

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

 

We have attempted to implement, and will continue to develop andimplement, various revenue enhancement and cost reduction initiatives.  Revenue enhancement initiatives will focus on(1) improvements in our sales and marketing efforts, (2) technologyenhancements to create greater efficiency in the gathering of patient and claiminformation at the time a procedure is scheduled or completed, and (3) improvementsin our revenue cycle management.  Costreduction initiatives will focus on streamlining our organizational structureand leveraging relationships with strategic vendors.  While we have experienced some improvementsthrough our cost reduction initiatives, our revenue enhancement initiativeshave produced minimal improvements to date.  Moreover, future revenueenhancement initiatives will face significant challenges because of thecontinued overcapacity in the diagnostic imaging industry and reimbursementreductions.  The adequacy and ultimatesuccess of our initiatives to enhance revenues and reduce costs cannot beassured.

 

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

 

We compete with several national and regional providers of diagnosticimaging services, as well as local providers.  As a result of thereimbursement reductions by Medicare and other third-party payors, some ofthese competitors may consolidate their operations in order to obtain certaincost structure advantages and improve equipment utilization.  In calendar2006, two fixed-site competitors consolidated and formed a combined businessthat is the largest national provider of fixed-site imaging services.  Incalendar 2007, a fixed-site competitor was acquired by a large not-for-profitintegrated group of hospitals and physician clinics.  These companies could achieve certainadvantages over us including increased financial and business resources,economies of scale, breadth of service offerings, and favored relationshipswith equipment vendors, hospital systems, leading radiologists and third-partypayors.   We may be forced to exitcertain markets, reduce our prices or provide state-of-the-art equipment inorder to retain and attract customers.  These pressures could adverselyaffect our financial condition and results of operations.

 

***Failure to attract and retain qualified employees andcontracted radiologists could hinder our business strategy and negativelyimpact our financial condition and results of operations.***

 

Our future successdepends on our continuing ability to identify, hire or contract with, develop,motivate and retain highly skilled persons for all areas of our organization,including senior executives and contracted radiologists.  We 

 

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are currently looking tohire an Executive Vice President and Chief Financial Officer and an ExecutiveVice President, Sales and Marketing. Competition in our industry for qualified employees isintense.   There is a very high demand for qualified technologists,particularly MRI, PET and PET/CT technologists, and we may not be able to hireand retain a sufficient number of technologists.   Failure to attract and retain qualified employeesand contracted radiologists could hinder our business strategy and negativelyimpact our financial condition and 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.

 

***Technological change in our industry could reduce the demandfor our services and our ability to maintain a competitive position.***

 

We operate in acompetitive, capital intensive, high fixed-cost industry. The development ofnew technologies or refinements of existing ones have made and continue to makeour existing systems technologically or economically obsolete, or reduce theneed for our systems.   Competition among manufacturers has resultedin and likely will continue to result in technological advances in the speedand imaging capacity of new systems.  Consequently, the obsolescence ofour systems may be accelerated.  Other than ultra-high field MRI systemsand 256-slice CT systems, we are aware of no substantial technological changes;however, should such changes occur, we may not be able to acquire the new orimproved systems.   In the future, to the extent we are unableto generate sufficient cash from our operations or obtain additional fundsthrough bank or equipment vendor financing, the issuance of equity or debtsecurities, and operating leases, we may be unable to maintain a competitiveequipment base.  In addition, advancingtechnology may enable hospitals, physicians or other diagnostic imaging serviceproviders to perform procedures without the assistance of diagnostic imagingservice providers such as ourselves.  As a result of the age of ourimaging equipment, we may not be able to maintain our competitive position inour core markets or expand our business.

 

***Because a high percentage of our operating expenses arefixed, a relatively small decrease in revenues could have a significantnegative effect 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,depreciation, salaries, maintenance, insurance and vehicle operationcosts.  As a result, a relatively smallreduction in the prices we charge for our services or procedure volume couldhave a disproportionate negative effect on our financial condition and resultsof operations.

 

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

 

We have not experiencedany material losses due to claims for malpractice.  However, claims for malpractice have beenasserted against us in the past and any future claims, if successful, couldentail significant defense costs and could result in substantial damage awardsto the claimants, which may exceed the limits of any applicable insurancecoverage.  Successful malpractice claims asserted against us, to theextent not covered by our liability insurance, could have a material adverseeffect on our financial condition and results of operations.  In additionto claims for malpractice, there are other professional liability risks towhich we are exposed through our operation of diagnostic imaging systems,including liabilities associated with the improper use or malfunction of ourdiagnostic imaging equipment.

 

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

 

***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 of accidentalenvironmental contamination and physical injury.  We are subject tofederal, state and local regulations governing storage, handling and disposalof these materials and waste products.  Although we believe that oursafety 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 event of an accident, we would be held liablefor any resulting damages, and any liability could exceed the limits of or falloutside the coverage of our insurance.  In addition, we may not be able tomaintain insurance on acceptable terms, or at all.   We could incursignificant costs in order to comply with current or future environmental,health and safety laws and regulations which would adversely affect ourfinancial condition and results of operations.

 

***We may not receive payment from some of our healthcare providercustomers because of their financial circumstances.***

 

Some of our healthcareprovider customers do not have significant financial resources, liquidity oraccess to capital.  If these customersexperience financial difficulties they may be unable to pay us for the equipmentand services that we provide.  We haveexperienced, and expect to continue to experience, write-offs of accountsreceivables from healthcare provider customers that become insolvent, file forbankruptcy or are otherwise unable to pay amounts owed to us.  A significant deterioration in general orlocal economic conditions could have a material adverse affect on the financialhealth of certain of our healthcare provider customers.  As a result, we may have to increase theamounts of accounts receivables that we write-off, which would adversely affectour financial condition and results of operations.

 

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

 

Timely, effective serviceis essential to maintaining our reputation and utilization rates on our imagingequipment.  Our warranties and maintenance contracts do not compensate usfor 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.

 

***Natural disasters and harsh weather conditions couldadversely affect our business and operations.***

 

Our corporateheadquarters, including our information technology center, and a materialnumber of our fixed-site centers are located in California, which has a highrisk for natural disasters, including earthquakes and wildfires.  Depending upon its severity, a naturaldisaster could severely damage our facilities or our information technologysystem or prevent potential patients from traveling to our centers. Damage to our equipment or our information technology system or anyinterruption in our business would adversely affect our financial condition andresults of operations.  We currently do not maintain a secondary disasterrecovery facility for our information technology operations.  In addition, while we presently carryearthquake and business interruption insurance in amounts we believe areappropriate in light of the risks, the amount of our earthquake insurancecoverage may not be sufficient to cover losses from earthquakes.  We maydiscontinue some or all of this insurance coverage on some or all of our 

 

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centers in the future ifthe cost of premiums exceeds the value of the coverage discounted for the riskof loss.  If we experience a loss which is uninsured or which exceedspolicy limits, we could lose the capital invested in the damaged centers aswell as the anticipated future cash flows from those centers.

 

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.

 

***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, we may need to curtail certainmobile routes or redeploy our mobile facilities.  There have been significant fluctuations infuel costs and any further increases to already high fuel costs would adverselyaffect our financial 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 necessaryrequirements under Medicare could adversely affect our financial condition andresults of operations.

 

*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****** failureto comply could result in substantial penalties and adversely affect ourability to operate our business and our financial condition and results ofoperations.***

 

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 CMP law;

 

·                  HIPAA;

 

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·                  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;

 

·                  FDArequirements;

 

·                  statelicensing and certification requirements, including CONs; 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 of themhave not been fully interpreted by the regulatory authorities or the courts,and their provisions are open to a variety of interpretations.  Any actionbrought against us for violation of these laws or regulations, even if wesuccessfully 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 ourfinancial condition and results of operations. In addition, although we believe that we are operating in compliancewith applicable federal and state laws, neither our current or anticipatedbusiness operations nor the operations of our contracted radiology groups havebeen the subject of judicial or regulatory interpretation.  A review ofour business by courts or regulatory authorities may result in a determinationthat could adversely affect our operations or the healthcare regulatoryenvironment may change in a way that restricts our operations.

 

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

 

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

 

A significant portion ofHoldings’ outstanding common stock is held by a small number of holders.  We believe that as of September 15,2008, one person holds beneficial ownership in excess of 20% of Holdings’common stock and another holds beneficial ownership in excess of 10% ofHoldings’ common stock.  As a result,these stockholders will have significant voting power with respect to theability to:

 

·                  authorizeadditional shares of Holdings’ capital stock;

 

·                  amendHoldings’ certificate of incorporation or bylaws;

 

·                  electHoldings’ directors; or

 

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

 

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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**

 

As of September 15,2008, we lease approximately 48,400 square feet of office space for ourcorporate headquarters and a billing office at 26250 Enterprise Court,Lake Forest, California 92630; however, as of October 1, 2008, this lease willbe reduced to approximately 42,000 square feet. The lease for this location expires in 2013.

 

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

 

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

 

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

 

None.

 

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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, or the OTCBB, under the symbol “ISGT”.   As of September 15,2008, there were six record holders of Holdings’ common stock and approximately 350 beneficial holders ofHoldings’ 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 contain restrictions on Holdings’ ability to pay dividends on its common stock.

 

The following table setsforth the high and low prices as reported by the OTCBB for Holdings’ commonstock for the quarters indicated. Holdings’ common stock began trading on the OTCBB on August 3,2007.  The prices represent quotationsbetween dealers without adjustment for mark-up, mark-down or commission, andmay not necessarily represent actual transactions.

 
| **Quarter Ended**   | ** ** | **Low** | ** ** | **High** | ** ** |
|--------------------------|------------|---------|------------|----------|------------|
|                     |       |    |       |     |       |
| September 30,  2007 |       | $       | 4.00       |     | $          | 12.50 |   |
| December 31,  2007  |       | 3.00    |       | 9.00     |       |
| March 31,  2008     |       | 0.75    |       | 3.25     |       |
| June 30,  2008      |       | 0.25    |       | 1.01     |       |
|                          |            |         |            |          |            |  |  |

 

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

 

The selectedconsolidated financial data presented as of and for the eleven months ended June 30,2008, the one month ended July 31, 2007, and the years ended June 30,2007, 2006, 2005 and 2004 has been derived from our audited consolidatedfinancial statements.  The information inthe following table should be read together with our audited consolidatedfinancial statements 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 AmericanInstitute of Certified Public Accountants’ Statement of Position 90-7, “FinancialReporting by Entities in Reorganization under the Bankruptcy Code”, or SOP90-7.  The provisions of fresh-startreporting required that we revalue our assets and liabilities to fair value,reestablish stockholders’ equity and record any applicable reorganization valuein excess of amounts allocable to identifiable assets as an intangibleasset.  Under fresh-start reporting, ourasset values are remeasured using fair value, and are allocated in conformitywith Statement of Financial Accounting Standards (SFAS) No. 141, “BusinessCombinations”, or SFAS 141.  Fresh-startreporting also requires that all liabilities, other than deferred taxes, shouldbe stated at fair value or at the present value of the amounts to be paid usingappropriate market interest rates. Deferred taxes are determined in conformity with SFAS No. 109, “Accountingfor Income Taxes.”

 

References to “Successor” refer to our company on or after August 1,2007, after giving effect to (1) the cancellation of Holdings’ commonstock prior to the effective date; (2) the issuance of new Holdings’common stock in exchange for all of InSight’s senior subordinated notes and thecancelled Holdings’ common stock; and (3) the application of fresh-startreporting.  References to “Predecessor”refer to our company prior to August 1, 2007.

 

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| ** **                            | ** ** | **Successor**          | ** ** | ** ** | **Predecessor**                      | ** ** |
|---------------------------------------|------------|------------------------|------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **Eleven Months** | ** ** | ** ** | **One Month**                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Ended**              | ** ** | ** ** | **Ended**                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **June 30,**      | ** ** | ** ** | **July 31,**                    | ** ** | **Years Ended June 30,** | ** ** |
| ** **                            | ** ** | **2008**               | ** ** | ** ** | **2007**                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                            | ** ** | ** **             | ** ** | ** ** | **(Amounts in thousands)** | ** ** |
| STATEMENT OF  OPERATIONS DATA:        |       |                   |       |       |                                 |       |   |   |   |   |   |   |   |   |
| Revenues                              |       | $                      | 242,585    |       |                                 | $          | 22,362 |   | $ | 286,914 |   | $ | 306,298 |   | $ | 316,873 |   | $ | 290,884 |   |
| Gross profit                          |       | 5,554                  |       |       | 1,812                                |       | 25,488 |   | 35,026 |   | 48,716 |   | 57,463 |   |
| Interest  expense, net                |       | 32,480                 |       |       | 2,918                                |       | 52,780 |   | 50,754 |   | 44,860 |   | 40,682 |   |
| Net (loss)  income (1)(2)(3)          |       | (169,185               | )          |       | 196,326                              |       | (99,041 | ) | (210,218 | ) | (27,217 | ) | 2,924 |   |
| Net (loss)  income per common share:  |       |                   |       |       |                                 |       |   |   |   |   |   |   |   |   |
| Basic                                 |       | $                      | (19.57     | )          |                                 | $          | 227.23 |   | $ | (114.63 | ) | $ | (243.31 | ) | $ | (31.50 | ) | $ | 3.38 |   |
| Diluted                               |       | (19.57                 | )          |       | 227.23                               |       | (114.63 | ) | (243.31 | ) | (31.50 | ) | 3.32 |   |
| ** **                            | ** ** | ** **             | ** ** | ** ** | ** **                           | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **June 30,**      | ** ** | ** ** | ** **                           | ** ** | **June 30,** | ** ** |
| ** **                            | ** ** | **2008**               | ** ** | ** ** | ** **                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| BALANCE SHEET  DATA:                  |       |                   |       |       |                                 |       |   |   |   |   |   |   |   |   |
| Working capital                       |       | $                      | 28,207     |       |                                 |       |   | $ | 24,567 |   | $ | 34,550 |   | $ | 36,068 |   | $ | 48,116 |   |
| Property and  equipment, net          |       | 113,684                |       |       |                                 |       | 144,823 |   | 181,026 |   | 209,461 |   | 242,336 |   |
| Goodwill and  other intangible assets |       | 24,370                 |       |       |                                 |       | 95,084 |   | 125,936 |   | 314,989 |   | 319,463 |   |
| Total assets                          |       | 217,691                |       |       |                                 |       | 323,051 |   | 408,204 |   | 624,523 |   | 675,631 |   |
| Total long-term  liabilities          |       | 312,915                |       |       |                                 |       | 517,200 |   | 504,360 |   | 512,608 |   | 537,177 |   |
| Stockholders’  (deficit) equity  |       | (130,712               | )          |       |                                 |       | (241,432 | ) | (141,893 | )  | 67,724 |   | 94,941 |   |

 

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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 and other intangible assets ofapproximately $119.8 million, goodwill of approximately $29.6 million andgoodwill and other intangible assets of approximately $190.8 million for theeleven months ended June 30, 2008, the years ended June 30, 2007 and2006, respectively.

 

(3)                                 Includesreorganization items, net of approximately $199.0 million of income for the onemonth ended July 31, 2007 and approximately $17.5 million of expense forthe year ended June 30, 2007, respectively.

 

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

 

The followingdiscussion and analysis of our financial condition and results of operationsshould be read in conjunction with our consolidated financial statements andaccompanying notes which appear elsewhere in this Form 10-K. It containsforward-looking statements that reflect our plans, estimates and beliefs, andwhich involve risks, 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 provider of diagnostic imaging servicesthrough a network of fixed-site centers and mobile facilities.  Our services are noninvasive procedures thatgenerate representations of internal anatomy on film or digital media, whichare 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 inmore than 30 states with a substantial presence in California, Arizona, NewEngland, the Carolinas, Florida and the Mid-Atlantic states.   While we generated approximately 68% of ourtotal revenues from MRI services during the year ended June 30, 2008, weprovide a comprehensive offering of diagnostic imaging services, including PET,PET/CT, CT, mammography, bone densitometry, ultrasound and x-ray.

 

As of June 30, 2008, our network consists of 82fixed-site centers and 110 mobile facilities. This combination allows us toprovide a full range of imaging services to better meet the varying needs ofour customers.  Our fixed-site centersinclude freestanding centers and joint ventures with hospitals and radiologygroups.  Our mobile facilities 

 

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provide hospitals and physician groups access toimaging technologies when they lack either the resources or patient volume toprovide their own imaging services or require incremental capacity.  We do not engage in the practice of medicine,instead we contract with radiologists to provide professional services,including supervision, interpretation and quality assurance.   We have two reportable segments: mobileoperations and fixed operations.  Our 82fixed-site centers include 12 parked mobile facilities, each of which serves asingle customer.  These parked mobilefacilities are included in our mobile operations.  Of our 110 mobile facilities, four mobilefacilities are included as part of our fixed operations in Maine.

 

The diagnostic imagingindustry has grown, and we believe will continue to grow, because of (1) anaging population, (2) the increasing acceptance of diagnostic imaging,particularly PET/CT and (3) expanding applications of CT, MRI and PETtechnologies.  Notwithstanding the growthin the industry, our Adjusted EBITDA declined approximately 33.1% for the yearended June 30, 2008 as compared to the year ended June 30, 2007 (seeour definition of Adjusted EBITDA and reconciliation of net cash provided byoperating activities to Adjusted EBITDA in the subsection entitled “FinancialCondition, Liquidity and Capital Resources” below).  The decline in Adjusted EBITDA as compared toprior year periods has become a historical trend based on our performanceduring the past four fiscal years.  This negative trend in Adjusted EBITDAmay continue and may be exacerbated by the reimbursement reductions discussedin the subsection entitled “Reimbursement” below.

 

We have implemented thefollowing steps in an attempt to reverse the negative trend in Adjusted EBITDA:

 

*Leadership Changes*.  During the fourth quarter of fiscal 2008, weappointed Louis E. “Kip” Hallman, III, our President and Chief ExecutiveOfficer, and Bernard O’Rourke, our Executive Vice President and Chief OperatingOfficer.  Previously, these executivesserved in various executive positions with us. Messrs. Hallman and O’Rourke have 11 years and 9 years,respectively, of executive healthcare experience.   We are currently looking to hire anExecutive Vice President and Chief Financial Officer and an Executive VicePresident, Sales and Marketing.

 

*Core Market Strategy. *We are implementing astrategy based on core markets.  Webelieve that such a strategy will allow us more operating efficiencies andsynergies than are available in a nationwide strategy.  A core market may be based on many factors,including, without limitation, the number of fixed-site centers or mobilefacilities in an area, 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 or establishingnew markets, which may be accomplished through business or asset sales, swaps,purchases, closures and the development of new fixed-site centers and mobileroutes.  In implementing our core marketstrategy, we have taken the following actions:

 

·                  BetweenApril and August 2008, we sold ten fixed-site centers in California,our majority ownership interest in a joint venture that operates a fixed-sitecenter in Ohio and our majority ownership interest in a joint venture thatoperates a fixed-site center in New York. In addition, in July 2008 we closed a fixed-site center inCalifornia.

 

·                  Weare currently engaged, at various stages, in a number of transactions, for thesale of certain underperforming assets and/or assets in non-core markets.

 

·                  Weexpect to utilize proceeds from such transactions to acquire assets and/orupgrade imaging equipment in our core markets and/or purchase portions of thefloating rate notes.

 

There can be no assurancethat we can complete sales and/or purchases of assets on terms favorable to usin a timely manner to replace the loss of Adjusted EBITDA related to the assetswe sell.

 

*Initiatives. *We have attempted to implement, and will continue todevelop and implement, various revenue enhancement and cost reductioninitiatives.  Revenue enhancementinitiatives will focus on (1) improvements in our sales and marketingefforts, (2) technology enhancements to create greater efficiency in thegathering of patient and claim information at the time a procedure is scheduledor completed, and (3) improvements in our revenue cycle management.  Cost reduction initiatives will focus onstreamlining our organizational structure and leveraging 

 

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relationships with strategic vendors.  While we have experienced some improvementsthrough our cost reduction initiatives, our revenue enhancement initiativeshave produced minimal improvements to date.  Moreover, future revenueenhancement initiatives will face significant challenges because of thecontinued overcapacity in the diagnostic imaging industry and reimbursementreductions.  As a result, in May 2008,we commenced a new cost reduction initiative that will be phased in over thenext three fiscal quarters relating to field and corporate organizationalchanges.  We expect that this initiative,once fully implemented, will result in estimated annual savings ofapproximately $5.0 million.

 

**Reorganization**

 

On May 29, 2007,Holdings and InSight filed voluntary petitions to reorganize their businessunder chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for theDistrict of Delaware (Case No. 07-10700). The filing was in connection with a prepackaged plan of reorganizationand related exchange offer.  The othersubsidiaries of Holdings were not included in the bankruptcy filing and continuedto operate their business.  On July 10,2007, the bankruptcy court confirmed Holdings’ and InSight’s Second AmendedJoint Plan of Reorganization pursuant to chapter 11 of the BankruptcyCode.  The plan of reorganization becameeffective and Holdings and InSight emerged from bankruptcy protection on August 1,2007, or the effective date. Pursuant to the confirmed plan of reorganizationand the related exchange offer, (1) all of Holdings’ common stock, alloptions for Holdings’ common stock and all of InSight’s senior subordinatednotes were cancelled, and (2) holders of InSight’s senior subordinatednotes and holders of Holdings’ common stock prior to the effective datereceived 7,780,000 and 864,444 shares of newly issued Holdings’ common stock,respectively, in each case after giving effect to a one for 6.326392 reversestock split of Holdings’ common stock.

 

The reorganizationsignificantly deleveraged our balance sheet and improved our projected cashflow after debt service. However, we still have a substantial amount of debt,which requires significant interest and principal payments.  As of June 30, 2008, we had totalindebtedness of approximately $322.4 million in aggregate principal amount,including InSight’s $315 million of senior secured floating rate notes.  We believe that future net cash provided byoperating and investing activities and our credit facility will be adequate tomeet our operating cash and debt service requirements for at least the next twelvemonths.  Nevertheless, the floating ratenotes mature in November 2011 and unless our financial performancesignificantly improves, we can give no assurance that we will be able torefinance the floating rate notes on commercially reasonable terms, if at all.

 

**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 ourfixed-site centers are primarily generated from services billed, on afee-for-service basis, directly to patients or third-party payors such asmanaged care organizations, Medicare, Medicaid, commercial insurance carriersand workers’ compensation funds, which we generally refer to as our patientservices revenues and management fees. Revenues from our fixed operations have been and will continue to bedriven by the growth in the diagnostic imaging industry and are dependent onour ability to:

 

·                  attractand maintain patient 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

 

·                  acquire or develop new fixed-sitecenters.

 

*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 contract servicesrevenues.  Revenues from our mobileoperations have been and will continue to be driven by the growth in thediagnostic imaging industry and are dependent on our ability to:

 

·                  establish newmobile customers within our core markets;

 

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

 

·                  renew existingcontracts with our mobile customers.

 

**NegativeTrends**

 

Our operationshave been and will continue to be adversely affected by the following negativetrends:

 

·                  overcapacity inthe diagnostic imaging industry;

 

·                  reductions inreimbursement from certain third-party payors including Medicare;

 

·                  reductions incompensation paid by our mobile customers;

 

·                  lower revenuesdue to our aging equipment in both of our operating segments;

 

·                  competition fromother mobile and fixed-site providers;

 

·                  competition fromequipment manufacturers;

 

·                  loss of revenuesfrom former referral sources that invested in their own diagnostic imaging equipment;and

 

·                  loss of revenuesfrom former mobile customers that invested in their own diagnostic imagingequipment.

 

**Reimbursement**

 

*Medicare.*The Medicare program provides reimbursement forhospitalization, physician, diagnostic and certain other services to eligiblepersons 65 years of age and over and certain other individuals.  Providers are paid by the federal governmentin accordance with regulations promulgated by the HHS and generally accept thepayment with nominal deductible and co-insurance amounts required to be paid bythe service recipient, as payment in full. Hospital inpatient services arereimbursed under a prospective payment system. Hospitals receive a specificprospective payment for inpatient treatment services based upon the diagnosis ofthe 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, to whichthe service is assigned rather than on a hospital’s costs. Each year the CMS,publish new APC rates that are determined in accordance with the promulgatedmethodology.

 

Under the final rule forOPPS effective January 1, 2008, CMS is packaging many radiology andradiation oncology services and drugs into procedural codes, thereby paying oneconsolidated payment for a service that commonly involves several codingcomponents.  The practical overall effectin many cases is to decrease the total reimbursement received by hospitals forcertain outpatient radiological services, including PET/CT.  Because unfavorable reimbursement policiesconstrict the profit margins of the mobile customers we bill directly, we haveand may continue to lower our fees to retain existing PET and PET/CT customersand attract new ones.  Although CMS continues to expand reimbursement fornew applications of PET and PET/CT, broader applications are unlikely tosignificantly offset the anticipated overall reductions in PET and PET/CTreimbursement.  Any modifications under OPPS further reducingreimbursement to hospitals may adversely impact our financial condition andresults of operations since hospitals will seek to offset such modifications.

 

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Services provided innon-hospital based freestanding facilities, such as independent diagnostictreatment facilities, are paid under the Medicare Part B fee schedule. In November 2005,CMS published final regulations that decreased the reimbursement for diagnosticprocedures performed together on the same day. Under these regulations, CMS identified families of imaging proceduresby imaging modality and contiguous body area. Medicare would pay 100% of thetechnical component of the higher priced procedure and 50% for the technicalcomponent of each additional procedure for procedures involving contiguous bodyparts within a family of codes when performed in the same session.  CMS anticipated phasing in this 50% ratereduction over two years, 25% in 2006, and another 25% in 2007.  The firstphase of the rate reduction was effective January 1, 2006; however,pursuant to final regulations released in November 2006, CMS did notimplement the second phase of the rate reduction in 2007.  CMS has not yet stated whether it willimplement the second phase.  CMS has alsopublished proposed regulations for hospital outpatient services that wouldimplement the same multi procedure reimbursement methodology set forth underthe Medicare Part B fee schedule; however it has delayed theimplementation of this reimbursement methodology for an indefinite period oftime.  As a result Medicare continues topay 100% of the technical component of each procedure for hospital outpatientservices.  If CMS implements thisreimbursement methodology, it would adversely impact our financial conditionand results of operations since our hospital customers would seek to offsettheir reduced reimbursement through lower rates with us.

 

The Deficit ReductionAct, or the DRA, became effective January 1, 2007 and has resulted insignificant reductions in reimbursement for radiology services for Medicarebeneficiaries.  The DRA provides, among other things, that reimbursementfor the technical component for imaging services (excluding diagnostic andscreening mammography) in non-hospital based freestanding facilities will bethe lesser of OPPS or the Medicare Part B fee schedule.  Theimplementation of the reimbursement reductions in the DRA has had, and webelieve will continue to have, a material adverse effect on our financialcondition and results of operations.

 

Finally, Medicarereimbursement rates under the Medicare Part B fee schedule are calculatedin accordance with a statutory formula. As a result, for calendar years 2005, 2006, 2007 and 2008, CMS publishedregulations decreasing the Part B reimbursement rates by 3.3%, 4.3%, 5.0%and 10.1%, respectively.  In eachinstance, Congress enacted legislation preventing the decreases from takingeffect. We anticipate that CMS will continue to release regulations fordecreases in reimbursement rates under the Medicare Part B fee scheduleuntil the statutory formula is changed through enactment of newlegislation.  In fact, CMS has proposed a5.4% decrease under the Medicare Part B fee schedule for calendar year2009 which has been blocked by Congress through December 31, 2009.  If the proposed 5.4% or similar decrease inthe Medicare Part B fee schedule becomes effective January 1, 2010 itcould have a material adverse effect on our financial condition and results ofoperations.

 

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.

 

*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 increasing number ofstates have established or are establishing payment methodologies intended toprovide 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, some managed care organizations havereduced or otherwise limited, and we believe that other managed careorganizations may reduce or otherwise limit, reimbursement in response toreductions in government reimbursement. These reductions have had, and any future reductions could have, anadverse impact on our financial condition and results of operations. These reductions have been, and any future reductions may be, similar to thereimbursement reductions set forth in the DRA. The development and expansion of HMOs, PPOs and other managed careorganizations within our core markets could have a negative impact onutilization of our services in certain markets and/or affect the revenues perprocedure which we can collect, since such organizations will exert greatercontrol over patients’ access to diagnostic imaging services, the selection ofthe provider of such services and the reimbursement thereof.

 

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

 

Private health insuranceprograms generally have authorized payment for our services on satisfactoryterms. However, we believe that private health insurance programs may alsoreduce or otherwise limit reimbursement in response to reductions in governmentreimbursement, which could have an adverse impact on our financial conditionand results of operations. These reductions may be similar to the reimbursementreductions set forth in the DRA.

 

Several significantthird-party payors implemented the reduction for multiple images on contiguousbody parts (as currently in effect under CMS regulations) and additional payorsmay propose to implement this reduction as well.  If CMS implements thesecond phase of the rate reduction for multiple images on contiguous bodyparts, third-party payors may follow CMS practice and implement a similarreduction.  Such reduction would furthernegatively affect our financial condition and results of operations.

 

Furthermore, certainthird-party payors have proposed and implemented initiatives which have theeffect of substantially decreasing reimbursement rates for diagnostic imagingservices provided at non-hospital facilities, and payors are continuing tomonitor reimbursement for diagnostic imaging services.  A third-party payor has instituted arequirement of participation that requires freestanding imaging centerproviders to offer multi-modality imaging services and not simply offer onetype of diagnostic imaging service. Other third-party payors have instituted specific credentialingrequirements on imaging center providers and physicians performinginterpretations and providing supervision.  Similar initiatives enacted in the future by a significant number ofadditional third-party payors may have a material****adverseimpact on our financial condition and results of operations.

 

**Revenues**

 

We earn revenues byproviding services to patients, hospitals and other healthcare providers.  Our patient services revenues are billed, ona fee-for-service basis, directly to patients or third-party payors such asmanaged care organizations, Medicare, Medicaid, commercial insurance carriersand workers’ compensation funds, collectively, payors.  Patient services revenues also includesbalances due from patients, which are primarily collected at the time theprocedure is performed.  Our charge for aprocedure is comprised of charges for both the technical and professionalcomponents of the service.  Patientservices revenues are presented net of (1) related contractualadjustments, which represent the difference between our charge for a procedureand what we will ultimately receive from the payors, and (2) payments dueto radiologists for interpreting the results of the diagnostic imagingprocedures.

 

Our billing system doesnot generate contractual adjustments. Contractual adjustments are manual estimates based upon an analysis ofhistorical experience of contractual payments from payors and the outstandingaccounts receivables from payors. Contractual adjustments are written-offagainst their corresponding asset account at the time a payment is receivedfrom a payor, with a reduction to the allowance for contractual adjustments tothe extent such an allowance was previously recorded.

 

We report payments toradiologists on a net basis because (1) we are not the primary obligor forthe provision of professional services, (2) the radiologists receivecontractually agreed upon amounts from collections and (3) theradiologists bear the risk of non-collection; however, we have entered intoarrangements with certain radiologists pursuant to which we pay theradiologists directly for their professional services at an agreed uponcontractual rate.  With respect to thesearrangements, the professional component is included in our revenues, and ourpayments to the radiologists are included in costs of services.

 

Our collection policy isto obtain all required insurance information at the time a procedure is scheduled,and to submit an invoice to the payor immediately after a procedure iscompleted.  Most third-party payorsrequire preauthorization before an MRI, PET or PET/CT procedure is performed ona patient.

 

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We refer to our revenuesfrom hospitals, physician groups and other healthcare providers as contractservices revenues.  Contract servicesrevenues are primarily generated from fee-for-service arrangements, fixed-feecontracts and management fees billed to the hospital, physician group or otherhealthcare provider.  Contract servicesrevenues are generally billed to our customers on a monthly basis.  Contract services revenues are recognizedover the applicable contract period. Revenues collected in advance are recorded as unearned revenue.  Revenues are affected by the timing ofholidays, patient and referring physician vacation schedules and inclementweather.

 

The provision fordoubtful accounts is reflected as an operating expense rather than a reductionof revenues and represents our estimate of amounts that will be uncollectiblefrom patients, payors, hospitals, physician groups and other healthcareproviders.  The provision for doubtfulaccounts includes amounts to be written off with respect to specific accountsinvolving customers that are financially unstable or materially fail to complywith the payment terms of their contracts and other accounts based on ourhistorical collection experience, including payor mix and the aging of patientaccounts receivables balances.  Estimatesof uncollectible amounts are revised each period, and changes are recorded inthe period they become known. Receivables deemed to be uncollectible, eitherthrough a customer default on payment terms or after reasonable collectionefforts have been exhausted, are fully written-off against their correspondingasset account, with a reduction to the allowance for doubtful accounts to the extentsuch an allowance was previously recorded. Our historical write-offs for uncollectible accounts are notconcentrated in a specific payor class.

 

The following illustratesour payor mix based on revenues for the year ended June 30, 2008:

 
| Percentage of Total Revenues                                    |   |   |   |
|-----------------------------------------------------------------|--------|--------|--------|
|                                                            |   |   |   |
| Hospitals,  physician groups and other healthcare providers (1) |   | 45     | %      |
| Managed care and  insurance                                     |   | 36     | %      |
| Medicare                                                        |   | 13     | %      |
| Medicaid                                                        |   | 2      | %      |
| Workers’ compensation                                      |   | 2      | %      |
| Other, including  self-pay patients                             |   | 2      | %      |

 

----

(1)              Wehave one healthcare provider that accounts for approximately 6% of our totalrevenues.  No other single hospital,physician group or other healthcare provider accounted for more than 5% of ourtotal revenues.

 

As of June 30,2008, our days sales outstanding for trade accounts receivables on a net basiswas 48 days.  We calculate days salesoutstanding by dividing accounts receivables, net of allowances, by thethree-month average revenue per day.

 

The aging of ourgross and net trade accounts receivables as of June 30, 2008 is as follows(amounts in thousands):

 
| ** **                                                     | ** ** | ** **      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | **120 days**  | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|-----------------|------------|------------------|------------|------------------|------------|------------------|------------|--------------------|------------|------------|------------|
| ** **                                                     | ** ** | **Current**     | ** ** | **30 days** | ** ** | **60 days** | ** ** | **90 days** | ** ** | **and older** | ** ** | **Total**  | ** ** |
| ** **                                                     | ** ** | **(unaudited)** | ** ** |
|                                                           |       |            |       |             |       |             |       |             |       |               |       |       |       |
| Hospitals,  physician groups and other healthcare providers    |       | $               | 9,013      |             | $          | 3,813            |       | $                | 928        |               | $          | 134        |       | $ | 547 |   | $ | 14,435 |   |
| Managed care and  insurance                                    |       | 15,758          |       | 6,458            |       | 4,103            |       | 2,312            |       | 8,875              |       | 37,506     |       |
| Medicare/Medicaid                                              |       | 4,950           |       | 1,264            |       | 849              |       | 636              |       | 2,513              |       | 10,212     |       |
| Workers’  compensation                                    |       | 1,087           |       | 673              |       | 370              |       | 322              |       | 854                |       | 3,306      |       |
| Other, including  self-pay patients                            |       | 533             |       | 98               |       | 101              |       | 70               |       | 16                 |       | 818        |       |
| Trade accounts  receivables                                    |       | 31,341          |       | 12,306           |       | 6,351            |       | 3,474            |       | 12,805             |       | 66,277     |       |
|                                                           |       |            |       |             |       |             |       |             |       |               |       |       |       |
| Less:    Allowances  for professional fees |       | (3,533          | )          | (1,341           | )          | (876             | )          | (502             | )          | (1,612             | )          | (7,864     | )          |
| Allowances for  contractual adjustments                        |       | (9,543          | )          | (3,034           | )          | (1,942           | )          | (177             | )          | (705               | )          | (15,401    | )          |
| Allowances for  doubtful accounts                              |       | (32             | )          | (45              | )          | (415             | )          | (1,615           | )          | (6,411             | )          | (8,518     | )          |
| Trade accounts  receivables, net                               |       | $               | 18,233     |             | $          | 7,886            |       | $                | 3,118      |               | $          | 1,180      |       | $ | 4,077 |   | $ | 34,494 |   |

 

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**OperatingExpenses**

 

We operate in acapital intensive 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, lease payments, salaries and benefit obligations,equipment maintenance expenses, and insurance and vehicle operationscosts.  Because a large portion of ouroperating expenses are fixed, any increase in our procedure volume orreimbursement rates disproportionately increases our operating cash flow.  Conversely, any decrease in our procedurevolume or reimbursement rates disproportionately decreases our operating cashflow.  Our variable costs, which compriseonly a small portion of our total operating expenses, include the cost ofservice supplies such as film, contrast media and radiopharmaceuticals used inPET and PET/CT procedures.

 

**Resultsof Operations**

 

Upon Holdings’ andInSight’s emergence from chapter 11, we adopted fresh-start reporting inaccordance with SOP 90-7.  The adoptionof fresh-start reporting results in our becoming a new entity for financialreporting purposes.  Accordingly, ourconsolidated financial statements on or after August 1, 2007 are notcomparable to our condensed consolidated financial statements prior to thatdate.  The adoption of fresh-startreporting primarily affects depreciation and amortization and interest expensein the consolidated statements of operations. The accompanying consolidated statements of operations for the yearended June 30, 2008 combine the results of operations for the one monthended July 31, 2007 of the Predecessor and the eleven months ended June 30,2008 of the Successor.  We then comparethe combined results of operations with the corresponding period in the prioryear.

 

Presentation of the combined results of operations for all of fiscal2008 does not comply with accounting principles generally accepted in theUnited States; however, we believe the combined results of operations for theyear ended June 30, 2008 provide management and investors with a moremeaningful perspective of our financial performance and operating trends thanif we did not combine the results of operations of Predecessor and Successor inthis manner.  Similarly, we combine thefinancial results of Predecessor and Successor when discussing sources and usesof cash for the year ended June 30, 2008.

 

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The following table sets forth the results of operations for the yearsended June 30, 2008, 2007 and 2006. These combined results have been prepared for comparative purposes onlyand do not purport to be indicative of what results of operations would havebeen, and may not be indicative of future operating results (amounts inthousands):

 
| ** **                                          | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **(Combined)**                          | ** ** | **(Predecessor)** | ** ** | **(Predecessor)** | ** ** |
| REVENUES:                                           |       |                                    |       |   |   |   |   |
| Contract  services                                  |       | $                                       | 118,995    |   | $ | 128,693 |   | $ | 134,406 |   |
| Patient services                                    |       | 145,952                                 |       | 158,221 |   | 171,892 |   |
| Total revenues                                      |       | 264,947                                 |       | 286,914 |   | 306,298 |   |
|                                                |       |                                    |       |   |   |   |   |
| COSTS OF  OPERATIONS:                               |       |                                    |       |   |   |   |   |
| Costs of  services                                  |       | 183,230                                 |       | 192,599 |   | 197,812 |   |
| Provision for  doubtful accounts                    |       | 6,179                                   |       | 5,643 |   | 5,351 |   |
| Equipment leases                                    |       | 10,006                                  |       | 6,144 |   | 3,257 |   |
| Depreciation and  amortization                      |       | 58,166                                  |       | 57,040 |   | 64,852 |   |
| Total costs of  operations                          |       | 257,581                                 |       | 261,426 |   | 271,272 |   |
|                                                |       |                                    |       |   |   |   |   |
| Gross profit                                        |       | 7,366                                   |       | 25,488 |   | 35,026 |   |
|                                                |       |                                    |       |   |   |   |   |
| CORPORATE  OPERATING EXPENSES                       |       | (27,422                                 | )          | (25,496 | ) | (23,655 | ) |
|                                                |       |                                    |       |   |   |   |   |
| EQUITY IN  EARNINGS OF UNCONSOLIDATED PARTNERSHIPS  |       | 2,065                                   |       | 3,030 |   | 3,072 |   |
|                                                |       |                                    |       |   |   |   |   |
| INTEREST  EXPENSE, net                              |       | (35,398                                 | )          | (52,780 | ) | (50,754 | ) |
|                                                |       |                                    |       |   |   |   |   |
| LOSS ON SALES OF  CENTERS                           |       | (644                                    | )          | — |   | — |   |
|                                                |       |                                    |       |   |   |   |   |
| GAIN ON  REPURCHASE OF NOTES PAYABLE                |       | —                                  |       | — |   | 3,076 |   |
|                                                |       |                                    |       |   |   |   |   |
| LOSS ON  DISSOLUTION OF PARTNERSHIP                 |       | —                                  |       | — |   | (1,000 | ) |
|                                                |       |                                    |       |   |   |   |   |
| IMPAIRMENT OF  GOODWILL AND OTHER INTANGIBLE ASSETS |       | (119,771                                | )          | (29,595 | ) | (190,807 | ) |
|                                                |       |                                    |       |   |   |   |   |
| Loss before  reorganization items and income taxes  |       | (173,804                                | )          | (79,353 | ) | (225,042 | ) |
|                                                |       |                                    |       |   |   |   |   |
| REORGANIZATION  ITEMS, net                          |       | 198,998                                 |       | (17,513 | ) | — |   |
|                                                |       |                                    |       |   |   |   |   |
| Income (loss)  before income taxes                  |       | 25,194                                  |       | (96,866 | ) | (225,042 | ) |
|                                                |       |                                    |       |   |   |   |   |
| (BENEFIT)  PROVISION FOR INCOME TAXES               |       | (1,947                                  | )          | 2,175 |   | (14,824 | ) |
|                                                |       |                                    |       |   |   |   |   |
| Net income  (loss)                                  |       | 27,141                                  |       | (99,041 | ) | (210,218 | ) |
|                                                     |            |                                         |            |  |  |  |  |  |  |  |

 

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The following table sets forth certain historical financial dataexpressed as a percentage of revenues for each of the years indicated:

 
| ** **                                          | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **(Combined)**                          | ** ** | **(Predecessor)** | ** ** | **(Predecessor)** | ** ** |
|                                                |       |                                    |       |   |   |   |   |
| REVENUES                                            |       | 100.0                                   | %          | 100.0 | % | 100.0 | % |
|                                                |       |                                    |       |   |   |   |   |
| COSTS OF  OPERATIONS:                               |       |                                    |       |   |   |   |   |
| Costs of  services                                  |       | 69.2                                    |       | 67.1 |   | 64.6 |   |
| Provision for  doubtful accounts                    |       | 2.3                                     |       | 2.0 |   | 1.7 |   |
| Equipment leases                                    |       | 3.7                                     |       | 2.1 |   | 1.1 |   |
| Depreciation and  amortization                      |       | 22.0                                    |       | 19.9 |   | 21.2 |   |
| Total costs of  operations                          |       | 97.2                                    |       | 91.1 |   | 88.6 |   |
|                                                |       |                                    |       |   |   |   |   |
| Gross profit                                        |       | 2.8                                     |       | 8.9 |   | 11.4 |   |
|                                                |       |                                    |       |   |   |   |   |
| CORPORATE  OPERATING EXPENSES                       |       | (10.3                                   | )          | (8.9 | ) | (7.7 | ) |
|                                                |       |                                    |       |   |   |   |   |
| EQUITY IN  EARNINGS OF UNCONSOLIDATED PARTNERSHIPS  |       | 0.8                                     |       | 1.1 |   | 1.0 |   |
|                                                |       |                                    |       |   |   |   |   |
| INTEREST  EXPENSE, net                              |       | (13.5                                   | )          | (18.5 | ) | (16.6 | ) |
|                                                |       |                                    |       |   |   |   |   |
| LOSS ON SALES OF  CENTERS                           |       | (0.2                                    | )          | — |   | — |   |
|                                                |       |                                    |       |   |   |   |   |
| GAIN ON  REPURCHASE OF NOTES PAYABLE                |       | —                                  |       | — |   | 1.0 |   |
|                                                |       |                                    |       |   |   |   |   |
| LOSS ON  DISSOLUTION OF PARTNERSHIP                 |       | —                                  |       | — |   | (0.3 | ) |
|                                                |       |                                    |       |   |   |   |   |
| IMPAIRMENT OF  GOODWILL AND OTHER INTANGIBLE ASSETS |       | (45.2                                   | )          | (10.3 | ) | (62.3 | ) |
|                                                |       |                                    |       |   |   |   |   |
| Loss before  reorganization items and income taxes  |       | (65.6                                   | )          | (27.7 | ) | (73.5 | ) |
|                                                |       |                                    |       |   |   |   |   |
| REORGANIZATION  ITEMS, net                          |       | 75.1                                    |       | (6.1 | ) | — |   |
|                                                |       |                                    |       |   |   |   |   |
| Income (loss)  before income taxes                  |       | 9.5                                     |       | (33.8 | ) | (73.5 | ) |
|                                                |       |                                    |       |   |   |   |   |
| (BENEFIT)  PROVISION FOR INCOME TAXES               |       | (0.7                                    | )          | 0.8 |   | (4.8 | ) |
|                                                |       |                                    |       |   |   |   |   |
| Net income  (loss)                                  |       | 10.2                                    | %          | (34.6 | )% | (68.6 | )% |

 

The following table sets forth certain historical financial data bysegment for the periods indicated (amounts in thousands):

 
| ** **                                      | ** ** | **Years Ended June 30,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                      | ** ** | **(Combined)**                          | ** ** | **(Predecessor)** | ** ** | **(Predecessor)** | ** ** |
|                                            |       |                                    |       |   |   |   |   |
| Revenues                                        |       |                                    |       |   |   |   |   |
| Fixed operations                                |       | $                                       | 168,805    |   | $ | 180,115 |   | $ | 191,637 |   |
| Mobile  operations                              |       | 96,142                                  |       | 106,799 |   | 114,661 |   |
| Total                                           |       | $                                       | 264,947    |   | $ | 286,914 |   | $ | 306,298 |   |
|                                            |       |                                    |       |   |   |   |   |
| Costs of Operations                             |       |                                    |       |   |   |   |   |
| Fixed operations                                |       | $                                       | 151,391    |   | $ | 151,447 |   | $ | 154,377 |   |
| Mobile  operations                              |       | 92,316                                  |       | 91,345 |   | 97,586 |   |
| Other                                           |       | 13,874                                  |       | 18,634 |   | 19,309 |   |
| Total                                           |       | $                                       | 257,581    |   | $ | 261,426 |   | $ | 271,272 |   |
|                                            |       |                                    |       |   |   |   |   |
| Costs of Operations as a Percentage of Revenues |       |                                    |       |   |   |   |   |
| Fixed operations                                |       | 89.7                                    | %          | 84.1 | % | 80.6 | % |
| Mobile  operations                              |       | 96.0                                    |       | 85.5 |   | 85.1 |   |
| Total                                           |       | 97.2                                    | %          | 91.1 | % | 88.6 | % |

 

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***Years Ended June 30, 2008and 2007***

 

*Revenues:*  Revenues decreased approximately7.7% from approximately $286.9 million for the year ended June 30,2007, to approximately $264.9 million for the year ended June 30,2008.  This decrease was due to lowerrevenues from our fixed operations (approximately $11.3 million) and fromour mobile operations (approximately $10.7 million).  Revenues from our fixed and mobile operationsrepresented approximately 64% and 36%, respectively, of our total revenues forthe year ended June 30, 2008. Revenues have been and are expected to continue to be adversely affectedby the negative trends discussed above.

 

Revenues from our fixedoperations decreased approximately 6.3% from approximately $180.1 millionfor the year ended June 30, 2007, to approximately $168.8 million forthe year ended June 30, 2008.  Thisdecrease was due primarily to lower revenues from our existing fixed-sitecenters (approximately $7.1 million, which amount includes approximately $2.6million as a result of the DRA) and the loss of revenues from the centers wesold or closed during fiscal 2008 and 2007 (approximately$4.2 million).  Revenues from ourexisting fixed-site centers decreased because of a decline in our averagereimbursement from payors (approximately 3.3%), partially offset by an increasein procedure volume (approximately 1%).

 

Revenues from our mobileoperations decreased approximately 10.0% from approximately $106.8 million forthe year ended June 30, 2007, to approximately $96.1 million for the yearended June 30, 2008. This decrease was due primarily to a reduction in thenumber of mobile facilities in operation and reductions in reimbursement fromour mobile customers for all modalities. The reductions in reimbursement are the result of competition from othermobile providers and the increased age of our mobile facilities.

 

*Costsof Operations: *Costs of operations decreased approximately 1.5% from approximately$261.4 million for the year ended June 30, 2007, to approximately $257.6million for the year ended June 30, 2008. This decrease was due primarilyto lower costs at our billing and other operations (approximately $4.7 million)and lower costs at our fixed operations (approximately $0.1 million), partiallyoffset by higher costs at our mobile operations (approximately $1.0million).  The decrease at our billingand other operations is due to lower salaries and benefits and reduceddepreciation and amortization expense, partially offset by higher consultingfees.   Our gross profit margin hasdeclined significantly as our costs of operations have not decreased assignificantly as our revenues due to the high fixed cost nature of ourbusiness.

 

Costs of operations atour fixed operations decreased from approximately $151.5 million for the yearended June 30, 2007, to approximately $151.4 million for the year ended June 30,2008.  The decrease was due primarily tothe elimination of costs from the centers we sold or closed in fiscal 2008 and2007 (approximately $4.0 million) and the elimination of charges related to theclosure of two fixed-site centers during the first quarter of fiscal 2007(approximately $0.3 million), partially offset by an increase in costs at ourexisting fixed-site centers (approximately $3.7 million) and a charge relatedto an unconsolidated fixed-site center (approximately $0.5 million).  The increase in costs of operations at ourexisting fixed-site centers was primarily caused by (1) higherdepreciation and amortization expense as a result of the fair value adjustmentrequired by fresh-start reporting (approximately $3.3 million); (2) higherminority interest expense from our consolidated partnerships (approximately$0.7 million); and (3) higher occupancy costs (approximately $0.5million); partially offset by lower medical supply costs (approximately $1.2million) and lower radiologist reading fee expenses as a result of lowerprocedure volume at certain centers (approximately $0.7 million).

 

Costs of operations atour mobile operations increased approximately 1.1% from approximately $91.3million for the year ended June 30, 2007, to approximately $92.3 millionfor the year ended June 30, 2008. The increase was due primarily to (1) higher equipment lease costsas a result of entering into more operating leases (approximately $3.9million); (2) higher bad debt expense (approximately $0.9 million); and (3) highervehicle operations costs (approximately $0.8 million); partially offset by (1) lowersalaries and benefits (approximately $2.9 million); (2) lower equipmentmaintenance costs (approximately $1.3 million); and (3) lower medicalsupply costs (approximately $0.5 million).

 

*CorporateOperating Expenses:* Corporate operating expenses increased approximately 7.5% from approximately$25.5 million for the year ended June 30, 2007, to approximately$27.4 million for the year ended June 30, 2008.  The increase was due primarily to severancecharges related to the reduction in staff described earlier 

 

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(approximately $2.0million) and higher board of director fees (approximately $0.3 million),partially offset by reduced accounting fees (approximately $0.4 million).  We incurred approximately $2.2 million in legalfees relating to litigation in each of the years ended June 30, 2008 and 2007.

 

*InterestExpense, net:* Interest expense, net decreased approximately 33.0% from approximately$52.8 million for the year ended June 30, 2007, to approximately$35.4 million for the year ended June 30, 2008.  The decrease was due primarily to (1) thecancellation and exchange of $194.5 million of senior subordinated notes forHoldings’ common stock pursuant to the reorganization (approximately $17.6million); (2) lower amortization of deferred financing costs(approximately $3.0 million); and (3) lower interest rates on the floatingrate notes (approximately $1.5 million), partially offset by increasedamortization of the bond discount (approximately $4.4 million).

 

*Impairmentof Goodwill and Other Intangible Assets: *For the year ended June 30, 2008, we recordednon-cash impairment charges of approximately $119.8 million.  Thesecharges are a reduction in the carrying value of  goodwill (approximately $107.4 million) andother intangible assets (approximately $12.4 million).  See “CriticalAccounting Policies and Estimates” below and Note 8 to our consolidated financialstatements, which are part of this Form 10-K.

 

*Loss Before Reorganization Items,net and Income Taxes:*  Loss before reorganizationitems and income taxes increased approximately 118.9% from approximately $79.4million for the year ended June 30, 2007, to approximately $173.8 millionfor the year ended June 30, 2008. The increase was due primarily to (1) an increase in impairment ofgoodwill and other intangible assets; (2) lower gross profit; (3) lowerequity in earnings of unconsolidated partnerships; and (4) highercorporate operating expenses, partially offset by lower interest expense.

 

*Reorganization Items, net:* During the one month ended July 31, 2007, Predecessor recorded netgains of approximately $199.0 million for items in accordance with SOP 90-7related to Holdings’ and InSight’s reorganization, primarily due to a gain ondebt discharge, revaluation of assets and liabilities, professional fees andconsent fees.  During the fourth quarterof fiscal 2007, we recorded net charges of approximately $17.5 million foritems in accordance with SOP 90-7 for expenses related to Holdings’ and InSight’s reorganization.

 

*Provision(Benefit) for Income Taxes: *Provision (benefit) for income taxes decreased from aprovision of approximately $2.2 million for the year ended June 30, 2007,to a benefit of approximately $1.9 million for the year ended June 30,2008.  The benefit for income taxes forthe year ended June 30, 2008 is primarily related to a decrease indeferred taxes due to impairment charges related to certain indefinite-livedintangible assets, partially offset by estimated state income taxes.

 

***Years Ended June 30, 2007and 2006***

 

*Revenues:*  Revenues decreased approximately6.3% from approximately $306.3 million for the year ended June 30,2006, to approximately $286.9 million for the year ended June 30,2007. This decrease was due to lower revenues from our fixed operations(approximately $11.5 million) and from our mobile operations(approximately $7.9 million). Revenues from our fixed and mobile operationsrepresented approximately 63% and 37%, respectively, of our total revenues forthe years ended June 30, 2007 and 2006.

 

Revenues from our fixedoperations decreased approximately 6.0% from approximately $191.6 millionfor the year ended June 30, 2006, to approximately $180.1 million forthe 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) theloss of revenues from the centers we sold or closed during fiscal 2007 and 2006(approximately $5.8 million), partially offset by (1) higher revenuesfrom changes in payment arrangements with certain radiologists discussed above(approximately $2.0 million) and (2) revenues from a joint venturefixed-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) lowerprocedure volume (approximately 1%) as a result of the negative trendsdiscussed above and (2) a decline in our average reimbursement from payors(approximately 4%).  Revenues have beenand may continue to be adversely affected by the negative trends discussedabove.

 

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Revenues from our mobileoperations decreased approximately 6.9% from approximately $114.7 million forthe year ended June 30, 2006, to approximately $106.8 million for the yearended June 30, 2007. This decrease was partially due to (1) lowerrevenues from our existing mobile facilities (approximately $7.5 million) and (2) lossof revenues from a mobile lithotripsy partnership we dissolved during thesecond 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 ourtotal revenues were generated from patient services revenues for the year endedJune 30, 2007.  All patient servicesrevenues were earned from our fixed operations for the year ended June 30,2007. 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 decreased approximately 3.6% from approximately$271.3 million for the year ended June 30, 2006, to approximately $261.4million for the year ended June 30, 2007. This decrease was due primarilyto (1) lower costs at our mobile operations (approximately $6.3 million); (2) lowercosts at our fixed operations (approximately $3.0 million); and (3) lowercosts at our billing and other operations (approximately $0.6 million).  The decrease at our billing and otheroperations is due to lower amortization expense on our other intangible assetsas a result of a reduction in their carrying value from an impairment chargetaken during the fourth quarter of fiscal 2006, partially offset by highersalaries and benefits, as a result of severance payments in connection with theconsolidation of a billing office.  Ourgross profit margin has declined significantly as our costs of operations havenot decreased as significantly as our revenues due to the high fixed costnature of our business.

 

Costs of operations atour fixed operations decreased approximately 1.9% from approximately $154.4million for the year ended June 30, 2006, to approximately $151.4 millionfor the year ended June 30, 2007. Costs of operations decreased due to the elimination of costs from thecenters we sold or closed in fiscal 2007 and 2006 (approximately $5.0 million),partially offset by (1) higher costs at our existing fixed-site centers(approximately $0.8 million); (2) costs from a joint venture fixed-sitecenter we acquired during the third quarter of fiscal 2006 (approximately $0.8million); (3) charges to close two fixed-site centers during the firstquarter of fiscal 2007 (approximately $0.3 million); and (4) severancecharges related to the reduction in labor force in the second quarter of fiscal2007 discussed above (approximately $0.1 million). The increase in costs at ourexisting fixed-site centers was primarily due to (1) higher payments toradiologists (approximately $2.0 million) discussed above; (2) higherequipment lease costs as a result of entering into more operating leases(approximately $1.4 million); (3) higher occupancy costs (approximately$0.7 million); and (4) higher equipment maintenance costs (approximately$0.3 million), partially offset by (1) lower medical supply costs as aresult of lower volumes and cost reduction initiatives throughout ourfixed-site centers (approximately $1.2 million); (2) reduced taxes,primarily property taxes (approximately $0.7 million); (3) reducedminority interest expense and management fees as a result of lower earningsfrom our consolidated partnerships (approximately $0.5 million); and (4) reducedinsurance premium costs (approximately $0.3 million).

 

Costs of operations atour mobile operations decreased approximately 6.5% from approximately $97.6million 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 depreciationand amortization expense (approximately $4.9 million); (2) lower salariesand benefits (approximately $2.6 million); (3) lower medical supply costsas a result 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 $0.2million), partially offset by (1) higher equipment lease costs as a resultof entering into more operating leases (approximately $1.9 million); (2) highervehicle operation costs (approximately $0.7 million); and (3) bad debtexpense (approximately $0.5 million).

 

*CorporateOperating Expenses:* Corporate operating expenses increased approximately 7.6% from approximately$23.7 million for the year ended June 30, 2006, to approximately$25.5 million for the year ended June 30, 2007.  The increase was due primarily to (1) higherlegal and consulting fees relating to certain legal proceedings (approximately$2.2 million); (2) higher sales and marketing costs (approximately $0.8million); and (3) higher 

 

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accounting costs(approximately $0.5 million), primarily related to compliance with regulationsrelated to the Sarbanes-Oxley Act, partially offset by the elimination of costsfrom a national sales meeting in the first quarter of fiscal 2006(approximately $0.9 million).

 

*InterestExpense, net:* Interest expense, net increased approximately 4.1% from approximately$50.7 million for the year ended June 30, 2006, to approximately$52.8 million for the year ended June 30, 2007.  The increase was due primarily to higherinterest rates on our variable rate indebtedness.

 

*Impairmentof Goodwill:*  In thesecond quarter of fiscal 2007 we recorded a non-cash goodwill impairment chargeof approximately $29.6 million.  Thischarge is a reduction in the carrying value of goodwill for our fixed reportingunit.  See “Critical Accounting Policies and Estimates” below and Note 8 to our consolidated financial statements, which are a part ofthis Form 10-K.

 

*Loss Before Reorganization Items,net and Income Taxes:*  Loss before reorganizationitems, net and income taxes decreased approximately 64.7% from approximately$225.0 million for the year ended June 30, 2006, to approximately $79.4million for the year ended June 30, 2007. The decrease was due primarily to lower impairment of goodwill and otherintangible assets, partially offset by (1) lower gross profit; (2) lowerequity in earnings of unconsolidated partnerships; (3) higher interestexpense; and (4) higher corporate operating expenses.

 

*Reorganization Items, net:* During the fourth quarter of fiscal 2007, we recorded net charges ofapproximately $17.5 million for items in accordance with SOP 90-7 for expensesrelated to Holdings’ and InSight’s reorganization.

 

*Provision(Benefit) for Income Taxes: *Provision (benefit) for income taxes increased from abenefit of approximately $14.8 million for the year ended June 30, 2006,to a provision of approximately $2.2 million for the year ended June 30,2007.  The provision for income taxes forthe year ended June 30, 2007 is primarily related to estimated stateincome taxes.  The benefit for the yearended June 30, 2006 is primarily related to a reduction in deferred taxliabilities related to financial statement and tax basis differences for goodwill.  As a result of the plan of reorganization,future utilization of our NOL carryforwards will be limited.

 

**FinancialCondition, Liquidity and Capital Resources**

 

We have historicallyfunded our operations and capital project requirements from net cash providedby operating activities and capital and operating leases.  We expect to fund future working capital andcapital project requirements from existing assets, sales of fixed-site centersand mobile facilities, net cash provided by operating activities, capital andoperating leases and our credit facility. If our operating cash flow continues to decline, it will result in:

 

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

 

·                  difficulty funding our capital projects;and

 

·                  more stringent financing and leasingterms from equipment manufacturers and other financing resources.

 

*Liquidity: *The reorganization significantly deleveraged ourbalance sheet and improved our projected cash flow after debt service. However,we still have a substantial amount of debt, which requires significant interestand principal payments.  As of June 30, 2008, we had totalindebtedness of approximately $322.4 million in aggregate principal amount,including InSight’s $315 million of floating rate notes.  We believe thatfuture net cash provided by operating and investing activities and our creditfacility will be adequate to meet our operating cash and debt servicerequirements for at least the next twelve months.

 

During recent years, ourfinancial performance has deteriorated.  We reported net losses ofapproximately $169.2 million, $99.0 million and $210.2 million for the elevenmonths ended June 30, 2008 and the years ended June 30, 2007 and2006, respectively.  We have implementedsteps to improve our financial performance, including, leadership changes, acore market strategy and various initiatives in response to thisdeterioration.  We have attempted toimplement, and will continue to develop and implement, various revenueenhancement and cost reduction initiatives. Revenue enhancement initiatives will focus on (1) improvements inour sales and marketing 

 

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efforts, (2) technologyenhancements to create greater efficiency in the gathering of patient and claiminformation at the time a procedure is scheduled or completed, and (3) improvementsin our revenue cycle management.  Costreduction initiatives will focus on streamlining our organizational structureand leveraging relationships with strategic vendors.  While we have experienced some improvementsthrough our cost reduction initiatives, our revenue enhancement initiativeshave produced minimal improvements to date.  Moreover, future revenueenhancement initiatives will face significant challenges because of thecontinued overcapacity in the diagnostic imaging industry and reimbursementreductions. We can give no assurance that these steps will be adequate toimprove our financial performance.  Unless our financial performancesignificantly improves, we can give no assurance that we will be able torefinance the floating rate notes, which mature in November 2011, on commerciallyreasonable terms, if at all.

 

Our short-term liquidityneeds relate primarily to:

 

·                  interest payments relating to the floating rate notesand credit facility;

 

·                  capital projects;

 

·                  working capital requirements;

 

·                  potential acquisitions; and

 

·                  potential repurchases of portions of the floating ratenotes.

 

Our long-term liquidityneeds relate primarily to the maturity of the floating rate notes in November 2011.

 

As mentioned above, wemay from time to time, in one or more open market or privately negotiatedtransactions, repurchase a portion of our outstanding floating rate notes.  Any such repurchases shall be in accordancewith the terms of agreements governing our material indebtedness.  On September 24, 2008, we purchased $2.5million in principal amount of the floating rate notes for approximately $1.1million.

 

Cash, cash equivalentsand restricted cash as of June 30, 2008 were approximately $29.1 million(including approximately $8.1 million, that was subject to the lien for thebenefit of the floating rate note holders, and may only be used for whollyowned capital projects or under certain circumstances the repurchase offloating rate notes).  Our primary sourceof liquidity is cash provided by operating activities.  Our ability to generate cash flows fromoperating activities is based upon several factors including the following:

 

·                  the procedure volume of patients at ourfixed-site centers;

 

·                  the reimbursement we receive for ourservices;

 

·                  the demand for our mobile services;

 

·                  our ability to control expenses;

 

·                  our ability to collect our trade accountsreceivables from third-party payors, hospitals, physician groups, otherhealthcare providers and patients; and

 

·                  our ability to implement steps to improveour financial performance.

 

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A summary of cashflows is as follows (amounts in thousands):

 
| ** **                                           | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(Combined)**                          | ** ** | **(Predecessor)** | ** ** | **(Predecessor)** | ** ** |
|                                                 |       |                                    |       |   |   |   |   |
| Net cash  provided by operating activities           |       | $                                       | 3,564      |   | $ | 9,065 |   | $ | 37,628 |   |
| Net cash used in  investing activities               |       | (7,218                                  | )          | (16,045 | ) | (28,507 | ) |
| Net cash  provided by (used in) financing activities |       | 3,824                                   |       | (396 | ) | (1,752 | ) |
|                                                 |       |                                    |       |   |   |   |   |
| Increase  (decrease) in cash and cash equivalents    |       | $                                       | 170        |   | $ | (7,376 | ) | $ | 7,369 |   |

 

Net cash provided byoperating activities was approximately $3.6 million for the year ended June 30,2008 and resulted primarily from our net income (approximately $27.1 million)and changes in certain assets and liabilities (approximately $1.5 million),partially offset by non-cash income (approximately $17.6 million) and cash usedfor reorganization items (approximately $8.0 million).  Non-cash income primarily includesreorganization items, net (approximately $199.0 million), partially offset bynon-cash charges of (1) impairment of goodwill and other intangible assets(approximately $119.8 million); (2) depreciation and amortization(approximately $58.2 million) and (3) amortization of bond discount(approximately $4.5 million).  Thechanges in certain assets and liabilities primarily consists of a decrease inaccounts receivables, net (approximately $8.2 million), partially offset by adecrease in accounts payable and accrued expenses (approximately $6.3 million).

 

Net cash used in investingactivities was approximately $7.2 million for the year ended June 30,2008.  Cash used in investing activitiesresulted primarily from our purchase or upgrade of diagnostic imaging equipment(approximately $8.3 million), and an increase in restricted cash(approximately $8.1 million), partially offset by proceeds from the sales ofcenters (approximately $9.1 million).

 

Net cash provided byfinancing activities was approximately $3.8 million for the year ended June 30,2008. Cash provided by financing activities resulted primarily from theissuance of additional floating rate notes (approximately $12.8 million),partially offset by principal payments on notes payable and capital leasepayments (approximately $8.9 million).

 

We define Adjusted EBITDA as our earnings beforeinterest expense, income taxes, depreciation and amortization, excludingimpairment of goodwill and other intangible assets, loss on sales of centers,reorganization items, net, gain on repurchase of notes payable and loss on dissolutionof partnership.  Adjusted EBITDA has beenincluded because we believe that it is a useful tool for us and our investorsto measure our ability to provide cash flows to meet debt service, capitalprojects and working capital requirements. Adjusted EBITDA should not be considered an alternative to, or moremeaningful than, income from company operations or other traditional indicatorsof operating performance and cash flow from operating activities determined inaccordance with accounting principles generally accepted in the UnitedStates.  We present the discussion of Adjusted EBITDA because covenants inthe agreements governing our material indebtedness contain ratios based on thismeasure.   While Adjusted EBITDA is usedas a measure of liquidity and the ability to meet debt service requirements, itis not necessarily comparable to other similarly titled captions of othercompanies due to differences in methods of calculations.  Our reconciliation of net cash provided byoperating activities to Adjusted EBITDA is as follows (amounts in thousands):

 

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| ** **                                         | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                         | ** ** | **2008**                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **(Combined)**                          | ** ** | **(Predecessor)** | ** ** | **(Predecessor)** | ** ** |
|                                               |       |                                    |       |   |   |   |   |
| Net cash  provided by operating activities         |       | $                                       | 3,564      |   | $ | 9,065 |   | $ | 37,628 |   |
| Cash used for  reorganization items                |       | 8,027                                   |       | 11,367 |   | — |   |
| (Benefit)  provision for income taxes              |       | (1,947                                  | )          | 2,175 |   | (14,824 | ) |
| Interest expense,  net                             |       | 35,398                                  |       | 52,780 |   | 50,754 |   |
| Amortization of  bond discount                     |       | (4,522                                  | )          | — |   | — |   |
| Share-based  compensation                          |       | (15                                     | )          | — |   | — |   |
| Amortization of  deferred financing costs          |       | (145                                    | )          | (3,158 | ) | (3,051 | ) |
| Equity in  earnings of unconsolidated partnerships |       | 2,065                                   |       | 3,030 |   | 3,072 |   |
| Distributions  from unconsolidated partnerships    |       | (2,621                                  | )          | (3,008 | ) | (3,387 | ) |
| Net change in  operating assets and liabilities    |       | (1,493                                  | )          | (12,189 | ) | (6,121 | ) |
| Net change in  deferred income taxes               |       | 1,864                                   |       | — |   | 15,224 |   |
|                                               |       |                                    |       |   |   |   |   |
| Adjusted EBITDA                                    |       | $                                       | 40,175     |   | $ | 60,062 |   | $ | 79,295 |   |

 

Adjusted EBITDA decreasedapproximately 33.1% from approximately $60.1 million for the year ended June 30,2007, to approximately $40.2 million for the year ended June 30,2008.  This decrease was due primarily to reductions in Adjusted EBITDAfrom our mobile operations (approximately $12.0 million) and our fixedoperations (approximately $9.3 million) and an increase in our corporateoperating expenses (approximately $1.9 million), partially offset by decreasesin costs at our billing and other operations (approximately $3.3 million).

 

Adjusted EBITDA from ourfixed operations decreased approximately 16.4% from approximately $56.6 millionfor the year ended June 30, 2007, to approximately $47.3 million for theyear ended June 30, 2008.  This decrease was due primarily to areduction in Adjusted EBITDA at our existing fixed-site centers (approximately$8.8 million).  The reduction is primarily due to the reduction inrevenues, including the reimbursement reductions from the DRA, and a decreasein equity in earnings from unconsolidated partnerships.

 

Adjusted EBITDA from ourmobile operations decreased approximately 29.2% from approximately $41.1million for the year ended June 30, 2007, to approximately $29.1 millionfor the year ended June 30, 2008.  This decrease was due primarily tothe reduction in revenues and increase in costs discussed above.

 

Adjusted EBITDA decreasedapproximately 24.2% from approximately $79.3 million for the year ended 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) anincrease in corporate operating expenses (approximately $1.8 million).

 

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

 

Adjusted EBITDA from ourmobile operations decreased approximately 13.7% from approximately $47.6million 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 chargesdiscussed above (approximately $0.4 million); and (3) the elimination ofAdjusted EBITDA from a mobile lithotripsy partnership we dissolved during thesecond quarter of fiscal 2006 (approximately $0.4 million), partially offset bythe reduction in costs discussed above.

 

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*Capital Projects: *As of June 30, 2008, we have committed to capitalprojects of approximately $6.5 million through August 31, 2009.   We expect to use either internally generatedfunds, capital or operating leases, cash on hand, including restricted cash,and the proceeds from the sale of fixed-site centers to finance the acquisitionof such equipment.  We may purchase,lease or upgrade other diagnostic imaging systems as opportunities arise toplace new equipment into service when new contract services agreements aresigned, existing agreements are renewed, acquisitions are completed, or newfixed-site centers and mobile facilities are developed in accordance with ourcore market strategy.  If we are unableto generate sufficient cash from our operations or obtain additional fundsthrough bank financing, the issuance of equity or debt securities, or operatingleases, we may 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.

 

*FloatingRate Notes and Credit Facility: *Through InSight, we had outstanding $315million of aggregate principal amount of floating rate notes as of June 30,2008.  The floating rate notes mature in November 2011and bear interest at LIBOR plus 5.25% per annum, payable quarterly.  If prior to the maturity of the floating ratenotes, we elect to redeem the floating rate notes or are otherwise required tomake a prepayment with respect to the floating rate notes for which aredemption price is not otherwise specified in the indenture, regardless ofwhether such prepayment is made voluntarily or mandatorily, as a result ofacceleration upon the occurrence of an event of default or otherwise, we arerequired to pay a price above the principal amount of the notes.  If the redemption or prepayment occurs priorto January 1, 2009, the redemption or prepayment price for floating ratenotes would be 103% of the principal amount plus accrued and unpaidinterest.  If the prepayment occurs on orafter January 1, 2009, the redemption or prepayment price would be 102% ofthe principal amount plus accrued and unpaid interest.  An open-market purchase of floating ratenotes would not require a prepayment price at the foregoing rates.  In addition, the indenture provides that ifthere is a change of control, we will be required to make an offer to purchaseall outstanding floating rate notes at a price equal to 101% of their principalamount plus accrued and unpaid interest. The indenture provides that a change of control includes, among otherthings, if a person or group becomes directly or indirectly the beneficialowner of 35% or more of Holdings’ common stock. The $315 million of aggregate principal amount of floating rate notesincludes $15 million of aggregate principal amount of floating rate notesissued in July 2007, which were issued at 85% of their principalamount.  The fair value of the floatingrate notes as of June 30, 2008 was approximately $128 million.

 

Holdings’ andInSight’s wholly owned subsidiaries unconditionally 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 and intangible personal property including,without limitation, equipment, certain real property, certain contracts andintellectual property and a cash account related to the foregoing, but are notsecured by a lien on their accounts receivables and related assets, cashaccounts related to receivables and certain other assets.  In addition, the floating rate notes aresecured by a portion of InSight’s stock and the stock or other equity interestsof InSight’s subsidiaries.

 

Through InSight’s whollyowned subsidiaries we have an asset-based revolving credit facility of up to$30 million, which matures in June 2011, with the lenders named thereinand Bank of America, N.A. as collateral and administrative agent.  As of June 30, 2008, we hadapproximately $22.0 million of availability under the credit facility, based onour borrowing base.  At June 30,2008, there were no outstanding borrowings under the credit facility; however,there were letters of credit of approximately $2.3 million outstanding underthe credit facility of which approximately $0.3 million are cashcollateralized.

 

Holdings and InSight unconditionally guarantee all obligations ofInSight’s subsidiaries that are borrowers under the credit facility.  Allobligations under the credit facility and the obligations of Holdings andInSight under the guarantees are secured, subject to certain exceptions, by afirst priority security interest in all of Holdings’, InSight’s and theborrowers’: (i) accounts; (ii) instruments, chattel paper (including,without limitation, electronic chattel paper), documents, letter-of-creditrights and supporting obligations relating to any account; (iii) generalintangibles that relate to any account; (iv) monies in the possession orunder the control of the lenders under the credit facility; (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.

 

Borrowings under the credit facility bear interest at a per annum rateequal to LIBOR plus 2.5%, or, at our option, the base rate (which is the Bankof America, N.A. prime rate); however, the applicable margin will be adjustedin 

 

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accordance with a pricing grid based on our fixed charge coverageratio, and will range from 2.00% to 2.50% per annum.   In addition topaying interest on outstanding loans under the credit facility, we are requiredto pay a commitment fee to the lenders in respect of unutilized commitmentsthereunder at a rate equal to 0.50% per annum, subject to reduction based on aperformance grid tied to our fixed charge coverage ratio, as well as customaryletter-of-credit fees and fees of Bank of America, N.A.  There are no financial covenants included inthe credit facility, except a minimum fixed charge coverage ratio test whichwill be triggered if availability under the credit facility plus eligible cashfalls below $7.5 million.

 

We had an interest ratecap contract with a notional amount of $100 million and a LIBOR cap of 5.0%,which expired on January 31, 2008. In February 2008, we entered into an interest rate hedging contractwith Bank of America, N.A.  The contracteffectively provides us with an interest rate collar. The notional amount towhich the contract applies is $190 million, and it provides for a LIBOR cap of3.25% and a LIBOR floor of 2.59% on that amount. Our obligations under thecontract are secured on a pari passu basis by the same collateral that securesour credit facility, and the contract is cross-defaulted to our creditfacility. The stated term of the agreement is two years, although it may beterminated earlier if Bank of America, N.A. is no longer one of our lendersunder the credit facility.  As of June 30,2008, the contract had an asset fair value of approximately $1.0 million.

 

The agreements governingour credit facility and floating rate notes contain restrictions on among otherthings, our ability to incur additional liens and indebtedness, engage in mergers,consolidations and asset sales, make dividend payments, prepay otherindebtedness, make investments and engage in transactions with affiliates.

 

*ContractualCommitments: *Our contractual obligations as of June 30,2008 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    |       | $          | 405,632    |                                      | $          | 26,249 |   | $ | 51,538 |   | $ | 327,845 |   | $ | — |   |
| Capital lease  obligations     |       | 7,339      |       | 2,160                                     |       | 3,562 |   | 1,617 |   | — |   |
| Operating lease  obligations   |       | 47,993     |       | 13,798                                    |       | 21,220 |   | 9,551 |   | 3,424 |   |
| Purchase  commitments          |       | 6,538      |       | 6,538                                     |       | — |   | — |   | — |   |
|                           |       |       |       |                                      |       |   |   |   |   |   |   |
| Total  contractual obligations |       | $          | 467,502    |                                      | $          | 48,745 |   | $ | 76,320 |   | $ | 339,013 |   | $ | 3,424 |   |

 

The long-term debtobligations and capital lease obligations include both principal and interestcommitments for the periods presented. The interest commitment on the floating rate notes is based on theeffective interest rate at June 30, 2008 (8.12%), after giving effect to ourinterest rate cap contract.

 

**Off-BalanceSheet Arrangements**

 

There are nooff-balance sheet transactions, arrangements or obligations (includingcontingent obligations) that have, or are reasonably likely to have a currentor future material effect on our financial condition, changes in financialcondition, revenues or expenses, results of operations, liquidity, capitalprojects or capital 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,which have been prepared in accordance with accounting principles generallyaccepted in 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.

 

*Reorganization value and equityvalue:*Tofacilitate the calculation of reorganization value and equity value,management, with the assistance of outside financial advisors, developed anestimate of the enterprise value of the 

 

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successor entity,including $322.5 million in aggregate principal amount of total debt andcapital leases as of the date of consummation of the confirmed plan ofreorganization.

 

In establishing anestimate of enterprise value, management primarily focused on the market valueof the two publicly traded securities that were most affected by the confirmedplan of reorganization:

 

·            the market value of Holdings’ 8,644,444 shares ofcommon stock from August 3, 2007, the date the shares first traded afterconsummation of the confirmed plan of reorganization, through September 30,2007.  The value range of Holdings’ common stock was estimated from a lowof $35 million (based on $4 per share) to a high of $61 million (based on $7per share).  The range of enterprise value to correspond with theforegoing range would be from a low of $357 million to a high of $383 million.  Management recognized that the common stockvaluation approach may have been somewhat limited because the shares of commonstock issued after the consummation of the confirmed plan of reorganization didnot necessarily have the same liquidity as shares issued in connection with anunderwritten public offering.  Nevertheless, management primarily reliedon this valuation method because (i) orderly observable trading activityin the common stock, though limited in volume, did take place, (ii) thetrading activity did not indicate that the transactions were forced ordistressed sales, and (iii) as articulated by the hierarchy of inputs setforth in SFAS 157, observable inputs (regardless as to whether an active marketexists) generally are more useful in calculating fair value than unobservableinputs, which require a reporting entity to develop its own assumptions.

 

·            the market value of the $194.5 million of seniorsubordinated notes for a period of time leading up to cancellation of such debton the date of the consummation of the confirmed plan of reorganization. The value range of InSight’s senior subordinated notes was estimated from a lowof $65 million to a high of $74 million during an approximately 30 day periodof time leading up to the date of consummation of the plan.  The range ofenterprise value to correspond with the foregoing range would be from a low of$387 million to a high of $396 million.

 

Management considered theabove values in light of various relevant market comparables, which are notspecific to our publicly traded securities, such as (A) the market valuesof comparable companies and (B) recent transactions in our industry.

 

To a lesser extent,management considered the estimated present value of projected future cashflows in order to validate the determinations it made through the marketcomparable methods described above.  Management estimated that thediscounted cash flow value of the Company’s two reporting segments was slightlyless than the low point of the enterprise range determined by the trading valueof the common stock.   The projectedfuture cash flows were particularly sensitive to our assumptions regardingrevenues because of (a) the high fixed cost nature of our business, and (b) thedifficulty of estimating changes in reimbursement and procedure volume forfuture years.  In developing theseestimates, management assumed, among other things (i) a decline inrevenues for the Company’s fiscal year ending June 30, 2008 as a result ofreimbursement reductions, and (ii) for the Company’s fiscal years ending June 30,2009 and 2010, (I) modest increases in revenues (approximately 3.0% eachyear) for its fixed operations segment as a result of the anticipateddeceleration in the growth of additional imaging capacity within the Company’sindustry, and (II) an insignificant increase in the Company’s revenues forits mobile operations segment (an approximate 1.0% increase each year).  If known and unknown risks materialize, or ifour revenue assumptions were incorrect, our future cash flows could differsignificantly from our projections.  Thesensitivity of the revenue assumptions contributed to management’s decision tofocus on market values (observable inputs) in determining the Company’senterprise value.  Management believedthat the projected cash flows were appropriately discounted to reflect, amongother things, the capital structure and cost of capital (both debt and equity)for the Company’s two operating segments as well as industry risks.

 

Utilizing themethodologies described above, management determined that the enterprise valueof the successor entity was estimated to be in the range of $344 million to$396 million.  Based on this range, management deemed $360 million to bean appropriate estimate of the enterprise value of the successor entity. The enterprise value estimate of $360 million fell within the range establishedabove, and management believed the estimate was appropriate since the value wasprimarily derived from the trading value of the common stock and senior subordinatednotes described above.  Managementbelieved that the enterprise value of $360 million best reflected 

 

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the value of thesuccessor entity because trading activity reflected market based judgments asto the current business and industry challenges the successor entity faces,including the negative trends and numerous risks described elsewhere in this Form 10-K.  Furthermore, in estimating the enterprisevalue of $360 million management determined that a valuation at the low end ofthe value range based on the trading price of the common stock was appropriatebecause (i) a substantial majority of transactions in the common stockfrom August 3, 2007 through September 30, 2007, were for pricesbetween $4.00 and $5.15 per share, and (ii) there was limited volume inthe trading activity in the common stock. If the long-term debt and capital leases of $322.5 million in aggregateprincipal amount as of August 1, 2007, the effective date of the confirmedplan of reorganization and exchange offer, without giving effect to the netfair value discount associated with InSight’s $315 million in aggregateprincipal amount of senior secured floating rate notes due 2011, weresubtracted from the successor entity’s estimated enterprise value of $360million the resulting equity value was $37.5 million.

 

The foregoing estimatesof enterprise value and corresponding equity value were based upon certainprojections and assumptions.  Neither the projections nor the assumptionsare incorporated into this Form 10-K.

 

*Goodwill and Other IntangibleAssets:* As of August 1, 2007,**goodwillrepresented the reorganization value of the Successor in excess of the fairvalue of tangible and identified intangible assets and liabilities from ouradoption of fresh-start reporting. Identified intangible assets consist primarily of our trademark,certificates of need and wholesale contracts. The intangible assets, excluding the wholesale contracts, areindefinite-lived assets and are not amortized. Wholesale contracts are definite-lived assets and are amortized over theexpected term of the respective contracts. In accordance with SFAS No. 142, “Goodwill and Other IntangibleAssets”, or SFAS 142, the goodwill and indefinite-lived intangible assetbalances are not being amortized, but instead are subject to an annualassessment of impairment by applying a fair-value based test.

 

We evaluate the carryingvalue of goodwill and other indefinite-lived intangible assets in the secondquarter of each fiscal year. Additionally, we review the carrying amount of goodwill and otherindefinite-lived intangible assets whenever events and circumstances indicatethat their respective carrying amounts 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.  Goodwill is allocated to our two reportingunits (mobile and fixed), which are the same as our reportable operatingsegments, based on relative fair value of the assets and liabilities of theoperating segments.  In evaluating goodwill,we complete 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 theimpairment test is performed to measure the amount of impairment loss, if any.  The second step compares the implied fairvalue of the goodwill with the carrying amount of that goodwill.  Impairment losses, if any, are reflected inthe condensed consolidated statements of operations.

 

We assess the ongoingrecoverability of our intangible assets subject to amortization in accordancewith SFAS No. 144, “Accounting for the Impairment and Disposal ofLong-Lived Assets,” by determining whether the long-lived asset can berecovered over the remaining amortization period through projected undiscountedfuture cash flows.  If projected futurecash flows indicate that the long-lived asset balances will not be recovered,an adjustment is made to reduce the asset to an amount consistent withprojected future cash flows discounted at the market interest rate.  Cash flow projections, although subject to adegree of uncertainty, are based on trends of historical performance andmanagement’s estimate of future performance, giving consideration to existingand anticipated competitive and economic conditions.

 

**NewPronouncements**

 

In September 2006,the Financial Accounting Standards Board (FASB) issued SFAS No. 157, “FairValue Measurements”, or SFAS 157.  SFAS157 defines fair value, establishes a framework for measuring fair value undergenerally accepted accounting principles, and expands disclosures for eachmajor asset and liability category 

 

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measured at fair value oneither a recurring or nonrecurring basis. Upon Holdings’ and InSight’s emergence from bankruptcy, we adopted SFAS157.

 

In December 2007,the FASB issued SFAS No. 141(R), “Business Combinations”, or SFAS 141(R),which establishes principles and requirements for recognizing and measuringidentifiable assets and goodwill acquired, liabilities assumed and anynoncontrolling interest in an acquisition, at their fair value as of theacquisition date.  SFAS 141(R) iseffective for fiscal years beginning after December 15, 2008. We arecurrently reviewing SFAS 141(R) to determine its effects on businessacquisitions we may make in the future.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements-an Amendment of Accounting Research Bulletin No. 51”,or SFAS 160, which amends Accounting Research Bulletin No. 51 to establishaccounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary.  SFAS 160 is effective for fiscal yearsbeginning after December 15, 2008. We are currently evaluating the impact of the adoption of SFAS 160 onour consolidated financial statements.

 

In March 2008, theFASB issued SFAS No. 161, “Disclosures about Derivative Instruments andHedging Activities”, or SFAS 161, which amends SFAS No. 133 “Accountingfor Derivative Instruments and Hedging Activities”, or SFAS 133. SFAS 161requires enhanced disclosures about how and why an entity uses derivativeinstruments, how derivative instruments and related hedged items are accountedfor under SFAS 133 and its related interpretations, and how derivativeinstruments and related hedged items affect an entity’s financial position,financial performance and cash flows. SFAS 161 is effective for fiscal years and interim periods beginningafter November 15, 2008.  As SFAS161 only requires enhanced disclosures, it will have no impact on ourconsolidated financial statements.

 

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

 

We provide our servicesin the United States and receive payment for our services exclusively in UnitedStates dollars. Accordingly, our business is unlikely to be affected by factorssuch as changes in foreign market conditions or foreign currency exchangerates.

 

Our market risk exposurerelates primarily to interest rates relating to the floating rate notes and ourcredit facility.  As a result, we willperiodically use interest rate swaps, caps and collars to hedge variableinterest rates on long-term debt.  Webelieve there was not a material quantitative change in our market riskexposure during the quarter ended June 30, 2008, as compared to priorperiods.   At June 30, 2008,approximately 98% of our indebtedness was variable rate indebtedness; however,as a result of the interest rate collar contract discussed below our exposureon variable rate indebtedness was reduced by $190 million, to approximately 39%of our total indebtedness as of June 30, 2008.   We do not engage in activities using complexor highly leveraged instruments.

 

**InterestRate Risk**

 

In order to modify and manage the interest characteristics of ouroutstanding indebtedness and limit the effects of interest rates on ouroperations, we may use a variety of financial instruments, including interestrate hedges, caps, floors and other interest rate exchange contracts. The useof these types of instruments to hedge our exposure to changes in interestrates carries additional risks such as counter-party credit risk and legalenforceability of hedging contracts. We do not enter into any transactions forspeculative or trading purposes.

 

We had an interestrate cap contract with a notional amount of $100 million and a LIBOR cap of5.0%, which expired on January 31, 2008. In February 2008, we entered into an interest rate hedgingagreement with Bank of America, N.A.  Theagreement effectively provides us with an interest rate collar. The notionalamount to which the agreement applies is $190 million, and it provides for aLIBOR cap of 3.25% and a LIBOR floor of 2.59% on that amount. Our obligationsunder the agreement are secured on a pari passu basis by the same collateralthat secures our credit facility, and the agreement is cross-defaulted to ourcredit facility. The stated term of the agreement is two years, although it maybe terminated earlier if Bank of America, N.A. is no longer one of ourrevolving lenders. The contract exposes us to credit risk in the event that thecounterparty to the contract does not or cannot meet its obligations; however,Bank of America, N.A. is a major financial institution and we expect that itwill perform its 

 

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obligations underthe contract.  We designated thiscontract as a highly effective cash flow hedge of the floating rate notes underSFAS 133.  Accordingly, the value of thecontract is marked-to-market quarterly, with changes in the intrinsic value ofthe contract included as a separate component of other comprehensive income(loss).  As of June 30, 2008, thecontract had an asset fair value of approximately $1.0 million.

 

Our futureearnings and cash flows and some of our fair values relating to financialinstruments are dependent upon prevailing market rates of interest, such asLIBOR.  Based on interest rates andoutstanding balances as of June 30, 2008, a 1% increase or decrease ininterest rates on our $315 million of floating rate debt would affect annualfuture earnings and cash flows by approximately $1.8 million and $2.0 million,respectively.  The weighted averageinterest rate on the floating debt as of June 30, 2008 was 8.12%.

 

These amounts aredetermined by considering the impact of hypothetical interest rates on ourborrowing cost.  These analyses do notconsider the effects of the reduced level of overall economic activity thatcould exist in that environment. Further, in the event of a change of this magnitude, we would considertaking actions to further mitigate our exposure to any such change.  Due to the uncertainty of the specificactions that would be taken and their possible effects, however, thissensitivity analysis assumes no changes in our capital structure.

 

**Inflation****Risk**

 

We do not believethat inflation has had a material adverse impact on our business or operatingresults during the periods presented.  Wecannot assure you, however, that our business will not be affected by inflationin the future.

 

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**PART II**

** **

**ITEM 8.          FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

** **

**INSIGHT HEALTH SERVICES HOLDINGS CORP. ANDSUBSIDIARIES**

Index toConsolidated Financial Statements

For the Years Ended June30, 2008, 2007 and 2006

 
| ** **                                                      | **PAGE NUMBER** |
|-----------------------------------------------------------------|-----------------|
|                                                            |            |
| REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING  FIRM       | 49-50           |
|                                                            |            |
| CONSOLIDATED BALANCE SHEETS                                     | 51              |
|                                                            |            |
| CONSOLIDATED STATEMENTS OF OPERATIONS                           | 52              |
|                                                            |            |
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY  (DEFICIT) | 53              |
|                                                            |            |
| CONSOLIDATED STATEMENTS OF CASH FLOWS                           | 54              |
|                                                            |            |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                      | 55-90           |
|                                                            |            |
| SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS                 | 119             |

 

In accordance with SECRule3-10 of 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, theCompany's wholly owned subsidiary, and InSight's subsidiary guarantors are notincluded.  Condensed financial data forInSight and its subsidiary guarantors is included in Note 24 to theconsolidated financial statements.

 

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** **

**Report of IndependentRegistered Public Accounting Firm**

 

To the Board of Directors and Stockholders of InSight Health ServicesHoldings Corp.:

 

In our opinion, the accompanying consolidated balance sheet****and the related consolidated statements of operations,stockholders’ equity and cash flows present fairly, in all material respects,the financial position of InSight Health Services Holdings Corp. and itssubsidiaries****(Successor Company) at June 30,2008 and the results of their operations and their cash flows for the periodfrom August 1, 2007 to June 30, 2008 in conformity with accountingprinciples generally accepted in the United States of America.  In addition, in our opinion, the financialstatement schedule listed in the index appearing under Item 15 (a) (2) presentsfairly, in all material respects, the information set forth therein when readin conjunction with the related consolidated financial statements.  These financial statements and the financialstatement schedule are the responsibility of the Company’s management; ourresponsibility is to express an opinion on these financial statements and thefinancial statement schedule based on our audit.  We conducted our audit 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 includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

As discussed in Note 2 to the consolidated financial statements, theUnited States Bankruptcy Court for the District of Delaware confirmed theCompany’s Second Amended Joint Plan of Reorganization (the “plan”) on July 10,2007.  The plan was substantiallyconsummated on August 1, 2007 and the Company emerged from bankruptcywhich resulted in the discharge of liabilities subject to compromise****and substantially altered the rights and interests ofequity security holders as provided for in the plan.  In connection with its emergence frombankruptcy, the Company adopted fresh-start accounting as of August 1,2007.

 
| /s/ PRICEWATERHOUSECOOPERS  LLP |   |
|---------------------------------|--------|
|                            |
|                            |
| Orange County, California       |
| September 25, 2008         |

 

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**Report of Independent Registered PublicAccounting Firm**

 

To the Board of Directors and Stockholders of InSight Health ServicesHoldings Corp.:

 

In our opinion, the accompanying consolidated balance sheet****and the related consolidated statements of operations,stockholders’ equity and cash flows present fairly, in all material respects,the financial position of InSight Health Services Holdings Corp. and itssubsidiaries (Predecessor Company) at June 30, 2007 and the results oftheir operations and their cash flows for the period from July 1, 2007 to July 31,2007, and for each of the two years in the period ended June 30, 2007 inconformity with accounting principles generally accepted in the United Statesof America.  In addition, in our opinion,the financial statement schedule listed in the index appearing under Item 15 (a) (2) presentsfairly, in all material respects, the information set forth therein when readin conjunction with the related consolidated financial statements.  These financial statements and the financialstatement schedule are the responsibility of the Company’s management; ourresponsibility is to express an opinion on these financial statements and thefinancial statement schedule based on our audits.  We conducted our audits of these statementsin accordance with the standards of the Public Company Accounting OversightBoard (United States).   Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

As discussed in Note 2 to the consolidated financial statements, theCompany filed a petition on May 29, 2007 with the United States BankruptcyCourt for the District of Delaware for reorganization under the provisions ofChapter 11 of the Bankruptcy Code.  TheCompany’s Second Amended Joint Plan of Reorganization was substantiallyconsummated on August 1, 2007****and theCompany emerged from bankruptcy.  Inconnection with its emergence from bankruptcy, the Company adopted fresh-startaccounting.

 

As discussed in Note 4 to the consolidated financial statements, theCompany changed the manner in which it accounts for share-based compensation inthe year ended June 30, 2007.

 
| /s/ PRICEWATERHOUSECOOPERS  LLP |   |
|---------------------------------|--------|
|                            |
|                            |
| Orange County, California       |
| September 25, 2008         |

 

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**INSIGHT HEALTH SERVICES HOLDINGS CORP. ANDSUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**AS OF JUNE 30, 2008 AND 2007**

(Amounts in thousands, except share data)

 
| ** **                                                                                                                             | ** ** | **Successor** | ** ** | ** ** | **Predecessor** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|------------|-----------------|------------|
| ** **                                                                                                                             | ** ** | **2008**      | ** ** | ** ** | **2007**        | ** ** |
| ASSETS                                                                                                                                 |       |          |       |       |            |       |
| CURRENT ASSETS:                                                                                                                        |       |          |       |       |            |       |
| Cash and cash equivalents                                                                                                              |       | $             | 21,002     |       |            | $          | 20,832 |   |
| Trade accounts receivables, net                                                                                                        |       | 34,494        |       |       | 42,683          |       |
| Other current assets                                                                                                                   |       | 8,199         |       |       | 8,335           |       |
| Total current assets                                                                                                                   |       | 63,695        |       |       | 71,850          |       |
|                                                                                                                                   |       |          |       |       |            |       |
| PROPERTY AND EQUIPMENT, net                                                                                                            |       | 113,684       |       |       | 144,823         |       |
| CASH, restricted                                                                                                                       |       | 8,072         |       |       | —          |       |
| INVESTMENTS IN PARTNERSHIPS                                                                                                            |       | 6,794         |       |       | 3,413           |       |
| OTHER ASSETS                                                                                                                           |       | 1,076         |       |       | 7,881           |       |
| OTHER INTANGIBLE ASSETS, net                                                                                                           |       | 24,370        |       |       | 30,216          |       |
| GOODWILL                                                                                                                               |       | —        |       |       | 64,868          |       |
|                                                                                                                                   |       | $             | 217,691    |       |            | $          | 323,051 |   |
|                                                                                                                                   |       |          |       |       |            |       |
| LIABILITIES  AND STOCKHOLDERS’ DEFICIT                                                                                            |       |          |       |       |            |       |
| CURRENT LIABILITIES:                                                                                                                   |       |          |       |       |            |       |
| Current portion of notes payable                                                                                                       |       | $             | 624        |       |            | $          | 5,737 |   |
| Current portion of capital lease  obligations                                                                                          |       | 1,743         |       |       | 2,927           |       |
| Accounts payable and other accrued expenses                                                                                            |       | 33,121        |       |       | 38,619          |       |
| Total current liabilities                                                                                                              |       | 35,488        |       |       | 47,283          |       |
|                                                                                                                                   |       |          |       |       |            |       |
| LONG-TERM LIABILITIES:                                                                                                                 |       |          |       |       |            |       |
| Notes payable, less current portion                                                                                                    |       | 294,724       |       |       | 299,890         |       |
| Liabilities subject to compromise                                                                                                      |       | —        |       |       | 205,704         |       |
| Capital lease obligations, less current  portion                                                                                       |       | 4,631         |       |       | 3,302           |       |
| Other long-term liabilities                                                                                                            |       | 4,545         |       |       | 4,832           |       |
| Deferred income taxes                                                                                                                  |       | 9,015         |       |       | 3,472           |       |
| Total long-term liabilities                                                                                                            |       | 312,915       |       |       | 517,200         |       |
|                                                                                                                                   |       |          |       |       |            |       |
| COMMITMENTS AND CONTINGENCIES (Note 11)                                                                                                |       |          |       |       |            |       |
|                                                                                                                                   |       |          |       |       |            |       |
| STOCKHOLDERS’ DEFICIT:                                                                                                            |       |          |       |       |            |       |
| Predecessor common stock, $.001 par value,  10,000,000 shares authorized, 864,444 shares issued and outstanding at  June 30, 2007 |       | —        |       |       | 1               |       |
| Successor common stock, $.001 par value,  10,000,000 shares authorized, 8,644,444 shares issued and outstanding at  June 30, 2008 |       | 9             |       |       | —          |       |
| Additional paid-in capital                                                                                                             |       | 37,463        |       |       | 87,085          |       |
| Accumulated other comprehensive income                                                                                                 |       | 1,001         |       |       | 103             |       |
| Accumulated deficit                                                                                                                    |       | (169,185      | )          |       | (328,621        | )          |
| Total stockholders’ deficit                                                                                                       |       | (130,712      | )          |       | (241,432        | )          |
|                                                                                                                                   |       | $             | 217,691    |       |            | $          | 323,051 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**INSIGHT HEALTH SERVICES HOLDINGS CORP. ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THE ELEVEN MONTHS ENDED JUNE 30, 2008,THE ONE MONTH ENDED JULY 31, 2007, AND**

**THE YEARS ENDED JUNE 30, 2007 AND 2006**

(Amounts in thousands, except per share data)

 
| ** **                                                              | ** ** | **Successor**          | ** ** | ** ** | **Predecessor**    | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|------------|--------------------|------------|
| ** **                                                              | ** ** | **Eleven Months** | ** ** | ** ** | **One Month** | ** ** | **Year** | ** ** | **Year** | ** ** |
| ** **                                                              | ** ** | **Ended**              | ** ** | ** ** | **Ended**          | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                                                              | ** ** | **June 30,**      | ** ** | ** ** | **July 31,**  | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                              | ** ** | **2008**               | ** ** | ** ** | **2007**           | ** ** | **2007** | ** ** | **2006** | ** ** |
| REVENUES:                                                               |       |                   |       |       |               |       |   |   |   |   |
| Contract services                                                       |       | $                      | 108,944    |       |               | $          | 10,051 |   | $ | 128,693 |   | $ | 134,406 |   |
| Patient services                                                        |       | 133,641                |       |       | 12,311             |       | 158,221 |   | 171,892 |   |
| Total revenues                                                          |       | 242,585                |       |       | 22,362             |       | 286,914 |   | 306,298 |   |
|                                                                    |       |                   |       |       |               |       |   |   |   |   |
| COSTS OF OPERATIONS:                                                    |       |                   |       |       |               |       |   |   |   |   |
| Costs of services                                                       |       | 168,297                |       |       | 14,933             |       | 192,599 |   | 197,812 |   |
| Provision for doubtful accounts                                         |       | 5,790                  |       |       | 389                |       | 5,643 |   | 5,351 |   |
| Equipment leases                                                        |       | 9,246                  |       |       | 760                |       | 6,144 |   | 3,257 |   |
| Depreciation and amortization                                           |       | 53,698                 |       |       | 4,468              |       | 57,040 |   | 64,852 |   |
| Total costs of operations                                               |       | 237,031                |       |       | 20,550             |       | 261,426 |   | 271,272 |   |
|                                                                    |       |                   |       |       |               |       |   |   |   |   |
| Gross profit                                                            |       | 5,554                  |       |       | 1,812              |       | 25,488 |   | 35,026 |   |
|                                                                    |       |                   |       |       |               |       |   |   |   |   |
| CORPORATE OPERATING EXPENSES                                            |       | (25,744                | )          |       | (1,678             | )          | (25,496 | ) | (23,655 | ) |
|                                                                    |       |                   |       |       |               |       |   |   |   |   |
| EQUITY IN EARNINGS OF UNCONSOLIDATED  PARTNERSHIPS                      |       | 1,891                  |       |       | 174                |       | 3,030 |   | 3,072 |   |
|                                                                    |       |                   |       |       |               |       |   |   |   |   |
| INTEREST EXPENSE, net                                                   |       | (32,480                | )          |       | (2,918             | )          | (52,780 | ) | (50,754 | ) |
|                                                                    |       |                   |       |       |               |       |   |   |   |   |
| LOSS ON SALES OF CENTERS                                                |       | (644                   | )          |       | —             |       | — |   | — |   |
|                                                                    |       |                   |       |       |               |       |   |   |   |   |
| GAIN ON REPURCHASE OF NOTES PAYABLE                                     |       | —                 |       |       | —             |       | — |   | 3,076 |   |
|                                                                    |       |                   |       |       |               |       |   |   |   |   |
| LOSS ON DISSOLUTION OF PARTNERSHIP                                      |       | —                 |       |       | —             |       | — |   | (1,000 | ) |
|                                                                    |       |                   |       |       |               |       |   |   |   |   |
| IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE  ASSETS                     |       | (119,771               | )          |       | —             |       | (29,595 | ) | (190,807 | ) |
|                                                                    |       |                   |       |       |               |       |   |   |   |   |
| Loss before reorganization items and income  taxes                      |       | (171,194               | )          |       | (2,610             | )          | (79,353 | ) | (225,042 | ) |
|                                                                    |       |                   |       |       |               |       |   |   |   |   |
| REORGANIZATION ITEMS, net                                               |       | —                 |       |       | 198,998            |       | (17,513 | ) | — |   |
|                                                                    |       |                   |       |       |               |       |   |   |   |   |
| (Loss) income before income taxes                                       |       | (171,194               | )          |       | 196,388            |       | (96,866 | ) | (225,042 | ) |
|                                                                    |       |                   |       |       |               |       |   |   |   |   |
| PROVISION (BENEFIT) FOR INCOME TAXES                                    |       | (2,009                 | )          |       | 62                 |       | 2,175 |   | (14,824 | ) |
|                                                                    |       |                   |       |       |               |       |   |   |   |   |
| Net (loss) income                                                       |       | $                      | (169,185   | )          |               | $          | 196,326 |   | $ | (99,041 | ) | $ | (210,218 | ) |
|                                                                    |       |                   |       |       |               |       |   |   |   |   |
| Basic and diluted (loss) income per common  share                       |       | $                      | (19.57     | )          |               | $          | 227.23 |   | $ | (114.63 | ) | $ | (243.31 | ) |
|                                                                    |       |                   |       |       |               |       |   |   |   |   |
| Weighted average number of basic and  diluted common shares outstanding |       | 8,644                  |       |       | 864                |       | 864 |   | 864 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**INSIGHT HEALTH SERVICES HOLDINGS CORP. ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**

**FOR THE ELEVEN MONTHS ENDED JUNE 30, 2008,THE ONE MONTH ENDED JULY 31, 2007, AND**

**THE YEARS ENDED JUNE 30, 2007 AND 2006**

(Amounts in thousands, except share data)

 
| ** **                                                                                                                           | ** ** | ** **        | ** ** | ** **     | ** ** | **Accumulated**   | ** ** | ** **           | ** ** | ** **    | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|-------------------|------------|----------------------|------------|---------------|------------|
| ** **                                                                                                                           | ** ** | ** **        | ** ** | **Additional** | ** ** | **Other**         | ** ** | **Retained**         | ** ** | ** **    | ** ** |
| ** **                                                                                                                           | ** ** | **Common  Stock** | ** ** | **Paid-In**    | ** ** | **Comprehensive** | ** ** | **Earnings**         | ** ** | ** **    | ** ** |
| ** **                                                                                                                           | ** ** | **Shares**        | ** ** | **Amount**     | ** ** | **Capital**       | ** ** | **Gain (Loss)** | ** ** | **(Deficit)** | ** ** | **Total** | ** ** |
| BALANCE AT JUNE 30, 2005                                                                                                             |       | 864,444           |       | $              | 1          |              | $          | 87,085               |       | $             | —     |   | $ | (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                                                                                                             |       | 864,444           |       | 1              |       | 87,085            |       | 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                                                                                                             |       | 864,444           |       | 1              |       | 87,085            |       | 103                  |       | (328,621      | )          | (241,432 | ) |
|                                                                                                                                 |       |              |       |           |       |              |       |                 |       |          |       |   |   |
| Net income from July 1 to  July 31, 2007                                                                                   |       | —            |       | —         |       | —            |       | —               |       | 196,326       |       | 196,326 |   |
|                                                                                                                                 |       |              |       |           |       |              |       |                 |       |          |       |   |   |
| Fresh-start adjustments:                                                                                                             |       |              |       |           |       |              |       |                 |       |          |       |   |   |
| Elimination of Predecessor common stock, additional  paid-in capital, accumulated other comprehensive income and accumulated deficit |       | (864,444          | )          | (1             | )          | (87,085           | )          | (103                 | )          | 132,295       |       | 45,106 |   |
|                                                                                                                                 |       |              |       |           |       |              |       |                 |       |          |       |   |   |
| Reorganization value ascribed to Successor                                                                                           |       | —            |       | —         |       | 37,456            |       | —               |       | —        |       | 37,456 |   |
|                                                                                                                                 |       |              |       |           |       |              |       |                 |       |          |       |   |   |
| BALANCE AT JULY 31, 2007 (PREDECESSOR)                                                                                          |       | —            |       | —         |       | 37,456            |       | —               |       | —        |       | 37,456 |   |
|                                                                                                                                 |       |              |       |           |       |              |       |                 |       |          |       |   |   |
|                                                                                                                                 |       |              |       |           |       |              |       |                 |       |          |       |   |   |
| Issuance of 864,444 shares of common stock  to existing stockholders                                                                 |       | 864,444           |       | 1              |       | —            |       | —               |       | —        |       | 1 |   |
|                                                                                                                                 |       |              |       |           |       |              |       |                 |       |          |       |   |   |
| Issuance of 7,780,000 shares of common stock  to holders of senior subordinated notes                                                |       | 7,780,000         |       | 8              |       | (8                | )          | —               |       | —        |       | — |   |
|                                                                                                                                 |       |              |       |           |       |              |       |                 |       |          |       |   |   |
| Share-based compensation                                                                                                             |       |              |       |           |       | 15                |       |                 |       |          |       | 15 |   |
|                                                                                                                                 |       |              |       |           |       |              |       |                 |       |          |       |   |   |
| Net loss from August 1, 2007 to  June 30, 2008                                                                             |       | —            |       | —         |       | —            |       | —               |       | (169,185      | )          | (169,185 | ) |
|                                                                                                                                 |       |              |       |           |       |              |       |                 |       |          |       |   |   |
| Other comprehensive income (loss):                                                                                                   |       |              |       |           |       |              |       |                 |       |          |       |   |   |
| Unrealized gain attributable to change in  fair value of derivative                                                                  |       | —            |       | —         |       | —            |       | 1,001                |       | —        |       | 1,001 |   |
| Comprehensive income (loss)                                                                                                          |       |              |       |           |       |              |       |                 |       |          |       | (168,184 | ) |
| BALANCE AT JUNE 30, 2008 (SUCCESSOR)                                                                                            |       | 8,644,444         |       | $              | 9          |              | $          | 37,463               |       | $             | 1,001      |   | $ | (169,185 | ) | $ | (130,712 | ) |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**INSIGHT HEALTH SERVICES HOLDINGS CORP. ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FOR THE ELEVEN MONTHS ENDED JUNE 30, 2008,THE ONE MONTH ENDED JULY 31, 2007, AND**

**THE YEARS ENDED JUNE 30, 2007 AND 2006**

(Amounts in thousands)

 
| ** **                                                                                          | ** ** | **Successor**          | ** ** | ** ** | **Predecessor**    | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------|--------------------|------------|
| ** **                                                                                          | ** ** | **Eleven Months** | ** ** | ** ** | **One Month** | ** ** | **Year** | ** ** | **Year** | ** ** |
| ** **                                                                                          | ** ** | **Ended**              | ** ** | ** ** | **Ended**          | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                                                                                          | ** ** | **June 30,**      | ** ** | ** ** | **July 31,**  | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                                                          | ** ** | **2008**               | ** ** | ** ** | **2007**           | ** ** | **2007** | ** ** | **2006** | ** ** |
| OPERATING ACTIVITIES:                                                                          | ** ** | ** **             | ** ** | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net (loss) income                                                                                   |       | $                      | (169,185   | )          |               | $          | 196,326 |   | $ | (99,041 | ) | $ | (210,218 | ) |
| Adjustments to reconcile net (loss) income  to net cash provided by (used in) operating activities: |       |                   |       |       |               |       |   |   |   |   |
| Cash used for reorganization items                                                                  |       | 4,764                  |       |       | 3,263              |       | 11,367 |   | — |   |
| Noncash reorganization items                                                                        |       | —                 |       |       | (207,025           | )          | 6,146 |   | — |   |
| Depreciation and amortization                                                                       |       | 53,698                 |       |       | 4,468              |       | 57,040 |   | 64,852 |   |
| Amortization of bond discount                                                                       |       | 4,522                  |       |       | —             |       | — |   | — |   |
| Amortization of deferred financing costs                                                            |       | —                 |       |       | 145                |       | 3,158 |   | 3,051 |   |
| Share-based compensation                                                                            |       | 15                     |       |       | —             |       | — |   | — |   |
| Equity in earnings of unconsolidated  partnerships                                                  |       | (1,891                 | )          |       | (174               | )          | (3,030 | ) | (3,072 | ) |
| Distributions from unconsolidated  partnerships                                                     |       | 2,563                  |       |       | 58                 |       | 3,008 |   | 3,387 |   |
| Loss on sales of centers                                                                            |       | 644                    |       |       | —             |       | — |   | — |   |
| Gain on repurchase of notes payable                                                                 |       | —                 |       |       | —             |       | — |   | (3,076 | ) |
| Loss on dissolution of partnership                                                                  |       | —                 |       |       | —             |       | — |   | 1,000 |   |
| Impairment of goodwill and other intangible  assets                                                 |       | 119,771                |       |       | —             |       | 29,595 |   | 190,807 |   |
| Deferred income taxes                                                                               |       | (1,864                 | )          |       | —             |       | — |   | (15,224 | ) |
| Changes in operating assets and  liabilities:                                                       |       |                   |       |       |               |       |   |   |   |   |
| Trade accounts receivables, net                                                                     |       | 7,679                  |       |       | 510                |       | 1,007 |   | 3,016 |   |
| Other current assets                                                                                |       | (798                   | )          |       | 387                |       | 81 |   | (407 | ) |
| Accounts payable, other accrued expenses  and accrued interest subject to compromise                |       | (4,751                 | )          |       | (1,534             | )          | 11,101 |   | 3,512 |   |
| Net cash provided by (used in) operating  activities before reorganization items                    |       | 15,167                 |       |       | (3,576             | )          | 20,432 |   | 37,628 |   |
|                                                                                                |       |                   |       |       |               |       |   |   |   |   |
| Cash used for reorganization items                                                                  |       | (4,764                 | )          |       | (3,263             | )          | (11,367 | ) | — |   |
| Net cash provided by (used in) operating  activities                                                |       | 10,403                 |       |       | (6,839             | )          | 9,065 |   | 37,628 |   |
|                                                                                                |       |                   |       |       |               |       |   |   |   |   |
| INVESTING ACTIVITIES:                                                                               |       |                   |       |       |               |       |   |   |   |   |
| Acquisition of fixed-site center, net of  cash acquired                                             |       | —                 |       |       | —             |       | — |   | (2,345 | ) |
| Proceeds from sales of centers                                                                      |       | 9,050                  |       |       | —             |       | — |   | — |   |
| Increase in restricted cash                                                                         |       | (8,072                 | )          |       | —             |       | — |   | — |   |
| Additions to property and equipment                                                                 |       | (8,262                 | )          |       | —             |       | (16,163 | ) | (30,927 | ) |
| Sale of short-term investments                                                                      |       | —                 |       |       | —             |       | — |   | 5,000 |   |
| Other                                                                                               |       | (115                   | )          |       | 181                |       | 118 |   | (235 | ) |
| Net cash provided by (used in) investing  activities                                                |       | (7,399                 | )          |       | 181                |       | (16,045 | ) | (28,507 | ) |
|                                                                                                |       |                   |       |       |               |       |   |   |   |   |
| FINANCING ACTIVITIES:                                                                               |       |                   |       |       |               |       |   |   |   |   |
| Principal payments of notes payable and  capital lease obligations                                  |       | (3,474                 | )          |       | (470               | )          | (6,529 | ) | (293,109 | ) |
| Proceeds from issuance of notes payable                                                             |       | —                 |       |       | 12,768             |       | 1,145 |   | 298,500 |   |
| Principal borrowings (payments) on credit  facility                                                 |       | —                 |       |       | (5,000             | )          | 5,000 |   | — |   |
| Payments made in connection with  refinancing notes payable                                         |       | —                 |       |       | —             |       | — |   | (6,836 | ) |
| Payment for interest rate cap contract                                                              |       | —                 |       |       | —             |       | — |   | (307 | ) |
| Other                                                                                               |       | —                 |       |       | —             |       | (12 | ) | — |   |
| Net cash (used in) provided by financing  activities                                                |       | (3,474                 | )          |       | 7,298              |       | (396 | ) | (1,752 | ) |
|                                                                                                |       |                   |       |       |               |       |   |   |   |   |
| (DECREASE) INCREASE IN CASH AND CASH  EQUIVALENTS:                                                  |       | (470                   | )          |       | 640                |       | (7,376 | ) | 7,369 |   |
| Cash, beginning of period                                                                           |       | 21,472                 |       |       | 20,832             |       | 28,208 |   | 20,839 |   |
| Cash, end of period                                                                                 |       | $                      | 21,002     |       |               | $          | 21,472 |   | $ | 20,832 |   | $ | 28,208 |   |
|                                                                                                |       |                   |       |       |               |       |   |   |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:                                                  |       |                   |       |       |               |       |   |   |   |   |
| Interest paid                                                                                       |       | $                      | 24,004     |       |               | $          | 8,184 |   | $ | 42,116 |   | $ | 42,852 |   |
| Income taxes paid                                                                                   |       | 581                    |       |       | —             |       | 318 |   | 422 |   |
| Equipment additions under capital leases                                                            |       | 3,338                  |       |       | —             |       | 3,358 |   | 737 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30, 2008**

 

**1.       NATUREOF BUSINESS**

 

All referencesto “we,” “us,” “our,” “our company” or “the Company” mean InSight HealthServices Holdings Corp., a Delaware corporation, and all entities andsubsidiaries owned or controlled by InSight Health Services Holdings Corp. Allreferences to “Holdings” mean InSight Health Services Holdings Corp. by itself.All references to “InSight” mean InSight Health Services Corp., a Delawarecorporation and a wholly owned subsidiary of Holdings, by itself.  Through InSight and its subsidiaries, weprovide diagnostic imaging, treatment and related management services in morethan 30 states throughout the United States. Our operations are primarily concentrated in California, Arizona, NewEngland, the Carolinas, Florida, and the Mid-Atlantic states.  We have two reportable segments:  fixed operations and mobile operations.  Our services are provided through a networkof 91 mobile MRI facilities, four PET facilities, one mobile CT facility, and14 mobile PET/CT facilities (collectively, mobile facilities) and 46 fixed-siteMRI centers, 35 multi-modality fixed-site centers and one PET fixed-site center(collectively, fixed-site centers).  Atour multi-modality fixed-site centers, we typically offer other services inaddition to MRI, including PET, PET/CT, CT, x-ray, mammography, ultrasound,nuclear medicine and bone densitometry services.

 

**2.     REORGANIZATION**

 

**General Information**

 

On May 29, 2007, Holdings and InSight filed voluntary petitions toreorganize their business under chapter 11 of the Bankruptcy Code in the U.S.Bankruptcy Court for the District of Delaware (Case No. 07-10700).  The filing was in connection with aprepackaged plan of reorganization and related exchange offer.  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 of Reorganizationpursuant to chapter 11 of the Bankruptcy Code.  The plan of reorganization became effectiveand Holdings and InSight emerged from bankruptcy protection on August 1,2007, or the effective date. Pursuant to the confirmed plan of reorganizationand the related exchange offer, (1) all of Holdings’ common stock, alloptions for Holdings’ common stock and all of InSight’s 9.875% seniorsubordinated notes due 2011, or senior subordinated notes, were cancelled, and (2) holdersof InSight’s senior subordinated notes and holders of Holdings’ common stockprior to the effective date received 7,780,000 and 864,444 shares of newlyissued Holdings’ common stock, respectively, in each case after giving effectto a one for 6.326392 reverse stock split of Holdings’ common stock.

 

On August 1, 2007, we implementedfresh-start reporting in accordance with American Institute of Certified PublicAccountants’ Statement of Position 90-7, “Financial Reporting by Entities inReorganization under the Bankruptcy Code”, or SOP 90-7.  The provisions of fresh-start reportingrequired that we revalue our assets and liabilities to fair value, reestablishstockholders’ equity and record any applicable reorganization value in excessof amounts allocable to identifiable assets as an intangible asset.  Under fresh-start reporting, our asset valuesare remeasured using fair value, and are allocated in conformity with Statementof Financial Accounting Standards (SFAS) No. 141, “Business Combinations”,or SFAS 141.  Fresh-start reporting alsorequires that all liabilities, other than deferred taxes, should be stated atfair value or at the present value of the amounts to be paid using appropriatemarket interest rates.  Deferred taxesare determined in conformity with SFAS No. 109, “Accounting for IncomeTaxes.”

 

Additional informationregarding the impact of fresh-start reporting on our condensed consolidated balancesheet on the effective date is included in “Condensed Consolidated Fresh-StartBalance Sheet” below.

 

References to “Successor”refer to our company on or after August 1, 2007, after giving effect to (1) thecancellation of Holdings’ common stock prior to the effective date; (2) theissuance of new Holdings’ common stock in exchange for all of InSight’s seniorsubordinated notes and the cancelled Holdings’ common stock; and (3) theapplication of fresh-start reporting. References to “Predecessor” refer to our company prior to August 1,2007.

 

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**Liabilities Subject to Compromise**

 

Liabilities subject to compromise arecomprised of the following (amounts in thousands):

 
| ** **                        | ** ** | **Successor**     | ** ** | ** ** | **Predecessor**   | ** ** |
|-----------------------------------|------------|-------------------|------------|------------|-------------------|------------|
| ** **                        | ** ** | **June 30,** | ** ** | ** ** | **June 30,** | ** ** |
| ** **                        | ** ** | **2008**          | ** ** | ** ** | **2007**          | ** ** |
| Senior subordinated notes payable |       | $                 | —     |       |              | $          | 194,500 |   |
| Accrued interest expense (1)      |       | —            |       |       | 11,204            |       |
|                              |       | $                 | —     |       |              | $          | 205,704 |   |

 

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

 

Liabilities subject to compromise refers to pre-petition obligationsthat were impacted by the reorganization process.  The amounts represented known obligationsresolved in connection with the plan of reorganization.  At June 30, 2008, we had a zero balancefor liabilities subject to compromise due to Holdings’ and InSight’s emergencefrom bankruptcy.  Information regardingthe discharge of liabilities subject to compromise is included in “CondensedConsolidated Fresh-Start Balance Sheet” below.

 

**Reorganization Items, net**

 

SOP 90-7 requires that the consolidated financial statements forperiods subsequent to a chapter 11 filing separate transactions and events thatare directly associated with the reorganization from the ongoing operations ofthe business.  Accordingly, alltransactions (including, but not limited to, all professional fees) directlyassociated with the reorganization of the business are reported separately inthe financial statements.

 

Predecessor recognized the following reorganization items in itsconsolidated statement of operations (amounts in thousands):

 
| ** **                            | ** ** | **Predecessor**             | ** ** |
|---------------------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **One Month**          | ** ** | **Year** | ** ** |
| ** **                            | ** ** | **Ended**                   | ** ** | **Ended** | ** ** |
| ** **                            | ** ** | **July 31, 2007** | ** ** | **June 30, 2007** | ** ** |
|                                  |       |                        |       |   |   |
| Gain on discharge of debt             |       | $                           | 168,248    |   | $ | — |   |
| Revaluation of assets and liabilities |       | 38,674                      |       | — |   |
| Professional fees                     |       | (4,962                      | )          | (7,559 | ) |
| Write-off of deferred financing costs |       | —                      |       | (6,146 | ) |
| Consent fees                          |       | (2,954                      | )          | (1,250 | ) |
| Management incentive                  |       | —                      |       | (1,698 | ) |
| Other                                 |       | (8                          | )          | (860 | ) |
|                                  |       | $                           | 198,998    |   | $ | (17,513 | ) |

 

**Condensed Consolidated Fresh-Start Balance Sheet**

 

Paragraph 36 of SOP 90-7 requires an entity to adopt fresh-startreporting if the reorganization value of the assets of the emerging entityimmediately before the consummation of the confirmed plan of reorganization isless than the total of all post-petition liabilities and allowed claims, and ifholders of existing voting shares immediately before confirmation receive lessthan 50% of the voting shares of the emerging entity.  The Company met both criteria and adoptedfresh-start reporting upon Holdings’ and InSight’s emergence from chapter11.  Fresh-start reporting required us torevalue our assets and liabilities to fair value.  In estimating fair value we based ourestimates and assumptions on the guidance prescribed by SFAS No. 157,“Fair Value Measurements”, or SFAS 157, which we

 

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adopted in conjunction with our adoption of fresh-start reporting.  SFAS 157, among other things, defines fairvalue, establishes a framework for measuring fair value under generallyaccepted accounting principles and expands disclosure about fair value measurements(Note 22).

 

Our estimates of fair value of our tangibleand identifiable intangible assets were determined by management with theassistance of outside financial advisors. Adjustments to the recorded fair values of these assets and liabilitiesmay impact the amount of recorded goodwill.

 

To facilitate the calculation of reorganization value and equity value,management, with the assistance of outside financial advisors, developed anestimate of the enterprise value of the successor entity, including $322.5million in aggregate principal amount of total debt and capital leases as ofthe date of consummation of the confirmed plan of reorganization.

 

In establishing an estimate of enterprise value, management primarilyfocused on the market value of the two publicly traded securities that weremost affected by the confirmed  plan ofreorganization:

 

·    the market value ofHoldings’ 8,644,444 shares of common stock from August 3, 2007, the datethe shares first traded after consummation of the confirmed plan ofreorganization, through September 30, 2007.  The value range ofHoldings’ common stock was estimated from a low of $35 million (based on $4 pershare) to a high of $61 million (based on $7 per share).  The range ofenterprise value to correspond with the foregoing range would be from a low of$357 million to a high of $383 million. Management recognized that the common stock valuation approach may havebeen somewhat limited because the shares of common stock issued after theconsummation of the confirmed plan of reorganization did not necessarily havethe same liquidity as shares issued in connection with an underwritten publicoffering.  Nevertheless, management primarily relied on this valuationmethod because (i) orderly observable trading activity in the commonstock, though limited in volume, did take place, (ii) the trading activitydid not indicate that the transactions were forced or distressed sales, and (iii) asarticulated by the hierarchy of inputs set forth in SFAS 157, observable inputs(regardless as to whether an active market exists) generally are more useful incalculating fair value than unobservable inputs, which require a reportingentity to develop its own assumptions.

 

·    the market value of the$194.5 million of senior subordinated notes for a period of time leading up tocancellation of such debt on the date of the consummation of the confirmed planof reorganization.  The value range of InSight’s senior subordinated noteswas estimated from a low of $65 million to a high of $74 million during anapproximate 30 day period of time leading up to the date of consummation of theplan.  The range of enterprise value to correspond with the foregoingrange would be from a low of $387 million to a high of $396 million.

 

Management considered the above values in light of various relevantmarket comparables, which are not specific to our publicly traded securities,such as (A) the market values of comparable companies and (B) recenttransactions in our industry.

 

To a lesser extent, management considered the estimated present valueof projected future cash flows in order to validate the determinations it madethrough the market comparable methods described above.  Managementestimated that the discounted cash flow value of the Company’s two reportingsegments was slightly less than the low point of the enterprise rangedetermined by the trading value of the common stock.   The projected future cash flows wereparticularly sensitive to our assumptions regarding revenues because of (a) thehigh fixed cost nature of our business, and (b) the difficulty ofestimating changes in reimbursement and procedure volume for future years.  In developing these estimates, managementassumed, among other things (i) a decline in revenues for the Company’sfiscal year ending June 30, 2008 as a result of reimbursement reductions,and (ii) for the Company’s fiscal years ending June 30, 2009 and2010, (I) modest increases in revenues (approximately 3.0% each year) forits fixed operations segment as a result of the anticipated deceleration in thegrowth of additional imaging capacity within the Company’s industry, and (II) aninsignificant increase in the Company’s revenues for its mobile operationssegment (an approximate 1.0% increase each year). If known and unknown risksmaterialize, or if our revenue assumptions were incorrect, our future cashflows could differ significantly from our projections.  The sensitivity of the revenue assumptionscontributed to management’s decision to focus on market values (observableinputs) in determining the Company’s enterprise value.  Management believed that the projected cashflows were appropriately discounted to

 

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reflect, among other things, the capital structure and cost of capital(both debt and equity) for the Company’s two operating segments as well asindustry risks.

 

Utilizing the methodologies described above, management determined thatthe enterprise value of the successor entity was estimated to be in the rangeof $344 million to $396 million.  Based on this range, management deemed$360 million to be an appropriate estimate of the enterprise value of thesuccessor entity.  The enterprise value estimate of $360 million fellwithin the range established above, and management believed the estimate wasappropriate since the value was primarily derived from the trading value of thecommon stock and senior subordinated notes as described above.  Managementbelieved that the enterprise value of $360 million best reflected the value ofthe successor entity because trading activity reflected market based judgmentsas to the current business and industry challenges the successor entity faces,including negative trends.  Furthermore,in estimating the enterprise value of $360 million management determined that avaluation at the low end of the value range based on the trading price of thecommon stock was appropriate because (i) a substantial majority oftransactions in the common stock from August 3, 2007 through September 30,2007, were for prices between $4.00 and $5.15 per share, and (ii) therewas limited volume in the trading activity in the common stock.   If the long-term debt and capital leases of$322.5 million in aggregate principal amount as of August 1, 2007, theeffective date of the plan of reorganization and exchange offer, without givingeffect to the net fair value discount associated with InSight’s $315 million inaggregate principal amount of senior secured floating rate notes due 2011, weresubtracted from the successor entity’s estimated enterprise value of $360million the resulting equity value was $37.5 million.

 

The foregoing estimates of enterprise value and corresponding equityvalue, were based upon certain projects and assumptions.  Neither theprojections nor the assumptions are incorporated into these consolidatedfinancial statements.

 

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The adjustments set forthin the following Condensed Consolidated Fresh-Start Balance Sheet in thecolumns “Debt Discharge” and “Revaluation of Assets and Liabilities” whichreflect the effect of the consummation of the confirmed plan of reorganizationand the adoption of fresh-start reporting on our condensed consolidated balancesheet at August 1, 2007 are as follows (amounts in thousands):

 
| ** **                                                         | ** ** | **Predecessor**   | ** ** | **Fresh-Start Adjustments** | ** ** | **Successor**            | ** ** |
|--------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|
| ** **                                                         | ** ** | ** **        | ** ** | ** **                       | ** ** | ** **               | ** ** | **Reorganized** | ** ** |
| ** **                                                         | ** ** | ** **        | ** ** | ** **                       | ** ** | **Revaluation**          | ** ** | **Balance** | ** ** |
| ** **                                                         | ** ** | ** **        | ** ** | ** **                       | ** ** | **of Assets**       | ** ** | **Sheet** | ** ** |
| ** **                                                         | ** ** | **July 31,** | ** ** | **Debt**                         | ** ** | **and**                  | ** ** | **August 1,** | ** ** |
| ** **                                                         | ** ** | **2007**          | ** ** | **Discharge (a)**           | ** ** | **Liabilities (b)** | ** ** | **2007** | ** ** |
| ASSETS                                                             |       |              |       |                             |       |                     |       |   |   |
| Current assets:                                                    |       |              |       |                             |       |                     |       |   |   |
| Cash and cash equivalents                                          |       | $                 | 21,472     |                             | $          | —                   |       | $ | — |   | $ | 21,472 |   |
| Trade accounts  receivables, net                                   |       | 42,173            |       | —                           |       | —                   |       | 42,173 |   |
| Other current  assets                                              |       | 7,948             |       | —                           |       | (195                     | )          | 7,753 |   |
| Total current  assets                                              |       | 71,593            |       | —                           |       | (195                     | )          | 71,398 |   |
|                                                               |       |              |       |                             |       |                     |       |   |   |
| Property and  equipment, net                                       |       | 140,345           |       | —                           |       | 18,295                   |       | 158,640 |   |
| Investments in  partnerships                                       |       | 3,529             |       | —                           |       | 7,698                    |       | 11,227 |   |
| Other assets                                                       |       | 7,731             |       | —                           |       | (7,587                   | )          | 144 |   |
| Other intangible  assets, net                                      |       | 30,111            |       | —                           |       | 5,889                    |       | 36,000 |   |
| Goodwill                                                           |       | 64,868            |       | —                           |       | 45,208                   |       | 110,076 |   |
|                                                               |       | $                 | 318,177    |                             | $          | —                   |       | $ | 69,308 |   | $ | 387,485 |   |
|                                                               |       |              |       |                             |       |                     |       |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                |       |              |       |                             |       |                     |       |   |   |
| Current  liabilities:                                              |       |              |       |                             |       |                     |       |   |   |
| Current portion  of notes payable and capital lease obligations    |       | $                 | 3,359      |                             | $          | —                   |       | $ | — |   | $ | 3,359 |   |
| Accounts payable  and other accrued expenses                       |       | 37,084            |       | —                           |       | —                   |       | 37,084 |   |
| Total current  liabilities                                         |       | 40,443            |       | —                           |       | —                   |       | 40,443 |   |
|                                                               |       |              |       |                             |       |                     |       |   |   |
| Long-term  liabilities:                                            |       |              |       |                             |       |                     |       |   |   |
| Notes payable  and capital lease obligations, less current portion |       | 315,795           |       | —                           |       | (21,818                  | )          | 293,977 |   |
| Liabilities  subject to compromise                                 |       | 205,704           |       | (205,704                         | )          | —                   |       | — |   |
| Other long-term  liabilities                                       |       | 8,365             |       | —                           |       | 7,243                    |       | 15,608 |   |
| Total long-term  liabilities                                       |       | 529,864           |       | (205,704                         | )          | (14,575                  | )          | 309,585 |   |
|                                                               |       |              |       |                             |       |                     |       |   |   |
| Stockholders’  equity (deficit)                               |       |              |       |                             |       |                     |       |   |   |
| Predecessor                                                        |       |              |       |                             |       |                     |       |   |   |
| Common stock                                                       |       | 1                 |       | —                           |       | (1                       | )          | — |   |
| Additional  paid-in capital                                        |       | 87,085            |       | —                           |       | (87,085                  | )          | — |   |
| Accumulated  other comprehensive income                            |       | 103               |       | —                           |       | (103                     | )          | — |   |
| Accumulated  deficit                                               |       | (339,319          | )          | 168,248                          |       | 171,071                  |       | — |   |
| Successor                                                          |       |              |       |                             |       |                     |       |   |   |
| Common stock                                                       |       | —            |       | 8                                |       | 1                        |       | 9 |   |
| Additional  paid-in capital                                        |       | —            |       | 37,448                           |       | —                   |       | 37,448 |   |
| Total  stockholders’ equity (deficit)                         |       | (252,130          | )          | 205,704                          |       | 83,883                   |       | 37,457 |   |
|                                                               |       | $                 | 318,177    |                             | $          | —                   |       | $ | 69,308 |   | $ | 387,485 |   |

 

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(a)                Debt Discharge.  This reflects the cancellation of $205,704 ofliabilities subject to compromise pursuant to the terms of the confirmed planof reorganization.  The holders of seniorsubordinated notes received 7,780 shares of Holdings’ common stock in satisfaction of such claims.

 

(b)               Revaluation of Assets and Liabilities.  Fresh-start adjustments made to reflect assetand liability values at estimated fair value are summarized as follows:

 

·                  Other current assets.  An adjustment of $195 was recorded todecrease the value of deferred tax benefit.

 

·                  Property and equipment, net.  An adjustment of $18,295 was recorded toincrease the net book value of property and equipment, net.

 

·                  Investments in partnerships.  An adjustment of $7,698 was recorded torecognize the estimated fair value of our investments in partnerships.

 

·                  Other assets. Adjustments of $7,587 were recorded to reduce the value of deferredfinancing costs and the value of the interest rate cap contract.

 

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·                  Other intangible assets, net.  An adjustment of $5,889 was recorded torecognize identifiable intangible assets. These intangible assets reflect the estimated fair value of ourtrademark, wholesale contracts and certificates of need.  These assets will be subject to an annualimpairment review (Note 8).

 

·                  Goodwill. An adjustment of $45,208 was recorded to reflect reorganization value ofthe successor equity in excess of the fair value of tangible and identifiedintangible assets and liabilities.  Thisamount was determined as the stockholders’ deficit immediately prior to Holdings’ and InSight’s emergence from bankruptcy ($252,130), offsetby the gain on discharge of debt ($168,248) and revaluation of assets andliabilities ($38,674).  This amount wassubsequently impaired as of June 30, 2008 (Note 8).

 

·                  Notes payable.  An adjustment of $21,818 was recorded toreflect a net fair value discount associated with InSight’s senior secured floating rate notes due2011, to be amortized in interest expense over the remaining life of suchnotes.  The fair market value of thenotes was determined based on the quoted market value as of August 1,2007, which represented the present value of amounts to be paid at appropriatecurrent interest rates.

 

·                  Other long-term liabilities.  Anadjustment of $7,243 was recorded to increase the value of deferred taxliabilities related to the increase in value of our other indefinite-livedintangible assets.

 

·                  Total stockholders’ deficit. The adoption of fresh-start reporting resulted in a new entity with nobeginning retained earnings or accumulated deficit.  The condensed consolidated balance sheetreflected initial stockholders’equity value of approximately $37,457 estimated as described above.

 

**3.**       **LIQUIDITYAND CAPITAL RESOURCES**

 

The reorganizationsignificantly deleveraged our balance sheet and improved our projected cashflow after debt service. However, we still have a substantial amount of debt,which requires significant interest and principal payments.  As of June 30,2008, we had total indebtedness of approximately $322.4 million in aggregateprincipal amount, including InSight’s $315 million of senior secured floatingrate notes due 2011, or floating rate notes.  We believe that future netcash provided by operating and investing activities and our credit facilitywill be adequate to meet our operating cash and debt service requirements forat least the next twelve months.

 

During recent years, ourfinancial performance has deteriorated. We reported net losses of approximately $169.2 million, $99.0 millionand $210.2 million for the eleven months ended June 30, 2008 and the yearsended June 30, 2007 and 2006, respectively.  We have implemented steps to improve ourfinancial performance, including, leadership changes, a core market strategyand various initiatives in response to this deterioration.  We have attempted to implement, and willcontinue to develop and implement, various revenue enhancement and costreduction initiatives.  Revenue enhancementinitiatives will focus on (1) improvements in our sales and marketingefforts, (2) technology enhancements to create greater efficiency in thegathering of patient and claim information at the time a procedure is scheduledor completed, and (3) improvements in our revenue cycle management.  Cost reduction initiatives will focus onstreamlining our organizational structure and leveraging relationships withstrategic vendors.  While we haveexperienced some improvements through our cost reduction initiatives, ourrevenue enhancement initiatives have produced minimal improvements todate.  Moreover, future revenue enhancement initiatives will facesignificant challenges because of the continued overcapacity in the diagnosticimaging industry and reimbursement reductions. We can give no assurance thatthese steps will be adequate to improve our financial performance.  Unlessour financial performance significantly improves, we can give no assurance thatwe will be able to refinance the floating rate notes, which mature in November 2011,on commercially reasonable terms, if at all.

 

**4.**       **SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

a.     CONSOLIDATED FINANCIALSTATEMENTS

 

Our consolidatedfinancial statements include our accounts and those of all controlledsubsidiaries.  All significantintercompany transactions and balances have been eliminated.  Equity investments in which the Companyexercises significant influence, but does not control, and is not the primarybeneficiary are accounted

 

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

 

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 agreedupon amounts from collections and (iii) the radiologists bear the risk ofnon-collection; however, we have entered into arrangements with certain radiologistspursuant to which we pay the radiologists directly for their professionalservices at an agreed upon contractual rate. With respect to these arrangements, the professional component isincluded in our revenues, and our payments to the radiologists are included incosts of services.  Contract servicesrevenues are recognized over the applicable contract period.  Revenues collected in advance are recorded asunearned revenue.

 

d.   CASH, CASH EQUIVALENTS ANDRESTRICTED CASH

 

Cash equivalents aregenerally composed of liquid investments with original maturities of threemonths or less, such as certificates of deposit and commercial paper.  As of June 30, 2008, there wasrestricted cash of approximately $8.1 million, that was subject to the lien forthe benefit of the floating rate note holders, and may only be used for whollyowned capital projects or under certain circumstances the repurchase offloating rate notes.  These funds areclassified as restricted cash on our consolidated balance sheet.

 

e.     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 (i) historicalexperience of contractual payments from payors and (ii) the outstandingaccounts 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 involvingcustomers, which are financially unstable or materially fail to comply with thepayment terms of their contract and (2) other accounts based on ourhistorical collection experience, including payor mix and the aging of patientaccounts receivables balances. Receivables deemed to be uncollectible, either through a customerdefault on payment terms or after reasonable collection efforts have beenexhausted, are fully written off against their corresponding asset account,with a reduction to the allowance for doubtful accounts to the extent such anallowance was previously recorded.

 

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f.      LONG-LIVED ASSETS

 

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

 

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

 

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

 

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

 

g.     DEFERRED FINANCING COSTS

 

Costsincurred in connection with financing activities are deferred and amortizedusing the effective interest method over the terms of the related debtagreements ranging from seven to ten years. Amortization of these costs is charged to interest expense in theaccompanying consolidated statements of operations.  During the one month ended July 31,2007, approximately $7.6 million of deferred financing costs were adjusted aspart of our revaluation of assets and liabilities in fresh-start reportingwhich are included in reorganization items, net in the consolidated statementsof operations (Note 2).  During the yearended June 30, 2007 we wrote-off approximately $6.1 million of deferredfinancing costs associated with our senior subordinated notes, which areincluded in reorganization items, net in the consolidated statements ofoperations (Note 2).

 

h.     SHARE-BASED COMPENSATION

 

On July 1, 2006, weadopted SFAS No. 123R, “Share-Based Payment”, or SFAS 123R.  SFAS 123R focuses primarily on theaccounting for transactions in which an entity obtains employee services inshare-based payment transactions.  SFAS123R requires companies to recognize in the statement of operations the cost ofemployee services received in exchange for awards of equity instruments basedon the grant date fair value of those awards. Because we used the minimum value method of measuring share-basedcompensation expense under SFAS No. 123, “Accounting for Stock-BasedCompensation”, or SFAS 123, and because we previously met the definition of anonpublic entity under SFAS 123R, we adopted the provisions of SFAS 123Rprospectively to new and modified awards on or after July 1, 2006 (Note12).

 

i.      GOODWILL AND OTHERINTANGIBLE ASSETS

 

As of August 1,2007, goodwill represented the reorganization value of the Successor in excessof the fair value of tangible and identified intangible assets and liabilitiesfrom our adoption of fresh-start reporting. We recorded approximately $110.1 million of goodwill upon Holdings’ andInSight’s emergence from bankruptcy (Note 2). Identified intangible assets consist primarily of our trademark,certificates of need and wholesale contracts. The intangible assets, excluding the wholesale contracts, areindefinite-lived assets and are not amortized. Wholesale contracts are definite-lived intangible assets and areamortized over the expected term of the respective contracts.  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.  Wholesale contracts are amortized on astraight-line basis over the estimated lives of the assets.

 

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We evaluate the carryingvalue of goodwill and other indefinite-lived intangible assets in the secondquarter of each fiscal year. Additionally, we review the carrying amount of goodwill and otherindefinite-lived intangible assets whenever events and circumstances indicatethat the carrying amount of goodwill and other indefinite-lived assets may notbe recoverable.  Impairment indicatorsinclude, among other conditions, cash flow deficits, historic or anticipateddeclines in revenue or gross profit and adverse legal or regulatorydevelopments.  Goodwill is allocated toour two reporting units (mobile and fixed), which are the same as ourreportable operating segments, based on the relative fair value of the assetsand liabilities of the operating segments. In evaluating goodwill, we complete the two-step goodwill impairmenttest as required by SFAS 142.  In thefirst of the two-step impairment test, we determine the fair value of thesereporting units using a discounted cash flow valuation model, market multiplemodel or appraised value model, as appropriate. SFAS 142 requires us to compare the fair value of the reporting unit toits carrying value on an annual basis to determine if there is potentialimpairment.  If the fair value of areporting unit exceeds its carrying value, goodwill of the reporting unit isconsidered not impaired and no further testing is required.  If the fair value does not exceed thecarrying value, the second step of the impairment test is performed to measurethe amount of impairment loss, if any. The second step compares the implied fair value of the goodwill with thecarrying amount of that goodwill. Impairment losses, if any, are reflected in the consolidated statementsof operations.  As of June 30, 2008,based on factors described in Note 8 to the consolidated financial statements,we performed an interim impairment analysis in accordance with SFAS 142 andrecognized a non-cash impairment charge in both our reporting units.

 

We assess the ongoingrecoverability of our other intangible assets subject to amortization inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, or SFAS 144, by determining whetherthe long-lived asset can be recovered over the remaining amortization periodthrough projected undiscounted future cash flows.  If projected future cash flows indicate thatthe unamortized long-lived asset will not be recovered, an adjustment is madeto reduce the asset to an amount consistent with projected future cash flowsdiscounted at the market interest rate. Cash flow projections, although subject to a degree of uncertainty, arebased on trends of historical performance and management’s estimate of future performance, giving consideration toexisting and anticipated competitive and economic conditions.  As of June 30, 2008, based on factorsdescribed in Note 8 to the consolidated financial statements, we performed aninterim impairment analysis in accordance with SFAS 144 and recognized anon-cash impairment charge to certain intangible assets in our mobile reportingunit.

 

j.      INCOME TAXES

 

Weaccount for income taxes 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.   COMPREHENSIVEINCOME (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), and our only othercomponent of comprehensive income (loss) is the change in unrealized gain orloss on derivatives qualifying for hedge accounting, net of tax. The aggregateamount of such changes to equity that have not yet been recognized in netincome (loss) are reported in the equity portion of the accompanyingconsolidated balance sheets as accumulated other comprehensive income.

 

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l.    FAIR VALUE OF FINANCIALINSTRUMENTS

 

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

 

m.            NEWPRONOUNCEMENTS

 

In September 2006,the FASB issued SFAS 157, which, among other things, defines fair value,establishes a framework for measuring fair value under generally acceptedaccounting principles, and expands disclosures for each major asset andliability category measured at fair value on either a recurring or nonrecurringbasis.  Upon Holdings’ and InSight’semergence from bankruptcy, we adopted SFAS 157 (Notes 2 and 22).

 

In December 2007,the FASB issued SFAS No. 141(R), “Business Combinations”, or SFAS 141(R),which establishes principles and requirements for recognizing and measuringidentifiable assets and goodwill acquired, liabilities assumed and anynoncontrolling interest in an acquisition, at their fair value as of theacquisition date.  SFAS 141(R) iseffective for fiscal years beginning after December 15, 2008. We arecurrently reviewing SFAS 141(R) to determine its effects on businessacquisitions we may make in the future.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements-an Amendment of Accounting Research Bulletin No. 51”,or SFAS 160, which amends Accounting Research Bulletin No. 51 to establishaccounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary.  SFAS 160 is effective for fiscal yearsbeginning after December 15, 2008.  We are currently evaluating the impact of theadoption of SFAS 160 on our consolidated financial statements.

 

In March 2008, theFASB issued SFAS No. 161, “Disclosures about Derivative Instruments andHedging Activities”, or SFAS 161, which amends SFAS No. 133 “Accountingfor Derivative Instruments and Hedging Activities”, or SFAS 133. SFAS 161requires enhanced disclosures about how and why an entity uses derivativeinstruments, how derivative instruments and related hedged items are accountedfor under SFAS 133 and its related interpretations, and how derivativeinstruments and related hedged items affect an entity’s financial position,financial performance and cash flows. SFAS 161 is effective for fiscal years and interim periods beginningafter November 15, 2008.  As SFAS161 only requires enhanced disclosures, it will have no impact on ourconsolidated financial statements.

 

**5.**       **TRADEACCOUNTS RECEIVABLES**

 

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

 
| ** **                              | ** ** | **Successor**     | ** ** | ** ** | **Predecessor**   | ** ** |
|-----------------------------------------|------------|-------------------|------------|------------|-------------------|------------|
| ** **                              | ** ** | **June 30,** | ** ** | ** ** | **June 30,** | ** ** |
| ** **                              | ** ** | **2008**          | ** ** | ** ** | **2007**          | ** ** |
| Trade accounts  receivables             |       | $                 | 66,277     |       |              | $          | 87,246 |   |
| Less: Allowances  for professional fees |       | (7,864            | )          |       | (10,461           | )          |
| Allowances for  contractual adjustments |       | (15,401           | )          |       | (21,454           | )          |
| Allowances for  doubtful accounts       |       | (8,518            | )          |       | (12,648           | )          |
| Trade accounts  receivables, net        |       | $                 | 34,494     |       |              | $          | 42,683 |   |

 

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 other unidentifiedaccounts included in accounts receivables. In estimating the write-offs and adjustments on specific accounts,management relies on a combination of in-house analysis and a review ofcontractual payment rates from private health insurance programs or under thefederal Medicare program.  In estimatingthe allowance for unidentified write-offs and adjustments, management relies onhistorical experience.  The amounts wewill ultimately realize could differ materially in the near term from theamounts assumed in arriving at the allowances for doubtful accounts andcontractual adjustments in the accompanying consolidated financial statementsat June 30, 2008.

 

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We reserve acontractually agreed upon percentage at several of our fixed-site centers,averaging 20 percent of the accounts receivables balance from patients andthird-party payors for payments to radiologists representing professional feesfor 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 feespayable account.

 

**6.**       **OTHER CURRENT ASSETS**

 

Other current assets are comprised of the following (amounts inthousands):

 
| ** **                                        | ** ** | **Successor**     | ** ** | ** ** | **Predecessor**   | ** ** |
|---------------------------------------------------|------------|-------------------|------------|------------|-------------------|------------|
| ** **                                        | ** ** | **June 30,** | ** ** | ** ** | **June 30,** | ** ** |
| ** **                                        | ** ** | **2008**          | ** ** | ** ** | **2007**          | ** ** |
| Prepaid expenses                                  |       | $                 | 5,719      |       |              | $          | 6,234 |   |
| Amounts due from  our unconsolidated partnerships |       | 2,480             |       |       | 2,101             |       |
|                                              |       | $                 | 8,199      |       |              | $          | 8,335 |   |

 

**7.**       **PROPERTY AND EQUIPMENT**

 

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

 
| ** **                                       | ** ** | **Successor**     | ** ** | ** ** | **Predecessor**   | ** ** |
|--------------------------------------------------|------------|-------------------|------------|------------|-------------------|------------|
| ** **                                       | ** ** | **June 30,** | ** ** | ** ** | **June 30,** | ** ** |
| ** **                                       | ** ** | **2008**          | ** ** | ** ** | **2007**          | ** ** |
| Vehicles                                         |       | $                 | 1,910      |       |              | $          | 5,066 |   |
| Land, building  and leasehold improvements       |       | 16,623            |       |       | 35,045            |       |
| Computer and  office equipment                   |       | 14,911            |       |       | 49,674            |       |
| Diagnostic and  related equipment                |       | 121,102           |       |       | 245,576           |       |
| Equipment and  vehicles under capital leases     |       | 6,357             |       |       | 66,068            |       |
|                                             |       | 160,903           |       |       | 401,429           |       |
| Less:  Accumulated depreciation and amortization |       | (47,219           | )          |       | (256,606          | )          |
| Property and  equipment, net                     |       | $                 | 113,684    |       |              | $          | 144,823 |   |

 

Depreciationexpense was approximately $50.6 million, $4.4 million, $55.7 million and $61.1million for the eleven months ended June 30, 2008 (Successor), the onemonth ended July 31, 2007, and for the years ended June 30, 2007 and2006 (Predecessor), respectively.

 

**8.**       **GOODWILLAND OTHER INTANGIBLE ASSETS**

 

During the fourth quarterof fiscal 2008, as a result of our continued declining performance and thedeclining market values of both our common stock and floating rate notes, wedetermined that an interim impairment analysis of the fair value of our two reportingunits (mobile and fixed) should be performed in accordance with SFAS 142 usinga 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.  Our analysis of the fair value ofour reporting units incorporated the use of a three-year plus terminal valuediscounted cash flow valuation model, among other valuation methods. Thestarting point in our discounted cash flow valuation model was our actualfinancial results for fiscal 2008. The assumptions used in our discounted cashflow valuation model included the following: (i) market attrition rates applied to revenue ranged from 4.6% to 4.0%in our mobile reporting unit and ranged from 11.4% to 0.0% in our fixedreporting unit; and (ii) operating profit margins ranged from 14.3% to 24.6% inour mobile reporting unit and from 13.1% to 14.1% in our fixed reportingunit.  These market attrition rates andoperating profit margins are reflective of the current general economicpressures now impacting us and the overall diagnostic imaging servicesindustry.

 

Based on our analysis ofthe fair value of our reporting units, we concluded that impairments hadoccurred and we recorded a non-cash goodwill impairment charge of approximately$107.4 million related to our reporting units (approximately $44.6 million forour fixed reporting unit and approximately $62.8 million for our mobilereporting unit).  We also recorded anon-cash impairment charge in our mobile reporting unit related to one of ourindefinite-lived intangible assets (trademark) of approximately $1.5million.  Additionally, in accordancewith SFAS 144, we considered whether there were any impairments of otherlong-lived assets included in the fixed and mobile asset groups.  We compared projected undiscounted cash flowsfor each of the asset groups to the carrying value of the assets, includingamortized wholesale contracts and depreciable property and equipment.  In each case, the carrying value of the assetgroups exceeded the undiscounted cash flows. Therefore, the carrying value of the long-lived assets included in theasset groups were compared to their estimated fair values, resulting in anon-cash impairment charge of approximately $7.1 million related to wholesalecontracts in our mobile reporting unit.

 

Finally, we also recordedother than temporary impairments of approximately $3.8 million in our fixedreporting unit related to the fair value in excess of our equity in the netassets of our investment in partnerships that had been recorded in fresh-startreporting.

 

During the second quarterof fiscal 2007, based on our continued declining financial performance anddeteriorating market conditions, management determined that a goodwillimpairment at our fixed reporting unit had occurred and

 

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we recorded a non-cashgoodwill impairment charge of approximately $29.6 million related to our fixedreporting unit.

 

During the fourthquarter of fiscal 2006, as a result of (1) our negative financial trendsand (2) the enactment of the Deficit Reduction Act of 2005 and itscorresponding anticipated impact on our revenues, we determined that an interimimpairment analysis of the fair value of our two reporting units (mobile andfixed) should be performed in accordance with SFAS 142 using a discounted cashflow model and a market multiples model. We completed our analysis of the fair value of our reporting unitsutilizing the assistance of an independent valuation firm.  We concluded that impairments had occurredand we recorded a non-cash goodwill impairment charge of approximately $189.4million related to our reporting units (approximately $126.8 million for ourfixed reporting unit and approximately $62.6 million for our mobile reportingunit).  Additionally, in accordance withSFAS 144, 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.

 

A reconciliationof goodwill for the years ended June 30, 2008 and 2007 is as follows(amounts in thousands):

 
| ** **                            | ** ** | **Mobile** | ** ** | **Fixed**  | ** ** | **Consolidated** | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|------------------|------------|
| Predecessor                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
| Goodwill,  June 30, 2006         |       | $          | 44,172     |       | $          | 50,291           |       | $ | 94,463 |   |
| Goodwill  impairment charge (1)       |       | —     |       | (29,595    | )          | (29,595          | )          |
| Goodwill,  June 30, 2007         |       | 44,172     |       | 20,696     |       | 64,868           |       |
| Fresh-start  reporting adjustment (2) |       | 18,676     |       | 26,532     |       | 45,208           |       |
| Goodwill,  July 31, 2007         |       | 62,848     |       | 47,228     |       | 110,076          |       |
|                                  |       |       |       |       |       |             |       |
| Successor                             |       |       |       |       |       |             |       |
| Sales of centers  (3)                 |       | —     |       | (2,671     | )          | (2,671           | )          |
| Goodwill  impairment charge (1)       |       | (62,848    | )          | (44,557    | )          | (107,405         | )          |
| Goodwill,  June 30, 2008         |       | $          | —     |       | $          | —           |       | $ | — |   |

 

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(1)         Werecorded goodwill impairment charges discussed above.

 

(2)         Note2.

 

(3)         Duringthe eleven months ended June 30, 2008 we sold seven fixed-site centers andour majority ownership interest in a joint venture that operates a fixed-sitecenter.  Goodwill associated with thesecenters was written-off and is included in loss on sales of centers in theconsolidated statement of operations.

 

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

 
| ** **                           | ** ** | **Successor**               | ** ** | ** **       | **Predecessor**             | ** ** |
|--------------------------------------|------------|-----------------------------|------------|------------------|-----------------------------|------------|
| ** **                           | ** ** | **June 30, 2008** | ** ** | ** **       | **June 30, 2007** | ** ** |
| ** **                           | ** ** | **Gross**                   | ** ** | ** **       | ** **                  | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Carrying**                | ** ** | **Accumulated**  | ** **                  | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                           | ** ** | **Value**                   | ** ** | **Amortization** | ** **                  | ** ** | **Value** | ** ** | **Amortization** | ** ** |
| Amortized  intangible assets:        |       |                        |       |             |                        |       |   |   |   |   |
| Managed care  contracts              |       | $                           | —     |             | $                           | —     |   |   | $ | 24,410 |   | $ | 4,202 |   |
| Wholesale contracts                  |       | 7,800                       |       | 1,430            |                        |       | 14,006 |   | 12,678 |   |
|                                 |       | 7,800                       |       | 1,430            |                        |       | 38,416 |   | 16,880 |   |
|                                 |       |                        |       |             |                        |       |   |   |   |   |
| Indefinite-lived  intangible assets: |       |                        |       |             |                        |       |   |   |   |   |
| Trademark                            |       | 7,400                       |       | —           |                        |       | 8,680 |   | — |   |
| Certificates of  need                |       | 10,600                      |       | —           |                        |       | — |   | — |   |
| Other intangible  assets             |       | $                           | 25,800     |             | $                           | 1,430      |   |   | $ | 47,096 |   | $ | 16,880 |   |

 

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Other intangible assetsare amortized on a straight-line method using the following estimated usefullives:

 
| Wholesale contracts |   | 5 years |   |
|---------------------|--------|---------|--------|

 

Amortization ofintangible assets was approximately $3.0 million, $0.1 million, $1.3 millionand $3.6 million for the eleven months ended June 30, 2008 (Successor),the one month ended July 31, 2007 and for the years ended June 30,2007 and 2006 (Predecessor), respectively.

 

Estimated amortizationexpense for the years ending June 30, are as follows (amounts inthousands):

 
| 2009 |   | $     | 1,560  |   |
|------|--------|-------|--------|--------|
| 2010 |   | 1,560 |   |
| 2011 |   | 1,560 |   |
| 2012 |   | 1,560 |   |
| 2013 |   | 130   |   |

 

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

 

Accounts payable andother accrued expenses are comprised of the following (amounts in thousands):

 
| ** **                         | ** ** | **Successor**     | ** ** | ** ** | **Predecessor**   | ** ** |
|------------------------------------|------------|-------------------|------------|------------|-------------------|------------|
| ** **                         | ** ** | **June 30,** | ** ** | ** ** | **June 30,** | ** ** |
| ** **                         | ** ** | **2008**          | ** ** | ** ** | **2007**          | ** ** |
| Accounts payable                   |       | $                 | 1,598      |       |              | $          | 2,651 |   |
| Accrued  equipment related costs   |       | 3,813             |       |       | 3,529             |       |
| Accrued payroll  and related costs |       | 12,839            |       |       | 12,744            |       |
| Accrued interest  expense          |       | 4,276             |       |       | 5,289             |       |
| Accrued  professional fees         |       | 1,937             |       |       | 2,020             |       |
| Accrued legal  fees                |       | 214               |       |       | 3,309             |       |
| Other accrued  expenses            |       | 8,444             |       |       | 9,077             |       |
|                               |       | $                 | 33,121     |       |              | $          | 38,619 |   |

 

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

 

Notes payable arecomprised of the following (amounts in thousands):

 
| ** **                                                                                                                                                                                                                                                                                    | ** ** | **Successor**     | ** ** | ** ** | **Predecessor**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                                                                                                    | ** ** | **June 30,** | ** ** | ** ** | **June 30,** | ** ** |
| ** **                                                                                                                                                                                                                                                                                    | ** ** | **2008**          | ** ** | ** ** | **2007**          | ** ** |
|                                                                                                                                                                                                                                                                                          |       |              |       |       |              |       |
| Senior secured  floating rate notes payable (floating rate notes), bearing interest at LIBOR  plus 5.25% (8.12% at June 30, 2008), interest payable quarterly,  principal due in November 2011. At June 30, 2008, the fair value of  the notes was approximately $128 million. |       | $                 | 315,000    |       |              | $          | 300,000 |   |
|                                                                                                                                                                                                                                                                                          |       |              |       |       |              |       |
| Unsecured senior  subordinated notes payable (senior subordinated notes).                                                                                                                                                                                                                     |       | —            |       |       | 194,500           |       |
|                                                                                                                                                                                                                                                                                          |       |              |       |       |              |       |
| Revolving credit  facility, bearing interest at LIBOR plus 2.5% or prime rate interest payable  monthly, principal due in June 2011.                                                                                                                                                     |       | —            |       |       | 5,000             |       |
|                                                                                                                                                                                                                                                                                          |       |              |       |       |              |       |
| Other notes  payable                                                                                                                                                                                                                                                                          |       | 1,026             |       |       | 1,777             |       |
|                                                                                                                                                                                                                                                                                          |       |              |       |       |              |       |
| Total notes  payable                                                                                                                                                                                                                                                                          |       | 316,026           |       |       | 501,277           |       |
| Less:  Unamortized discount on floating rate notes                                                                                                                                                                                                                                            |       | (20,678           | )          |       | (1,150            | )          |
| Less: Amounts  classified as liabilities subject to compromise                                                                                                                                                                                                                                |       | —            |       |       | (194,500          | )          |
| Less: Current  portion                                                                                                                                                                                                                                                                        |       | (624              | )          |       | (5,737            | )          |
| Long-term notes  payable                                                                                                                                                                                                                                                                      |       | $                 | 294,724    |       |              | $          | 299,890 |   |

 

Through InSight, we hadoutstanding $315 million of aggregate principal amount of senior securedfloating rate notes due 2011, or floating rate notes, as of June 30, 2008. Thefloating rate notes mature in November 2011 and bear interest at LIBORplus 5.25% per annum, payable quarterly. If prior to the maturity of thefloating rate notes, we elect to redeem the floating rate notes or areotherwise required to make a prepayment with respect to the floating rate notesfor which a redemption price is not otherwise specified in the indenture,regardless of whether such prepayment is made voluntarily or mandatorily, as aresult of acceleration upon the occurrence of an event of default or otherwise,we are required to pay a price above the principal amount of the notes. If theredemption or prepayment occurs prior to January 1, 2009, the redemptionor prepayment price for floating rate notes would be 103% of the principalamount plus accrued and unpaid interest. If the prepayment occurs on or after January 1,2009, the redemption or prepayment price would be 102% of the principal amountplus accrued and unpaid interest. An open-market purchase of floating ratenotes would not require a prepayment price at the foregoing rates. In addition,the indenture provides that if there is a change of control, we will berequired to make an offer to purchase all outstanding floating rate notes at aprice equal to 101% of their principal amount plus accrued and unpaid interest.The indenture provides that a change of control includes, among things, if aperson or group becomes directly or indirectly the beneficial owner of 35% ormore of Holdings’ common stock. The $315 million of aggregate principal amountof floating rate notes includes $15 million of aggregate principal amount offloating rate notes issued in July 2007, which were issued at 85% of theirprincipal amount. The fair value of the floating rate notes as of June 30,2008 was approximately $128 million.

 

Holdings’ andInSight’s wholly owned subsidiaries unconditionally guarantee all of InSight’sobligations under the indenture for the floating rate notes. The floating ratenotes are secured by a first priority lien on substantially all of InSight’sand the guarantors’ existing and future tangible and intangible personalproperty including, without limitation, equipment, certain real property,certain contracts and intellectual property and a cash account related to theforegoing but are not secured by a lien on their accounts receivables andrelated assets, cash accounts related to receivables and certain other assets. Inaddition, the floating rate notes are secured by a portion of InSight’s stockand the stock or other equity interests of InSight’s subsidiaries.

 

Through InSight, we also had outstanding $194.5 million aggregate principalamount of senior subordinated notes. On August 1, 2007, the seniorsubordinated notes were cancelled and exchanged for Holdings’ common stock aspart of Holdings’ and InSight’s plan of reorganization and exchange offer (Note2).

 

Through certain of InSight’s wholly owned subsidiaries, we have anasset-based revolving credit facility of up to $30 million, which matures in June 2011,with the lenders named therein and Bank of America, N.A., as collateral andadministrative agent. As of June 30, 2008, we had approximately $22.0million of availability under the credit

 

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facility, based on our borrowing base. Holdings and InSightunconditionally guarantee all obligations of InSight’s subsidiaries that areborrowers under the credit facility. All obligations under the credit facilityand the obligations of Holdings and InSight under the guarantees are secured,subject to certain exceptions, by a first priority security interest in all ofHoldings’, InSight’s and the borrowers’: (i) accounts; (ii) instruments,chattel paper (including, without limitation, electronic chattel paper),documents, letter-of-credit rights and supporting obligations relating to anyaccount; (iii) general intangibles that relate to any account; (iv) moniesin the possession or under the control of the lenders under the creditfacility; (v) products and cash and non-cash proceeds of the foregoing; (vi) depositaccounts established for the collection ofproceeds from the assets described above; and (vii) booksand records pertaining to any of the foregoing. Borrowings under the creditfacility bear interest at LIBOR plus 2.5% per annum or, at our option, theprime rate. The applicable margin is currently 2.50% per annum; however, theapplicable margin will be adjusted in accordance with a pricing grid based onour fixed charge coverage ratio, and will range from 2.00% to 2.50% per annum. Inaddition to paying interest on outstanding loans under the credit facility, weare required to pay a commitment fee to the lenders in respect of unutilizedcommitments thereunder at a rate equal to 0.50% per annum, subject to reductionbased on a performance grid tied to our fixed charge coverage ratio, as well ascustomary letter-of-credit fees and fees of Bank 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. At June 30,2008, there were no borrowings outstanding under the credit facility; however,there were letters of credit of approximately $2.3 million outstanding underthe credit facility of which approximately $0.3 million were cashcollateralized.

 

The agreements governing our credit facility and floating rate notescontain restrictions on, among other things, our ability to incur additionalliens and indebtedness, engage in mergers, consolidations and asset sales, makedividend payments, prepay other indebtedness, make investments and engage intransactions with affiliates.

 

In September 2005,through InSight, we repurchased approximately $55.5 million aggregate principalamount of our unsecured senior subordinated notes, or senior subordinatednotes, in privately negotiated transactions. We realized a gain ofapproximately $3.1 million, net of a write-off of deferred financing costs ofapproximately $2.5 million.

 

Scheduled maturities ofnotes payable at June 30, 2008, are as follows for the fiscal years ending(amounts in thousands):

 

| 2009   |   | $       | 624     |   |
|--------|--------|---------|---------|--------|
| 2010   |   | 167     |    |
| 2011   |   | 180     |    |
| 2012   |   | 315,055 |    |
|   |   | $       | 316,026 |   |

 

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

 

Welease diagnostic equipment, certain other equipment and our office and imagingfacilities under various capital and operating leases. Future minimum scheduledrental payments required under these noncancelable leases at June 30, 2008are as follows for the fiscal years ending (amounts in thousands):

 

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| ** **                                  | ** ** | **Capital** | ** ** | **Operating** | ** ** |
|---------------------------------------------|------------|-------------|------------|---------------|------------|
| 2009                                        |       | $           | 2,160      |          | $          | 13,798 |   |
| 2010                                        |       | 1,880       |       | 11,762        |       |
| 2011                                        |       | 1,682       |       | 9,458         |       |
| 2012                                        |       | 1,176       |       | 6,642         |       |
| 2013                                        |       | 441         |       | 2,909         |       |
| Thereafter                                  |       | —      |       | 3,424         |       |
| Total minimum  lease payments               |       | 7,339       |       | $             | 47,993     |   |
| Less: Amounts  representing interest        |       | (965        | )          |          |       |
| Present value of  capital lease obligations |       | 6,374       |       |          |       |
| Less: Current  portion                      |       | (1,743      | )          |          |       |
| Long-term  capital lease obligations        |       | $           | 4,631      |          |       |   |

 

Accumulated depreciation on assets under capital leases was $1.2million (Successor) and $11.3 million (Predecessor) at June 30, 2008 and2007, respectively.

 

Rental expense for diagnostic equipment and other equipment for theeleven months ended June 30, 2008 (Successor), the one month ended July 31,2007, and for the years ended June 30, 2007 and 2006 (Predecessor), was$9.2 million, $0.8 million, $6.1 million and $3.3 million respectively.

 

We occupy facilitiesunder lease agreements expiring through October 2017. Some of these leaseagreements may include provisions for an increase in lease payments based onthe Consumer Price Index or scheduled increases based on a guaranteed minimumpercentage or dollar amount. Rental expense for these facilities for the elevenmonths ended June 30, 2008 (Successor), the one month ended July 31,2007, and for the years ended June 30, 2007 and 2006 (Predecessor), was$7.9 million, $0.7 million, $8.8 million and $8.9 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 believe that the outcome of any such lawsuitswill not have a material adverse impact on our financial condition and resultsof operations.

 

**12.**    **EQUITYAND SHARE-BASED COMPENSATION**

 

**Equity**

 

Common stock: Priorto the effective date of the confirmed plan of reorganization, Holdingsdeclared a one for 6.326392 reverse stock split. Common stock as of June 30,2007 and the weighted average number of common shares outstanding for yearsended June 30, 2007 and 2006 have been adjusted to reflect the reversestock split.

 

Pursuant to the confirmedplan of reorganization and the related exchange offer, (i) all of Holdings’common stock, all options for Holdings’ common stock and all of the seniorsubordinated notes, were cancelled, and (ii) holders of the seniorsubordinated notes received 7,780,000 shares of newly issued Holdings’ commonstock, and holders of Holdings’ common stock prior to the effective datereceived 864,444 shares of newly issued Holdings’ common stock, in each caseafter giving effect to the reverse stock split.

 

Stock options: On April 14, 2008, the board of directors ofHoldings adopted the 2008 Director Stock Option Plan and the 2008 EmployeeStock Option Plan. The director plan permits the issuance of up to 192,096shares of Holdings’ common stock to Holdings’ directors, and the employee planpermits the issuance of up to 768,000 shares of Holdings’ common stock toemployees and key non-employees of Holdings. Each of the plans will besubmitted to Holdings’ stockholders for approval at Holdings’ next annualstockholders meeting.

 

On April 14, 2008, each of the Company’s non-employee directorswere granted options under the director plan to purchase (i) 16,008 sharesof Holdings’ common stock at an exercise price of $1.01 per share and (ii) 16,008shares of Holdings’ common stock at an exercise price of $1.16 per share. Eachset of options becomes exercisable in

 

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increments of 1/3rd (5,336 per set) on December 31, 2008, December 31,2009 and December 31, 2010. As of June 30, 2008, options to purchase192,096 shares of Holdings’ common stock were outstanding under this plan.

 

As of June 30, 2008, no options had been granted under theemployee plan. A form of employee stock option agreement has been adopted forthe employee plan providing for the vesting of such options only upon thecompletion of a refinancing of InSight’s floating rate notes, subject to therequirements that any refinanced or replacement debt must have a maturity of atleast five years from the date of original issuance, and the then-existingHoldings’ stockholders must not suffer any dilution as a result of an issuanceof equity or equity-related securities in connection with the refinanced orreplacement debt. Any determination of whether a refinancing transactionsatisfies the vesting requirement for purposes of the granted options will bemade by the compensation committee of Holdings’ board of directors, at its solediscretion.

 

A summary of the statusof options for shares of Holdings’ common stock at June 30, 2008, 2007 and 2006 and changesduring the periods is presented below:

 
| ** **                         | ** ** | ** **         | ** ** | ** **              | ** ** | ** **          | ** ** | **Weighted**          | ** ** |
|------------------------------------|------------|--------------------|------------|-------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                         | ** ** | ** **         | ** ** | ** **              | ** ** | **Weighted**        | ** ** | **Average**           | ** ** |
| ** **                         | ** ** | ** **         | ** ** | **Weighted**            | ** ** | **Average**         | ** ** | **Remaining**         | ** ** |
| ** **                         | ** ** | **Number of** | ** ** | **Average**             | ** ** | **Grant Date** | ** ** | **Contractual**       | ** ** |
| ** **                         | ** ** | **Options**        | ** ** | **Exercise Price** | ** ** | **Fair Value** | ** ** | **Term (years)** | ** ** |
| Successor                          |       |               |       |                    |       |                |       |                  |       |
| Outstanding,  August 1, 2007  |       | —             |       | $                       | —     |                | $          | —                |       |   |   |
| Granted                            |       | 192,096            |       | 1.09                    |       | 1.01                |       |                  |       |
| Outstanding,  June 30, 2008   |       | 192,096            |       | $                       | 1.09       |                | $          | 1.01                  |       | 9.83 |   |
|                               |       |               |       |                    |       |                |       |                  |       |
| Exercisable at  June 30, 2008 |       | —             |       | $                       | —     |                |       |                  |       |   |
|                               |       |               |       |                    |       |                |       |                  |       |
| Predecessor                        |       |               |       |                    |       |                |       |                  |       |
| Outstanding,  June 30, 2005   |       | 97,526             |       | $                       | 105.90     |                | $          | 42.07                 |       |   |   |
| Granted                            |       | 53,464             |       | 125.39                  |       | 42.07               |       |                  |       |
| Forfeited                          |       | (16,676            | )          | 122.92                  |       | 41.63               |       |                  |       |
| Outstanding,  June 30, 2006   |       | 134,314            |       | 112.23                  |       | 42.13               |       |                  |       |
| Forfeited                          |       | (9,484             | )          | 117.54                  |       | 41.94               |       |                  |       |
| Outstanding,  June 30, 2007   |       | 124,830            |       | 111.85                  |       | 42.13               |       |                  |       |
| Forfeited                          |       | (124,830           | )          | 111.85                  |       | 42.13               |       |                  |       |
| Outstanding,  July 31, 2007   |       | —             |       | $                       | —     |                | $          | —                |       |   |   |
|                               |       |               |       |                    |       |                |       |                  |       |
| Exercisable at  June 30, 2006 |       | 38,160             |       | $                       | 85.41      |                |       |                  |       |   |
| Exercisable at  June 30, 2007 |       | 46,010             |       | $                       | 92.56      |                |       |                  |       |   |

 

Of the optionsoutstanding at June 30, 2008, the characteristics are as follows:

 
| **Exercise Price** | ** ** | **Weighted Average** | ** ** | **Options**     | ** ** | **Total Options** | ** ** | **Remaining Contractual** | ** ** |
|-------------------------|------------|---------------------------|------------|-----------------|------------|------------------------|------------|--------------------------------|------------|
| **Range**               | ** ** | **Exercise Price**   | ** ** | **Exercisable** | ** ** | **Outstanding**        | ** ** | **Life**                       | ** ** |
| $                       | 1.01       |                      | $          | 1.01            |       | —                 |       | 96,048                         |       | 9.83 years |   |
| 1.16                    |       | 1.16                      |       | —          |       | 96,048                 |       | 9.83 years                     |       |
|                    |       |                      |       | —          |       | 192,096                |       |                           |       |
|                         |            |                           |            |                 |            |                        |            |                                |            |  |  |

 

**Share-based compensation**

 

We account forshare-based compensation under SFAS 123R. For the eleven months ended June 30,2008, we recognized approximately $0.1 million of compensation expense relatedto stock options in the consolidated statements of operations. There were nooptions or other forms of share-based payment granted during the one monthended July 31, 2007 and the year ended June 30, 2007, respectively,and no amounts of share-based

 

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compensation expense wererecognized in the consolidated statements of operations for such periods. Foreach of the years ended June 30, 2007 and 2006, our net loss would havereflected pro-forma share-based compensation expense of approximately $0.3million and $0.3 million, respectively.

 

SFAS 123R requires theuse of a valuation model to calculate the fair value of share-based awards. Wehave elected to use the Black-Scholes option pricing model, which incorporatesvarious assumptions including volatility, estimated life and interest rates. Theestimated life of an award is based on historical experience and on the termsand conditions of the stock awards granted to employees. The average risk-freerate is based on the ten-year U.S. Treasury security rate in effect as of thegrant date. The fair value of each option grant issued is estimated on the dateof grant or issuance using the Black-Scholes pricing model with the followingassumptions used for grants and issuances in the eleven months ended June 30,2008 and the year ended June 30, 2006.

 
| ** **                                                | ** ** | **Successor**          | ** ** | ** ** | **Predecessor**     | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|------------|---------------------|------------|
| ** **                                                | ** ** | **Eleven Months** | ** ** | ** ** | ** **          | ** ** |
| ** **                                                | ** ** | **Ended**              | ** ** | ** ** | **Year Ended** | ** ** |
| ** **                                                | ** ** | **June 30,**      | ** ** | ** ** | **June 30,**   | ** ** |
| **Assumptions**                                           | ** ** | **2008**               | ** ** | ** ** | **2006**            | ** ** |
| Weighted average estimated fair value per option  granted |       | $                      | 1.01       |       |                |       | $ | 42.07 |   |   |
| Risk-free interest rate                                   |       | 2.16%                  |       |       | 4.06-4.40%          |       |
| Volatility                                                |       | 113.00%                |       |       | 0.00%               |       |
| Expected dividend yield                                   |       | 0.00%                  |       |       | 0.00%               |       |
| Estimated life                                            |       | 10.00 years            |       |       | 10.00 years         |       |
|                                                           |            |                        |            |            |                     |            |  |  |  |  |

 

**13.**    **INCOMETAXES**

 

The provision for incometaxes includes income taxes currently payable and those deferred because oftemporary differences between the consolidated financial statements and taxbases of assets and liabilities. For the year ended June 30, 2007, we haveprovided approximately $1.7 million for tax exposure related to prior years. Theprovision for income taxes for the eleven months ended June 30, 2008(Successor), the one month ended July 31, 2007 and for the years ended June 30,2007 and 2006 is as follows (Predecessor) (amounts in thousands):

 
| ** **                                               | ** ** | **Successor**          | ** ** | ** ** | **Predecessor**    | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|------------|--------------------|------------|
| ** **                                               | ** ** | **Eleven Months** | ** ** | ** ** | **One Month** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | **Ended**              | ** ** | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | **June 30,**      | ** ** | ** ** | **July 31,**  | ** ** | **Years Ended June 30,** | ** ** |
| ** **                                               | ** ** | **2008**               | ** ** | ** ** | **2007**           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Current  provision:                                      |       |                   |       |       |               |       |   |   |   |   |
| Federal                                                  |       | $                      | —     |       |               | $          | — |   | $ | — |   | $ | — |   |
| State                                                    |       | (72                    | )          |       | 62                 |       | 2,175 |   | 400 |   |
|                                                     |       | (72                    | )          |       | 62                 |       | 2,175 |   | 400 |   |
| Deferred taxes  arising from temporary differences:      |       |                   |       |       |               |       |   |   |   |   |
| Federal                                                  |       | (2,059                 | )          |       | (11                | )          | (88 | ) | (15,233 | ) |
| State                                                    |       | 122                    |       |       | 11                 |       | 88 |   | 9 |   |
| Total deferred  taxes arising from temporary differences |       | (1,937                 | )          |       | —             |       | — |   | (15,224 | ) |
| Total (benefit)  provision for income taxes              |       | $                      | (2,009     | )          |               | $          | 62 |   | $ | 2,175 |   | $ | (14,824 | ) |

 

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A reconciliationbetween the statutory federal income tax rate and our effective income tax rateis as follows:

 
| ** **                                                           | ** ** | **Successor**          | ** ** | ** ** | **Predecessor**    | ** ** |
|----------------------------------------------------------------------|------------|------------------------|------------|------------|--------------------|------------|
| ** **                                                           | ** ** | **Eleven Months** | ** ** | ** ** | **One Month** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Ended**              | ** ** | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **June 30,**      | ** ** | ** ** | **July 31,**  | ** ** | **Years Ended June 30,** | ** ** |
| ** **                                                           | ** ** | **2008**               | ** ** | ** ** | **2007**           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Federal  statutory tax rate                                          |       | 34.0                   | %          |       | 34.0               | %          | 34.0 | % | 34.0 | % |
| State income  taxes, net of federal benefit                          |       | —                 |       |       | —             |       | (2.2 | ) | 0.6 |   |
| Permanent items,  including goodwill and non-deductible merger costs |       | (0.1                   | )          |       | —             |       | (0.2 | ) | (0.1 | ) |
| Changes in  valuation allowance                                      |       | (33.9                  | )          |       | (34.0              | )          | (29.7 | ) | (15.7 | ) |
| Impairment of  goodwill and other intangible assets                  |       | 1.1                    |       |       | —             |       | (4.1 | ) | (9.7 | ) |
| Other, net                                                           |       | —                 |       |       | —             |       | (0.1 | ) | (2.5 | ) |
| Net effective  tax rate                                              |       | 1.1                    | %          |       | —             | %          | (2.3 | )% | 6.6 | % |

 

The components ofour net deferred tax liability (including current and non-current portions) asof June 30, 2008 and 2007, respectively, which arise due to timingdifferences between financial and tax reporting and net operating loss, or NOL,carryforwards are as follows (amounts in thousands):

 

| ** **                   | ** ** | **Successor**     | ** ** | ** ** | **Predecessor**   | ** ** |
|------------------------------|------------|-------------------|------------|------------|-------------------|------------|
| ** **                   | ** ** | **June 30,** | ** ** | ** ** | **June 30,** | ** ** |
| ** **                   | ** ** | **2008**          | ** ** | ** ** | **2007**          | ** ** |
| Accrued expenses             |       | $                 | 1,932      |       |              | $          | 1,576 |   |
| Property and  equipment      |       | (8,690            | )          |       | (13,283           | )          |
| Other intangible  assets     |       | 11,193            |       |       | 14,604            |       |
| Reserves                     |       | 4,471             |       |       | 2,718             |       |
| Investments in  partnerships |       | 5,571             |       |       | 3,348             |       |
| State income  taxes          |       | (218              | )          |       | (85               | )          |
| NOL  carryforwards           |       | 52,952            |       |       | 77,034            |       |
| Other                        |       | 54                |       |       | 57                |       |
| Net deferred  asset          |       | 67,265            |       |       | 85,969            |       |
| Valuation allowance          |       | (76,280           | )          |       | (89,441           | )          |
|                         |       | $                 | (9,015     | )          |              | $          | (3,472 | ) |

 

As of June 30, 2008, we had federal NOL carryforwards ofapproximately $133.7 million and various state NOL carryforwards.  TheseNOL carryforwards expire between 2008 and 2027. As discussed in Note 2, on August 1, 2007 a confirmed plan ofreorganization and cancellation of indebtedness became effective.  Futureutilization of NOL carryforwards will be limited by Internal Revenue Codesection 382 and related provisions as a result of the change in control thatoccurred.  The rules under Internal Revenue Code Section 382 inconnection with reorganization and cancellation of indebtedness allow forcompanies to make an election as to how to compute the annual limitation.  We are in process of finalizing our analysisand will make this election upon filing our federal return for the year ended June 30,2008.

 

A valuation allowance is provided against net deferred tax assets whenit is more likely than not that the net deferred tax asset will not berealized.  Based upon (1) our losses in recent years, (2) impairmentcharges recorded in fiscal years 2008 and 2007 and (3) the availableevidence, management determined that is more likely than not that the netdeferred tax assets as of the date of applying fresh-start reporting, August 1,2007, will not be realized.  Consequently, we have a full valuationallowance against such net deferred tax assets as of August 1, 2007. In determining the net asset subject to a valuation allowance, we excluded thedeferred 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 $9.0 million after application of thevaluation allowance as of June 30, 2008.  The valuation allowance maybe reduced in the future if we forecast and realize future taxable income orother tax planning strategies are implemented. Currently, any future reversals of the valuation allowance, which wasrecorded as of August 1, 2007 in applying fresh-start reporting, will berecorded as a reduction of goodwill. However, after adoption of SFAS No. 141(R), “Business Combinations”(Note 4), future reversals of the valuation allowance recorded as of August 1,2007 will be recorded as an income tax benefit.

 

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On July 1, 2007, we adopted FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”,or FIN 48.  FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in a company’s financialstatements.  FIN 48 prescribes arecognition threshold and measurement attribute for financial statementrecognition and measurement of a tax position taken or expected to be taken inthe tax return.  There was no cumulativeeffect adjustment recorded as a result of implementing FIN 48 on July 1,2007.  The liability for income taxesassociated with uncertain tax positions was approximately $1.6 million as of July 1,2007 and $1.4 million as of June 30, 2008 and is included in otherlong-term liabilities.  This amount, ifnot required, would favorably affect our effective tax rate.  We recognize interest and penalties, if any,related to uncertain tax positions in the provision for income taxes.  We do not believe that any material change inthe liability for unrecognized tax benefits is likely within the next twelvemonths.  As of June 30, 2008, allmaterial federal and state income tax matters have been concluded through June 30,2004 and June 30, 2003, respectively.

 

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

 

InSight has a 401(k) SavingsPlan which is available to all eligible employees, pursuant to which InSightmatches a percentage of employee contributions. InSight contributed approximately $1.4 million, $0.1 million, $1.5million and $1.4 million for the eleven months ended June 30, 2008(Successor), the one month ended July 31, 2007 and for the years ended June 30,2007 and 2006 (Predecessor).

 

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

 

We have ownershipinterests in six partnerships or limited liability companies, which we refer toas partnerships, at June 30, 2008, four of which operate fixed-sitecenters and two of which operate mobile facilities.  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):

 
| ** **                       | ** ** | **Successor**     | ** ** | ** ** | **Predecessor**   | ** ** |
|----------------------------------|------------|-------------------|------------|------------|-------------------|------------|
| ** **                       | ** ** | **June 30,** | ** ** | ** ** | **June 30,** | ** ** |
| ** **                       | ** ** | **2008**          | ** ** | ** ** | **2007**          | ** ** |
| Combined  Financial Position:    |       |              |       |       |              |       |
| Current assets:                  |       |              |       |       |              |       |
| Cash                             |       | $                 | 3,979      |       |              | $          | 3,334 |   |
| Trade accounts  receivables, net |       | 3,509             |       |       | 3,499             |       |
| Other                            |       | 189               |       |       | 218               |       |
| Property and  equipment, net     |       | 2,792             |       |       | 3,550             |       |
| Other assets                     |       | 400               |       |       | 400               |       |
| Intangible  assets, net          |       | —            |       |       | 2                 |       |
| Total assets                     |       | 10,869            |       |       | 11,003            |       |
| Current  liabilities             |       | (1,749            | )          |       | (1,723            | )          |
| Due to the  Company              |       | (2,480            | )          |       | (1,797            | )          |
| Long-term  liabilities           |       | (257              | )          |       | (130              | )          |
| Net assets                       |       | $                 | 6,383      |       |              | $          | 7,353 |   |

 

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

 
| ** **                                         | ** ** | **Successor**          | ** ** | ** ** | **Predecessor**    | ** ** |
|----------------------------------------------------|------------|------------------------|------------|------------|--------------------|------------|
| ** **                                         | ** ** | **Eleven Months** | ** ** | ** ** | **One Month** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Ended**              | ** ** | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **June 30,**      | ** ** | ** ** | **July 31,**  | ** ** | **Years Ended June 30,** | ** ** |
| ** **                                         | ** ** | **2008**               | ** ** | ** ** | **2007**           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Operating  Results:                                |       |                   |       |       |               |       |   |   |   |   |
| Revenues                                           |       | $                      | 24,940     |       |               | $          | 2,159 |   | $ | 28,505 |   | $ | 27,430 |   |
| Expenses                                           |       | 20,133                 |       |       | 1,730              |       | 21,026 |   | 20,439 |   |
| Net income                                         |       | $                      | 4,807      |       |               | $          | 429 |   | $ | 7,479 |   | $ | 6,991 |   |
|                                               |       |                   |       |       |               |       |   |   |   |   |
| Equity in  earnings of unconsolidated partnerships |       | $                      | 1,891      |       |               | $          | 174 |   | $ | 3,030 |   | $ | 3,072 |   |

 

**16.****                               RELATEDPARTY TRANSACTIONS**

 

We had 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.  J.W. Childs Advisors II,L.P. and Halifax Genpar, L.P. provided business, management and financialadvisory services to InSight and the Company in consideration of (i) anannual fee of $240,000 to be paid to J.W. Childs Advisors II, L.P. and (ii) anannual fee of $60,000 to be paid to Halifax Genpar, L.P.  This management agreement was terminated asof August 1, 2007 in connection with the consummation of the confirmedplan of reorganization.

 

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

#### ** **

We have two reportablesegments:  mobile operations and fixedoperations, which are business units defined primarily by the type of serviceprovided.    Mobile operations consistprimarily of mobile facilities that generate contract services revenues whilefixed operations consist primarily of fixed-site centers that primarilygenerate patient services revenues.  Wedo not allocate corporate and billing related costs, depreciation related toour billing system and amortization related to other intangible assets to thetwo segments.    We also do not allocateincome taxes to the two segments.  Wemanage cash flows and assets on a consolidated basis, and not by segment.

 

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#### **The following tables summarize our operating results bysegment (amounts in thousands):**

 

Successor

 
| ** **                                                  | ** ** | **Mobile** | ** ** | **Fixed** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|------------------|------------|
| Eleven months  ended June 30, 2008:                    |       |       |       |      |       |      |       |             |       |
| Contract  services revenues                                 |       | $          | 87,973     |      | $          | 20,971    |       | $                | —     |   | $ | 108,944 |   |
| Patient services  revenues                                  |       | —     |       | 133,641   |       | —    |       | 133,641          |       |
| Total revenues                                              |       | 87,973     |       | 154,612   |       | —    |       | 242,585          |       |
| Depreciation and  amortization                              |       | 23,146     |       | 25,938    |       | 4,614     |       | 53,698           |       |
| Total costs of  operations                                  |       | 85,398     |       | 139,471   |       | 12,162    |       | 237,031          |       |
| Corporate  operating expenses                               |       | —     |       | —    |       | (25,744   | )          | (25,744          | )          |
| Equity in  earnings of unconsolidated partnerships          |       | 150        |       | 1,741     |       | —    |       | 1,891            |       |
| Loss on sales of  centers                                   |       | —     |       | (644      | )          | —    |       | (644             | )          |
| Interest  expense, net                                      |       | (1,857     | )          | (2,606    | )          | (28,017   | )          | (32,480          | )          |
| Impairment of  goodwill and other intangible assets         |       | (71,453    | )          | (48,318   | )          | —    |       | (119,771         | )          |
| Income (loss)  before reorganization items and income taxes |       | (70,585    | )          | (34,686   | )          | (65,923   | )          | (171,194         | )          |
|                                                        |       |       |       |      |       |      |       |             |       |
| Additions to  property and equipment                        |       | 2,352      |       | 3,917     |       | 1,993     |       | 8,262            |       |
|                                                             |            |            |            |           |            |           |            |                  |            |  |  |  |  |

 

Predecessor

 
| ** **                                                       | ** ** | **Mobile** | ** ** | **Fixed** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|------------------|------------|
| One month ended  July 31, 2007:                             |       |       |       |      |       |      |       |             |       |
| Contract  services revenues                                      |       | $          | 8,169      |      | $          | 1,882     |       | $                | —     |   | $ | 10,051 |   |
| Patient services  revenues                                       |       | —     |       | 12,311    |       | —    |       | 12,311           |       |
| Total revenues                                                   |       | 8,169      |       | 14,193    |       | —    |       | 22,362           |       |
| Depreciation and  amortization                                   |       | 1,958      |       | 2,045     |       | 465       |       | 4,468            |       |
| Total costs of  operations                                       |       | 6,918      |       | 11,920    |       | 1,712     |       | 20,550           |       |
| Corporate operating  expenses                                    |       | —     |       | —    |       | (1,678    | )          | (1,678           | )          |
| Equity in  earnings of unconsolidated partnerships               |       | —     |       | 174       |       | —    |       | 174              |       |
| Interest  expense, net                                           |       | (243       | )          | (289      | )          | (2,386    | )          | (2,918           | )          |
| Income (loss)  before reorganization items, net and income taxes |       | 1,008      |       | 2,158     |       | (5,776    | )          | (2,610           | )          |
|                                                             |       |       |       |      |       |      |       |             |       |
| Additions to  property and equipment                             |       | —     |       | —    |       | —    |       | —           |       |
|                                                                  |            |            |            |           |            |           |            |                  |            |  |  |  |  |

 
| ** **                                                  | ** ** | **Mobile** | ** ** | **Fixed** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|------------------|------------|
| Year ended  June 30, 2007:                             |       |       |       |      |       |      |       |             |       |
| 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           |       |
|                                                             |            |            |            |           |            |           |            |                  |            |  |  |  |  |

 
| ** **                                          | ** ** | **Mobile** | ** ** | **Fixed** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|------------------|------------|
| Year ended  June 30, 2006:                     |       |       |       |      |       |      |       |             |       |
| 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           |       |
|                                                     |            |            |            |           |            |           |            |                  |            |  |  |  |  |

 

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

 
| ** **                                            | ** ** | **Predecessor**                                   | ** ** | **Successor**          | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **One Month**                                | ** ** | **Two Months**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Ended**                                         | ** ** | **Ended**              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **July 31,**                                 | ** ** | **September 30,** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **2007**                                          | ** ** | **2007**               | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Total** | ** ** |
| ** **                                            | ** ** | **(amounts in thousands, except per share data)** | ** ** |
|                                                  |       |                                              |       |                   |       |   |   |   |   |   |   |   |   |
| 2008:                                                 |       |                                              |       |                   |       |   |   |   |   |   |   |   |   |
| Revenues                                              |       | $                                                 | 22,362     |                   | $          | 45,390 |   | $ | 67,038 |   | $ | 65,385 |   | $ | 64,772 |   | $ | 242,585 |   |
| Gross profit  (loss)                                  |       | 1,812                                             |       | 2,676                  |       | 2,067 |   | (1,357 | ) | 2,168 |   | 5,554 |   |
| Net income  (loss)                                    |       | 196,326                                           |       | (7,985                 | )          | (14,053 | ) | (19,376 | ) | (127,771 | ) | (169,185 | ) |
| Basic and  diluted net income (loss) per common share |       | 227.23                                            |       | (0.92                  | )          | (1.63 | ) | (2.24 | ) | (14.78 | ) | (19.57 | ) |
|                                                       |            |                                                   |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                   | ** ** | ** ** | ** ** | **Predecessor**                                   | ** ** |
|----------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|
| ** **                                   | ** ** | ** ** | ** ** | **First**                                         | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | ** ** | ** ** | **Quarter**                                       | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | ** ** | ** ** | **(amounts in thousands, except per share data)** | ** ** |
| 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 | ) |
| Basic and  diluted net loss per common share |       |       |       | (14.04                                            | )          | (50.40 | ) | (13.28 | ) | (36.91 | ) | (114.63 | ) |
|                                              |            |            |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**19.****                               HEDGINGACTIVITIES**

 

We account for hedgingactivities in accordance with SFAS 133, and we formally document our hedge relationships,including identification of the hedging instruments and the hedged items, aswell as our risk management objectives and strategies for undertaking thehedge.  We also formally assess, both atinception and at least quarterly thereafter, whether the derivative instrumentsthat are used in hedging transactions are highly effective in offsetting thechanges in either the fair value or cash flows of the hedged item.

 

We had an interest ratecap contract with notional amount of $100 million and a LIBOR cap of 5.0%,which expired on January 31, 2008. In February 2008, we entered into an interest rate hedging contractwith Bank of America, N.A.  The contracteffectively provides us with an interest rate collar. The notional amount towhich the contract applies is $190 million, and it provides for a LIBOR cap of3.25% and a LIBOR floor of 2.59% on that amount. Our obligations under thecontract are secured on a pari passu basis by the same collateral that securesour credit facility, and the contract is cross-defaulted to our creditfacility. The stated term of the contract is two years, although it may beterminated earlier if Bank of America, N.A. is no longer one of our lendersunder the credit facility. We designated this contract as a highly effectivecash flow hedge of the floating rate notes under SFAS 133.  Accordingly, the value of the contract ismarked-to-market quarterly, with changes in the fair value of the contractincluded as a separate component of other comprehensive income (loss).  As of June 30, 2008, the contract had anasset fair value of approximately $1.0 million.

 

**20.****                               COMPREHENSIVELOSS**

 

Comprehensiveloss consisted of the following components for the eleven months ended June 30,2008 (Successor), the one month ended July 31, 2007 and the years ended June 30,2007 and 2006 (Predecessor), respectively (amounts in thousands):

 

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| ** **                                                                              | ** ** | **Successor**          | ** ** | ** ** | **Predecessor**    | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------|------------|------------|--------------------|------------|
| ** **                                                                              | ** ** | **Eleven Months** | ** ** | ** ** | **One Month** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **Ended**              | ** ** | ** ** | **Ended**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **June 30,**      | ** ** | ** ** | **July 31,**  | ** ** | **Years Ended June 30,** | ** ** |
| ** **                                                                              | ** ** | **2008**               | ** ** | ** ** | **2007**           | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                    |       |                   |       |       |               |       |   |   |   |   |
| Net (loss)  income                                                                      |       | $                      | (169,185   | )          |               | $          | 196,326 |   | $ | (99,041 | ) | $ | (210,218 | ) |
| Unrealized gain  (loss) attributable to change in fair value of interest rate contracts |       | 1,001                  |       |       | —             |       | (498 | ) | 601 |   |
| Comprehensive  (loss) income                                                            |       | $                      | (168,184   | )          |               | $          | 196,326 |   | $ | (99,539 | ) | $ | (209,617 | ) |

 

**21.****                               (LOSS)INCOME PER COMMON SHARE**

 

We report basic anddiluted earnings per share, or EPS, for our common stock.  Basic EPS is computed by dividing reportedearnings by the weighted average number of common shares outstanding during therespective period.  Diluted EPS iscomputed by adding to the weighted average number of common shares the dilutiveeffect of stock options.  There were noadjustments to net (loss) income (the numerator) for purposes of computingEPS.   Due to the net losses reported forthe eleven months ended June 30, 2008 (Successor), the years ended June 30,2007 and 2006 (Predecessor), and that no stock options were dilutive for theone month ended July 31, 2007 (Predecessor), the calculation of dilutedEPS is the same as basic EPS.

 

**22.****                               FAIRVALUE MEASUREMENTS**

 

As discussed in Note 2,we adopted SFAS 157 upon Holdings and InSight emerging from bankruptcy.  SFAS 157, among other things, defines fairvalue, establishes a consistent framework for measuring fair value and expandsdisclosure for each major asset and liability category measured at fair valueon either a recurring or nonrecurring basis. SFAS 157 clarifies that fair value is an exit price, representing theamount that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants.  As such, fair value is a market-basedmeasurement that should be determined based on assumptions that marketparticipants would use in pricing an asset or liability.  As a basis for considering such assumptions,SFAS 157 establishes a three-tier value hierarchy, which prioritizes the inputsused in measuring fair value as follows: (Level 1) observable inputs such asquoted prices in active markets; (Level 2) inputs other than the quoted pricesin active markets that are observable either directly or indirectly; and (Level3) unobservable inputs in which there is little or no market data, whichrequire the reporting entity to develop its own assumptions.

 

Assets and liabilitiesmeasured at fair value are based on one or more of three valuation techniquesnoted in SFAS 157.  The three valuationtechniques are identified in the tables below. Where more than one technique is noted, individual assets or liabilitieswere valued using one or more of the noted techniques.  The valuation techniques are as follows:

 

(a)          Market approach – pricesand other relevant information generated by market conditions involvingidentical or comparable assets or liabilities;

 

(b)         Cost approach – amountsthat would be required to replace the service capacity of assets (replacementcost); and

 

(c)          Income approach –techniques to convert future amounts to single present amounts based on marketexpectations (including present value techniques, option-pricing and excessearnings models).

 

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Assets and liabilitiesmeasured at fair value on a recurring basis consist of an interest rate collarcontract, which is included in other assets. Assets and liabilities measured at fair value in connection with ourinterim evaluation of tangible assets, goodwill and intangible assets duringthe fourth quarter of fiscal 2008 are also summarized below, as well as thefair value of the floating rate notes, which is disclosed in Note 10 (amountsin thousands):

 
| ** **                              | ** ** | ** **        | ** ** | **Fair Value Measurements Using** | ** ** | ** **         | ** ** |
|-----------------------------------------|------------|-------------------|------------|--------------------------------------------------|------------|--------------------|------------|
| ** **                              | ** ** | ** **        | ** ** | **Quoted price**                            | ** ** | **Significant**    | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | ** **        | ** ** | **in active**                               | ** ** | **other**          | ** ** | **other** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Successor**     | ** ** | **markets for**                             | ** ** | **observable**     | ** ** | **unobservable** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **June 30,** | ** ** | **identical assets**                        | ** ** | **inputs**         | ** ** | **inputs** | ** ** | **Valuation** | ** ** |
| ** **                              | ** ** | **2008**          | ** ** | **(Level 1)**                               | ** ** | **(Level 2)** | ** ** | **(Level 3) (1)** | ** ** | **Technique** | ** ** |
| Property and  equipment                 |       | $                 | 113,684    |                                             | $          | —             |       | $ | — |   | $ | 113,684 |   | (b) |   |
| Investments in  partnerships            |       | 6,794             |       | —                                           |       | —             |       | 6,794 |   | (c) |   |
| Other assets                            |       | 1,001             |       | —                                           |       | 1,001              |       | — |   | (a) |   |
| Indefinite-lived  intangible assets (2) |       | 18,000            |       | —                                           |       | —             |       | 18,000 |   | (c) |   |
| Definite-lived  intangible assets (2)   |       | 7,800             |       | —                                           |       | —             |       | 7,800 |   | (c) |   |
| Goodwill                                |       | —            |       | —                                           |       | —             |       | — |   | (c) |   |
| Floating rate  notes                    |       | 128,000           |       | 128,000                                          |       | —             |       | — |   | (a) |   |
|                                         |            |                   |            |                                                  |            |                    |            |  |  |  |  |  |  |  |  |

 

Assets and liabilitiesmeasured at fair value in connection with our annual evaluation of goodwill andintangible assets during the second quarter of fiscal 2008 (amounts inthousands):

 
| ** **                              | ** ** | ** **            | ** ** | **Fair Value Measurements Using** | ** ** | ** **         | ** ** |
|-----------------------------------------|------------|-----------------------|------------|--------------------------------------------------|------------|--------------------|------------|
| ** **                              | ** ** | ** **            | ** ** | **Quoted price**                            | ** ** | **Significant**    | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | ** **            | ** ** | **in active**                               | ** ** | **other**          | ** ** | **other** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Successor**         | ** ** | **markets for**                             | ** ** | **observable**     | ** ** | **unobservable** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **December 31,** | ** ** | **identical assets**                        | ** ** | **inputs**         | ** ** | **inputs** | ** ** | **Valuation** | ** ** |
| ** **                              | ** ** | **2007**              | ** ** | **(Level 1)**                               | ** ** | **(Level 2)** | ** ** | **(Level 3) (1)** | ** ** | **Technique** | ** ** |
| Indefinite-lived  intangible assets (2) |       | $                     | 19,500     |                                             | $          | —             |       | $ | — |   | $ | 19,500 |   | (c) |   |
| Definite-lived  intangible assets (2)   |       | 15,125                |       | —                                           |       | —             |       | 15,125 |   | (c) |   |
|                                         |            |                       |            |                                                  |            |                    |            |  |  |  |  |  |  |  |  |

 

Assets and liabilitiesmeasured at fair value in connection with our adoption of fresh-start reporting(amounts in thousands):

 
| ** **                                         | ** ** | ** **         | ** ** | **Fair Value Measurements Using** | ** ** | ** **         | ** ** | ** **                  | ** ** |
|----------------------------------------------------|------------|--------------------|------------|--------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | ** **         | ** ** | **Quoted price**                            | ** ** | **Significant**    | ** ** | **Significant**             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | ** **         | ** ** | **in active**                               | ** ** | **other**          | ** ** | **other**                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Successor**      | ** ** | **markets for**                             | ** ** | **observable**     | ** ** | **unobservable**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **August 1,** | ** ** | **identical assets**                        | ** ** | **inputs**         | ** ** | **inputs**                  | ** ** | **Total** | ** ** | **Valuation** | ** ** |
| ** **                                         | ** ** | **2007**           | ** ** | **(Level 1)**                               | ** ** | **(Level 2)** | ** ** | **(Level 3) (1)** | ** ** | **Gain (loss)** | ** ** | **Technique** | ** ** |
| Property and  equipment                            |       | $                  | 158,640    |                                             | $          | —             |       | $                           | —     |   | $ | 158,640 |   | $ | 18,295 |   | (b) |   |
| Investments in  partnerships                       |       | 11,227             |       | —                                           |       | —             |       | 11,227                      |       | 7,698 |   | (b)(c) |   |
| Interest rate  cap contract                        |       | 144                |       | 144                                              |       | —             |       | —                      |       | (11 | ) | (a) |   |
| Indefinite-lived  intangible assets (2)            |       | 19,500             |       | —                                           |       | —             |       | 19,500                      |       | (4,931 | ) | (c) |   |
| Definite-lived  intangible assets (2)              |       | 16,500             |       | —                                           |       | —             |       | 16,500                      |       | 10,820 |   | (c) |   |
| Floating rate  notes                               |       | 289,800            |       | 289,800                                          |       | —             |       | —                      |       | 21,981 |   | (a) |   |
| Capital lease  obligations and other notes payable |       | 7,536              |       | —                                           |       | 7,536              |       | —                      |       | — |   | (b) |   |
|                                                    |            |                    |            |                                                  |            |                    |            |                             |            |  |  |  |  |  |  |  |  |  |

 

----

(1)          These valuations werebased on the present value of future cash flows for specific assets derivedfrom our projections of future revenues, cash flows and market conditions.  These cash flows were then discounted totheir present value using a rate of return that considers the relative risk ofnot realizing the estimated annual cash flows and time value of money (Note 2).

 

(2)          Note 8.

 

**23.****                               SUBSEQUENTEVENT**

 

On September 24,2008, we purchased $2.5 million in principal amount of the floating rate notesfor approximately $1.1 million.

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**24.****                               SUPPLEMENTALCONDENSED CONSOLIDATED FINANCIAL INFORMATION**

 

Holdings’ and all of InSight’s wholly owned subsidiaries, or guarantorsubsidiaries, guarantee InSight’s payment obligations under the floating rate notes(Note 10).  These guarantees are full,unconditional and joint and several.  Thefollowing condensed consolidating financial information has been prepared andpresented pursuant to SEC Regulation S-X Rule 3-10 “Financial statementsof guarantors and issuers of guaranteed securities registered or beingregistered.”  We account for investmentin InSight and its subsidiaries 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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**SUPPLEMENTALCONDENSED CONSOLIDATING BALANCE SHEET**

**JUNE30, 2008**

**(Amountsin thousands)**

**(Successor)**

 
| ** **                                                         | ** ** | ** **   | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **NON-GUARANTOR** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------|------------|--------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                         | ** ** | **HOLDINGS** | ** ** | **INSIGHT** | ** ** | **SUBSIDIARIES** | ** ** | **SUBSIDIARIES**  | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| ASSETS                                                             |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Current assets:                                                    |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash  equivalents                                         |       | $            | —     |        | $          | —           |       | $                 | 17,934     |             | $          | 3,068            |       | $ | — |   | $ | 21,002 |   |
| Trade accounts  receivables, net                                   |       | —       |       | —      |       | 29,517           |       | 4,977             |       | —           |       | 34,494           |       |
| Other current  assets                                              |       | —       |       | —      |       | 7,865            |       | 334               |       | —           |       | 8,199            |       |
| Intercompany  accounts receivable                                  |       | 38,473       |       | 293,321     |       | 7,400            |       | —            |       | (339,194         | )          | —           |       |
| Total current  assets                                              |       | 38,473       |       | 293,321     |       | 62,716           |       | 8,379             |       | (339,194         | )          | 63,695           |       |
| Property and  equipment, net                                       |       | —       |       | —      |       | 98,700           |       | 14,984            |       | —           |       | 113,684          |       |
| Cash, restricted                                                   |       | —       |       | —      |       | 8,072            |       | —            |       | —           |       | 8,072            |       |
| Investments in  partnerships                                       |       | —       |       | —      |       | 6,794            |       | —            |       | —           |       | 6,794            |       |
| Investments in  consolidated subsidiaries                          |       | (169,185     | )          | (168,184    | )          | 11,408           |       | —            |       | 325,961          |       | —           |       |
| Other assets                                                       |       | —       |       | —      |       | 1,076            |       | —            |       | —           |       | 1,076            |       |
| Goodwill and  other intangible assets, net               |       | —       |       | —      |       | 18,562           |       | 5,808             |       | —           |       | 24,370           |       |
|                                                               |       | $            | (130,712   | )           | $          | 125,137          |       | $                 | 207,328    |             | $          | 29,171           |       | $ | (13,233 | ) | $ | 217,691 |   |
|                                                               |       |         |       |        |       |             |       |              |       |             |       |             |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Current  liabilities:                                              |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Current portion  of notes payable and capital lease obligations    |       | $            | —     |        | $          | —           |       | $                 | 180        |             | $          | 2,187            |       | $ | — |   | $ | 2,367 |   |
| Accounts payable  and other accrued expenses                       |       | —       |       | —      |       | 31,678           |       | 1,443             |       | —           |       | 33,121           |       |
| Intercompany  accounts payable                                     |       | —       |       | —      |       | 331,794          |       | 7,400             |       | (339,194         | )          | —           |       |
| Total current  liabilities                                         |       | —       |       | —      |       | 363,652          |       | 11,030            |       | (339,194         | )          | 35,488           |       |
| Notes payable  and capital lease obligations, less current portion |       | —       |       | 294,322     |       | 753              |       | 4,280             |       | —           |       | 299,355          |       |
| Other long-term  liabilities                                       |       | —       |       | —      |       | 11,107           |       | 2,453             |       | —           |       | 13,560           |       |
| Stockholders’  equity (deficit)                               |       | (130,712     | )          | (169,185    | )          | (168,184         | )          | 11,408            |       | 325,961          |       | (130,712         | )          |
|                                                               |       | $            | (130,712   | )           | $          | 125,137          |       | $                 | 207,328    |             | $          | 29,171           |       | $ | (13,233 | ) | $ | 217,691 |   |

 

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**SUPPLEMENTALCONDENSED CONSOLIDATING BALANCE SHEET**

**JUNE30, 2007**

**(Amountsin thousands)**

**(Predecessor)**

 
| ** **                                                         | ** ** | ** **   | ** ** | ** **  | ** ** | **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 (DEFICIT)               |       |         |       |        |       |             |       |              |       |             |       |             |       |
| 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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**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**FORTHE ELEVEN MONTHS ENDED JUNE 30, 2008**

**(Amountsin thousands)**

**(Successor)**

 
| ** **                                               | ** ** | ** **   | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **NON-GUARANTOR** | ** ** | ** **      | ** ** | ** **       | ** ** |
|----------------------------------------------------------|------------|--------------|------------|-------------|------------|------------------|------------|-------------------|------------|-----------------|------------|------------------|------------|
| ** **                                               | ** ** | **HOLDINGS** | ** ** | **INSIGHT** | ** ** | **SUBSIDIARIES** | ** ** | **SUBSIDIARIES**  | ** ** | **ELIMINATION** | ** ** | **CONSOLIDATED** | ** ** |
| ** **                                               | ** ** | ** **   | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **      | ** ** | ** **       | ** ** |
| Revenues:                                                |       |         |       |        |       |             |       |              |       |            |       |             |       |
| Contract services                                        |       | $            | —     |        | $          | —           |       | $                 | 96,364     |            | $          | 12,580           |       | $ | — |   | $ | 108,944 |   |
| Patient services                                         |       | —       |       | —      |       | 115,384          |       | 18,257            |       | —          |       | 133,641          |       |
| Total revenues                                           |       | —       |       | —      |       | 211,748          |       | 30,837            |       | —          |       | 242,585          |       |
| Costs of  operations                                     |       | —       |       | —      |       | 204,050          |       | 32,981            |       | —          |       | 237,031          |       |
| Gross profit  (loss)                                     |       | —       |       | —      |       | 7,698            |       | (2,144            | )          | —          |       | 5,554            |       |
| Corporate  operating expenses                            |       | —       |       | —      |       | (25,744          | )          | —            |       | —          |       | (25,744          | )          |
| Equity in  earnings of unconsolidated partnerships       |       | —       |       | —      |       | 1,891            |       | —            |       | —          |       | 1,891            |       |
| Interest expense,  net                                   |       | —       |       | —      |       | (31,888          | )          | (592              | )          | —          |       | (32,480          | )          |
| Loss on sales of  centers                                |       | —       |       | —      |       | (644             | )          | —            |       | —          |       | (644             | )          |
| Impairment of  goodwill and other intangible assets      |       | —       |       | —      |       | (119,771         | )          | —            |       | —          |       | (119,771         | )          |
| Loss before  income taxes                                |       | —       |       | —      |       | (168,458         | )          | (2,736            | )          | —          |       | (171,194         | )          |
| Benefit for  income taxes                                |       | —       |       | —      |       | (2,009           | )          | —            |       | —          |       | (2,009           | )          |
| Loss before  equity in loss of consolidated subsidiaries |       | —       |       | —      |       | (166,449         | )          | (2,736            | )          | —          |       | (169,185         | )          |
| Equity in loss of  consolidated subsidiaries             |       | (169,185     | )          | (169,185    | )          | (2,736           | )          | —            |       | 341,106         |       | —           |       |
| Net loss                                                 |       | $            | (169,185   | )           | $          | (169,185         | )          | $                 | (169,185   | )               | $          | (2,736           | )          | $ | 341,106 |   | $ | (169,185 | ) |

 

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**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**FORTHE ONE MONTH ENDED JULY 31, 2007**

**(Amountsin thousands)**

**(Predecessor)**

 
| ** **                                                   | ** ** | ** **   | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **NON-GUARANTOR** | ** ** | ** **      | ** ** | ** **       | ** ** |
|--------------------------------------------------------------|------------|--------------|------------|-------------|------------|------------------|------------|-------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                   | ** ** | **HOLDINGS** | ** ** | **INSIGHT** | ** ** | **SUBSIDIARIES** | ** ** | **SUBSIDIARIES**  | ** ** | **ELIMINATION** | ** ** | **CONSOLIDATED** | ** ** |
| ** **                                                   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **      | ** ** | ** **       | ** ** |
| Revenues:                                                    |       |         |       |        |       |             |       |              |       |            |       |             |       |
| Contract services                                            |       | $            | —     |        | $          | —           |       | $                 | 9,371      |            | $          | 680              |       | $ | — |   | $ | 10,051 |   |
| Patient services                                             |       | —       |       | —      |       | 10,226           |       | 2,085             |       | —          |       | 12,311           |       |
| Total revenues                                               |       | —       |       | —      |       | 19,597           |       | 2,765             |       | —          |       | 22,362           |       |
| Costs of  operations                                         |       | —       |       | —      |       | 17,866           |       | 2,684             |       | —          |       | 20,550           |       |
| Gross profit                                                 |       | —       |       | —      |       | 1,731            |       | 81                |       | —          |       | 1,812            |       |
| Corporate  operating expenses                                |       | —       |       | —      |       | (1,678           | )          | —            |       | —          |       | (1,678           | )          |
| Equity in earnings  of unconsolidated partnerships           |       | —       |       | —      |       | 174              |       | —            |       | —          |       | 174              |       |
| Interest expense,  net                                       |       | —       |       | —      |       | (2,854           | )          | (64               | )          | —          |       | (2,918           | )          |
| (Loss) income  before reorganization items and income taxes  |       | —       |       | —      |       | (2,627           | )          | 17                |       | —          |       | (2,610           | )          |
| Reorganization  items, net                                   |       | —       |       | 168,248     |       | 30,750           |       | —            |       | —          |       | 198,998          |       |
| Income before  income taxes                                  |       | —       |       | 168,248     |       | 28,123           |       | 17                |       | —          |       | 196,388          |       |
| Provision for  income taxes                                  |       | —       |       | —      |       | 62               |       | —            |       | —          |       | 62               |       |
| Income before  equity in income of consolidated subsidiaries |       | —       |       | 168,248     |       | 28,061           |       | 17                |       | —          |       | 196,326          |       |
| Equity in income  of consolidated subsidiaries               |       | 196,326      |       | 28,078      |       | 17               |       | —            |       | (224,421        | )          | —           |       |
| Net income                                                   |       | $            | 196,326    |        | $          | 196,326          |       | $                 | 28,078     |            | $          | 17               |       | $ | (224,421 | ) | $ | 196,326 |   |

 

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**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**FORTHE YEAR ENDED JUNE 30, 2007**

**(Amountsin thousands)**

**(Predecessor)**

 
| ** **                                                          | ** ** | ** **   | ** ** | ** **  | ** ** | **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, net                                          |       | —       |       | —      |       | (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 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 | ) |

 

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**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**FORTHE YEAR ENDED JUNE 30, 2006**

**(Amountsin thousands)**

**(Predecessor)**

 
| ** **                                                                 | ** ** | ** **   | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **NON-GUARANTOR** | ** ** | ** **      | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|------------------|------------|-------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                 | ** ** | **HOLDINGS** | ** ** | **INSIGHT** | ** ** | **SUBSIDIARIES** | ** ** | **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 | ) |

 

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**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**FORTHE ELEVEN MONTHS ENDED JUNE 30, 2008**

**(Amountsin thousands)**

**(Successor)**

 
| ** **                                                                       | ** ** | ** **   | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **NON-GUARANTOR** | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                       | ** ** | **HOLDINGS** | ** ** | **INSIGHT** | ** ** | **SUBSIDIARIES** | ** ** | **SUBSIDIARIES**  | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                                             |       |         |       |        |       |             |       |              |       |             |       |             |       |
| OPERATING  ACTIVITIES:                                                           |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Net loss                                                                         |       | $            | (169,185   | )           | $          | (169,185         | )          | $                 | (169,185   | )                | $          | (2,736           | )          | $ | 341,106 |   | $ | (169,185 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Cash used for  reorganization items                                              |       | —       |       | —      |       | 4,764            |       | —            |       | —           |       | 4,764            |       |
| Depreciation and  amortization                                                   |       | —       |       | —      |       | 47,623           |       | 6,075             |       | —           |       | 53,698           |       |
| Amortization of  bond discount                                                   |       | —       |       | —      |       | 4,522            |       | —            |       | —           |       | 4,522            |       |
| Share-based  compensation                                                        |       | —       |       | —      |       | 15               |       | —            |       | —           |       | 15               |       |
| Equity in  earnings of unconsolidated partnerships                               |       | —       |       | —      |       | (1,891           | )          | —            |       | —           |       | (1,891           | )          |
| Distributions  from unconsolidated partnerships                                  |       | —       |       | —      |       | 2,563            |       | —            |       | —           |       | 2,563            |       |
| Loss on sales of  centers                                                        |       | —       |       | —      |       | 644              |       | —            |       | —           |       | 644              |       |
| Impairment of  goodwill and other intangible assets                              |       | —       |       | —      |       | 119,771          |       | —            |       | —           |       | 119,771          |       |
| Deferred income  taxes                                                           |       | —       |       | —      |       | (1,864           | )          | —            |       | —           |       | (1,864           | )          |
| Equity in loss of  consolidated subsidiaries                                     |       | 169,185      |       | 169,185     |       | 2,736            |       | —            |       | (341,106         | )          | —           |       |
| Changes in  operating assets and liabilities:                                    |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Trade accounts  receivables, net                                                 |       | —       |       | —      |       | 6,785            |       | 894               |       | —           |       | 7,679            |       |
| Intercompany  receivables, net                                                   |       | —       |       | —      |       | 1,893            |       | (1,893            | )          | —           |       | —           |       |
| Other current  assets                                                            |       | —       |       | —      |       | (742             | )          | (56               | )          | —           |       | (798             | )          |
| Accounts payable  and other accrued expenses                                     |       | —       |       | —      |       | (4,895           | )          | 144               |       | —           |       | (4,751           | )          |
| Net cash provided  by operating activities before reorganization items           |       | —       |       | —      |       | 12,739           |       | 2,428             |       | —           |       | 15,167           |       |
| Cash used for  reorganization items                                              |       | —       |       | —      |       | (4,764           | )          | —            |       | —           |       | (4,764           | )          |
| Net cash provided  by operating activities                                       |       | —       |       | —      |       | 7,975            |       | 2,428             |       | —           |       | 10,403           |       |
|                                                                             |       |         |       |        |       |             |       |              |       |             |       |             |       |
| INVESTING ACTIVITIES:                                                            |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Proceeds from  sales of centers                                                  |       | —       |       | —      |       | 9,050            |       |              |       | —           |       | 9,050            |       |
| Increase in  restricted cash                                                     |       | —       |       | —      |       | (8,072           | )          |              |       | —           |       | (8,072           | )          |
| Additions to  property and equipment                                             |       | —       |       | —      |       | (7,798           | )          | (464              | )          | —           |       | (8,262           | )          |
| Other                                                                            |       | —       |       | —      |       | 132              |       | (247              | )          | —           |       | (115             | )          |
| Net cash provided  by (used in) investing activities                             |       | —       |       | —      |       | (6,688           | )          | (711              | )          | —           |       | (7,399           | )          |
|                                                                             |       |         |       |        |       |             |       |              |       |             |       |             |       |
| FINANCING  ACTIVITIES:                                                           |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Principal  payments of notes payable and capital lease obligations               |       | —       |       | —      |       | (1,689           | )          | (1,785            | )          | —           |       | (3,474           | )          |
| Net cash used in  financing activities                                           |       | —       |       | —      |       | (1,689           | )          | (1,785            | )          | —           |       | (3,474           | )          |
|                                                                             |       |         |       |        |       |             |       |              |       |             |       |             |       |
| INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                |       | —       |       | —      |       | (402             | )          | (68               | )          | —           |       | (470             | )          |
| Cash, beginning  of period                                                       |       | —       |       | —      |       | 18,336           |       | 3,136             |       | —           |       | 21,472           |       |
| Cash, end of  period                                                             |       | $            | —     |        | $          | —           |       | $                 | 17,934     |             | $          | 3,068            |       | $ | — |   | $ | 21,002 |   |

 

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**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**FORTHE ONE MONTH ENDED JULY 31, 2007**

**(Amountsin thousands)**

**(Predecessor)**

 
| ** **                                                                       | ** ** | ** **   | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **NON-GUARANTOR** | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                       | ** ** | **HOLDINGS** | ** ** | **INSIGHT** | ** ** | **SUBSIDIARIES** | ** ** | **SUBSIDIARIES**  | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                                             |       |         |       |        |       |             |       |              |       |             |       |             |       |
| OPERATING  ACTIVITIES:                                                           |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Net income                                                                       |       | $            | 196,326    |        | $          | 196,326          |       | $                 | 28,078     |             | $          | 17               |       | $ | (224,421 | ) | $ | 196,326 |   |
| Adjustments to  reconcile net income to net cash (used in) provided by           |       |         |       |        |       |             |       |              |       |             |       |             |       |
| operating  activities:                                                           |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Cash used for  reorganization items                                              |       | —       |       | —      |       | 3,263            |       | —            |       | —           |       | 3,263            |       |
| Noncash  reorganization items                                                    |       | —       |       | (168,248    | )          | (38,777          | )          | —            |       | —           |       | (207,025         | )          |
| Depreciation and  amortization                                                   |       | —       |       | —      |       | 3,956            |       | 512               |       | —           |       | 4,468            |       |
| Amortization of  deferred financing costs                                        |       | —       |       | —      |       | 145              |       | —            |       | —           |       | 145              |       |
| Equity in  earnings of unconsolidated partnerships                               |       | —       |       | —      |       | (174             | )          | —            |       | —           |       | (174             | )          |
| Distributions  from unconsolidated partnerships                                  |       | —       |       | —      |       | 58               |       | —            |       | —           |       | 58               |       |
| Equity in loss  income of consolidated subsidiaries                              |       | (196,326     | )          | (28,078     | )          | (17              | )          | —            |       | 224,421          |       | —           |       |
| Changes in  operating assets and liabilities:                                    |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Trade accounts  receivables, net                                                 |       | —       |       | —      |       | 223              |       | 287               |       | —           |       | 510              |       |
| Intercompany  receivables, net                                                   |       | —       |       | (7,768      | )          | 8,208            |       | (440              | )          | —           |       | —           |       |
| Other current  assets                                                            |       | —       |       | —      |       | 425              |       | (38               | )          | —           |       | 387              |       |
| Accounts payable  and other accrued expenses                                     |       | —       |       | —      |       | (1,614           | )          | 80                |       | —           |       | (1,534           | )          |
| Net cash (used  in) provided by operating activities before reorganization items |       | —       |       | (7,768      | )          | 3,774            |       | 418               |       | —           |       | (3,576           | )          |
| Cash used for  reorganization items                                              |       | —       |       | —      |       | (3,263           | )          | —            |       | —           |       | (3,263           | )          |
| Net cash (used  in) provided by operating activities                             |       | —       |       | (7,768      | )          | 511              |       | 418               |       | —           |       | (6,839           | )          |
|                                                                             |       |         |       |        |       |             |       |              |       |             |       |             |       |
| INVESTING  ACTIVITIES:                                                           |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Other                                                                            |       | —       |       | —      |       | 171              |       | 10                |       | —           |       | 181              |       |
| Net cash provided  by investing activities                                       |       | —       |       | —      |       | 171              |       | 10                |       | —           |       | 181              |       |
|                                                                             |       |         |       |        |       |             |       |              |       |             |       |             |       |
| FINANCING  ACTIVITIES:                                                           |       |         |       |        |       |             |       |              |       |             |       |             |       |
| Principal  payments of notes payable and capital lease obligations               |       | —       |       | —      |       | (306             | )          | (164              | )          | —           |       | (470             | )          |
| Principal  payments on credit facility                                           |       | —       |       | (5,000      | )          | —           |       | —            |       | —           |       | (5,000           | )          |
| Proceeds from  issuance of notes payable                                         |       | —       |       | 12,768      |       | —           |       | —            |       | —           |       | 12,768           |       |
| Net cash provided  by (used in) financing activities                             |       | —       |       | 7,768       |       | (306             | )          | (164              | )          | —           |       | 7,298            |       |
|                                                                             |       |         |       |        |       |             |       |              |       |             |       |             |       |
| INCREASE IN CASH  AND CASH EQUIVALENTS                                           |       | —       |       | —      |       | 376              |       | 264               |       | —           |       | 640              |       |
| Cash, beginning  of period                                                       |       | —       |       | —      |       | 17,960           |       | 2,872             |       | —           |       | 20,832           |       |
| Cash, end of  period                                                             |       | $            | —     |        | $          | —           |       | $                 | 18,336     |             | $          | 3,136            |       | $ | — |   | $ | 21,472 |   |

 

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**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**FORTHE YEAR ENDED JUNE 30, 2007**

**(Amountsin thousands)**

**(Predecessor)**

 
| ** **                                                                                           | ** ** | ** **   | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **NON-GUARANTOR** | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                           | ** ** | **HOLDINGS** | ** ** | **INSIGHT** | ** ** | **SUBSIDIARIES** | ** ** | **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 |   |

 

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**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**FORTHE YEAR ENDED JUNE 30, 2006**

**(Amountsin thousands)**

**(Predecessor)**

 
| ** **                                                                                           | ** ** | ** **   | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **NON-GUARANTOR** | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                           | ** ** | **HOLDINGS** | ** ** | **INSIGHT** | ** ** | **SUBSIDIARIES** | ** ** | **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 |   |

 

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

 

None.

 
| **ITEM  9A.** | **CONTROLS AND PROCEDURES** |
|---------------|-----------------------------|

 

As required by Rule 13a-15(b) under the Securities ExchangeAct of 1934, as amended the Exchange Act, our management carried out anevaluation of the effectiveness of the design and operation of the Company’s “disclosurecontrols and procedures” as of June 30, 2008.  This evaluation was carried out under thesupervision and with the participation of our management, including the Company’sChief Executive Officer and Chief Financial Officer.  As defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act, disclosure controls and procedures arecontrols and other procedures of the Company that are designed to ensure thatinformation required to be disclosed by the Company in the reports it files orsubmits under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by the Company in the reports it files or submitsunder the Exchange Act is accumulated and communicated to the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure.  Based upon that evaluation,the Company’s Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures were effective as of June 30,2008.  It should be noted that the designof any system of controls is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions,regardless of how remote.

 

**InternalControl over Financial Reporting**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rules 13a-15(f) and 15d-15(f) ofthe Exchange Act.  Internal control overfinancial reporting is a process to provide reasonable assurance regarding thereliability of our financial reporting and the preparation of financialstatements for external purposes in accordance with generally acceptedaccounting principles.  Internal controlover financial reporting includes maintaining records that in reasonable detailaccurately and fairly reflect our transactions and disposition of assets;providing reasonable assurance that transactions are recorded as necessary forpreparation of our financial statements in accordance with generally acceptedaccounting principles; providing reasonable assurance that receipts andexpenditures of company assets are made in accordance of with authorization ofmanagement and directors of the Company; and providing reasonable assurancethat unauthorized acquisition, use or disposition of Company assets that couldhave a material effect on its financial statements would be prevented ordetected on a timely basis. Because of its inherent limitations, internalcontrol over financial reporting is not intended to provide absolute assurancethat a misstatement of the Company’s financial statements would be prevented ordetected.  In addition, projections ofany evaluation of effectiveness to future periods are subject to the risk that,owing to changes in conditions, controls may become inadequate, or that thedegree of compliance with policies or procedures may deteriorate.

 

Management conducted anevaluation of the effectiveness of the Company’s internal control overfinancial reporting based on the framework in Internal Control-IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  Based on this evaluation,management concluded that the Company’s internal control over financialreporting was effective as of June 30, 2008.  There were no changes in the Company’sinternal control over financial reporting during the quarter ended June 30,2008 that have materially affected, or are reasonably likely to materiallyaffect, the Company’s  internal controlover financial reporting.

 

This Form 10-K doesnot include an attestation report of the Company’s independent registeredpublic accounting firm regarding internal control over financialreporting.  Management’s report was notsubject to attestation by the Company’s independent registered publicaccounting firm pursuant to temporary rules of the SEC that permit theCompany to provide only management’s report in this Form 10-K.

 

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

 

## **None.**

 

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**PART III**

 

**ITEM 10.****                     ****DIRECTORS, EXECUTIVEOFFICERS AND CORPORATE GOVERNANCE**

 

The followingtable sets forth the names, ages and positions of our directors and executiveofficers (as defined by Rule 3b-7 of the Exchange Act) as of September 15,2008:

 
| **Name**                   | ** ** | **Age**    | ** ** | **Title**                                                          |
|----------------------------|------------|------------|------------|--------------------------------------------------------------------|
| ** **                 | ** ** | ** ** | ** ** | ** **                                                         |
| Wayne B. Lowell            |       | 53         |       | Chairman of the Board and Director                                 |
|                       |       |       |       |                                                               |
| Louis E. Hallman, III |       | 49         |       | President and Chief Executive Officer and Director                 |
|                       |       |       |       |                                                               |
| Patricia R. Blank          |       | 58         |       | Executive Vice President - Revenue Cycle Management                |
|                       |       |       |       |                                                               |
| Donald F. Hankus           |       | 54         |       | Executive Vice President and Chief Information  Officer of InSight |
|                       |       |       |       |                                                               |
| Mitch C. Hill              |       | 48         |       | Executive Vice President and Chief Financial Officer               |
|                       |       |       |       |                                                               |
| Eugene Linden              |       | 61         |       | Director                                                           |
|                       |       |       |       |                                                               |
| Marilyn U. MacNiven-Young  |       | 57         |       | Executive Vice President, General Counsel and Secretary            |
|                       |       |       |       |                                                               |
| Richard Nevins             |       | 61         |       | Director                                                           |
|                       |       |       |       |                                                               |
| James A. Ovenden           |       | 45         |       | Director                                                           |
|                       |       |       |       |                                                               |
| Bernard J. O’Rourke   |       | 48         |       | Executive Vice President and Chief Operating Officer               |
|                       |       |       |       |                                                               |
| Keith E. Rechner           |       | 50         |       | Director                                                           |
|                       |       |       |       |                                                               |
| Steven G. Segal            |       | 48         |       | Director                                                           |

 

*Wayne B. Lowell* has been a member of our Board of Directors since August 1,2007 and our Chairman since August 7, 2007.  From late 2007 to 2008, he was ChiefExecutive Officer of Wellmed Medical Management, Inc.  Since 1998, he has been President of JonchraAssociates, LLC, which provides strategic and operating advice to seniormanagement of private-equity funded and publicly held entities.  Mr. Lowell worked at PacifiCare HealthSystems from 1986 to 1998, most recently holding the positions of ExecutiveVice President, Chief Financial Officer and Chief Administrative Officer.

 

*Louis E. Hallman, III* has been our President and Chief ExecutiveOfficer and a member of our Board of Directors since April 7, 2008.  Mr. Hallman served as our Interim ChiefOperating Officer from October 26, 2007 through April 7, 2008.  From August 10, 2005 until April 7,2008, he was InSight’s Executive Vice Presidentand Chief Strategy Officer.  Prior tothese appointments, Mr. Hallman was the President of Right ManufacturingLLC, a specialty manufacturer, from January 2003 through January 2005.  From January 2002 until January 2003,Mr. Hallman was a private investor and reviewed various businessopportunities.  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. Hallmanco-founded TheraTx, Inc., which became a diversified healthcare servicescompany listed on NASDAQ.  While atTheraTx, he served as Vice President Corporate Development until its sale in April 1997.  He currently serves on the Board of Directorsof VeriCare Management, Inc., a provider of behavioral solutions to thelong-term care industry.

 

*Patricia R. Blank*has been our Executive Vice President - Revenue Cycle Management since May 15,2008.  From March 28, 2006 through May 15,2008 she was InSight’s Executive Vice President-Clinical Services andSupport.  She was InSight’sExecutive Vice President-Enterprise Operations from October 22, 2004 to March 28,2006.  She was InSight’sExecutive Vice President and Chief Information 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. Blankserved as Executive Vice President and Chief Operating Officer of HealthHelp, Inc.,a Houston, Texas-based radiology services organization managing radiologyprovider networks in multiple states. From 1988 to 1995, she was corporate director of radiology of FHP, aCalifornia insurance company.

 

*Donald F. Hankus*has been InSight’s Executive Vice President and Chief InformationOfficer since September 26, 2005. Prior to this appointment, Mr. Hankus was the Director of SalesOperations of Quest Software, Inc., a provider of application, databaseand infrastructure software, from January 2004 through September 2005.  From January 2000 through January 2004,he was Chief Information Officer of Directfit. From December 1996 to January 2000,he served as Director of Software Development for Cendant Corporation, a realestate brokerage and hotel franchisor.

 

*Mitch C. Hill*has been our Executive Vice President and Chief Financial Officer since January 10,2005.  Prior to this appointment, Mr. Hillwas President and Chief Executive Officer of BMS Reimbursement Management, aprovider of outsourced billing and collection, accounts receivable and practicemanagement services, from April 2001 to December 2004.  Prior to that, he held the followingpositions with Buy.Com Inc., a multi-category Internet superstore, ChiefFinancial Officer from November 1999 to April 2000 and President andChief Financial Officer from April 2000 to February 2001.  Pursuant to a separation agreement dated June 27,2008, Mr. Hill’s employment with InSight will terminate effective October 31,2008.

 

*Eugene Linden* has been a member of ourBoard of Directors since August 1, 2007. He has been the Chief Investment Strategist of Bennett ManagementCorporation, a family of investment funds, since 1995.  From 1987 to 1995, Mr. Linden was asenior writer at TIME Magazine.  Mr. Lindencurrently serves as a director of Cibus Genetics LLC and Syratech Corporation.

 

*Marilyn U.MacNiven-Young*has been ourExecutive Vice President, General Counsel and Secretary since February 11,2002 and Executive Vice President, General Counsel and Secretary of InSightsince August 1998.  From February 1996through July 1998, she was an 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-Youngserved as General Counsel of American Health Services Corp., a predecessor ofInSight.  Pursuant to a separationagreement dated May 15, 2008, Ms. MacNiven-Young’semployment with InSight will terminate effective October 31, 2008.

 

*Richard Nevins* has been a member of our Board of Directors sinceAugust 1, 2007. From October 26, 2007 to April 7, 2008, Mr. Nevins served asour Interim Chief Executive Officer. From July 2007 through September 2007, heserved as the interim Chief Executive Officer for US Energy Services, Inc. (“USEY”).  He also was an independent advisor after hisretirement in 2007 from Jefferies & Company, Inc. (“Jefferies”) until herejoined Jefferies in May 2008 as a managing director.  From 1998 until his retirement in 2007, Mr.Nevins was a managing director and co-head of the recapitalization andrestructuring group at Jefferies. Mr. Nevins currently serves as a director ofDayStar Technologies, Inc., Aurora Trailer Holdings and SPELL C LLC. After Mr.Nevins left USEY, on January 9, 2008, USEY and two of its subsidiaries filedvoluntary petitions under chapter 11 of the Bankruptcy Code in the U.S.Bankruptcy Court for the Southern District of New York.

 

*James A. Ovenden* has been a member of our Board of Directors sinceAugust 1, 2007. From 2004 until December 31, 2007, he was the Chief FinancialOfficer and a founding principal of OTO Development, LLC (“OTO”), a hospitalitydevelopment company established in 2004. Since January 2008, he has been anadvisor to OTO.  Mr. Ovenden has alsoserved as a principal consultant with CFO Solutions of SC, LLC since 2002.  Mr. Ovenden was the Chief Financial Officerof Extended Stay America, Inc. from January 2004 to May 2004 and held variouspositions at CMI Industries, Inc. from 1987 to 2002, including Chief FinancialOfficer. Mr. Ovenden currently serves as a director, and as chairman of theaudit committee of the board of directors, of Polymer Group, Inc.

 

*Bernard J. O*’*Rourke*has**been ourExecutive Vice President and Chief Operating Officer since May 15,2008.  From March 28, 2006 until May 15,2008, Mr. O’Rourke served as the Senior Vice President and GeneralManager, Eastern Division of InSight Health Corp., a subsidiary ofInSight.  From January 17, 2005 to March 26,2006, Mr. O’Rourke served as the Area Vice President-EnterpriseOperations, Northeast of InSight Health Corp. From September 2004 until joining InSight Health Corp., Mr. O’Rourkewas a consultant involved with laboratory operations and drug abusecollections.  From September 2002 toSeptember 2004, he was a director of operations for Radiologix, a providerof medical imaging services.

 

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*Keith E. Rechner* has been a member of our Board of Directors sinceAugust 1, 2007.  Mr. Rechner is alsocurrently a financial advisor with AXA Advisors, a position he has held since1997.  He also is a member of theoperating committee of United Wealth Strategies LLC, a financial and consultingservices company. He was Chief Executive Officer and President of BenefitAdvisors, Inc., an employee benefits consulting firm, from January 1997 throughDecember 2007. Mr. Rechner served as the Regional Vice President of TaxSheltered Markets for AXA Advisors from 2002 to 2005 and Vice President ofTraditional Markets for AXA Advisors from 2000 to 2002.  From 1993 to 1996, Mr. Rechner held variouspositions with VHA Great Rivers, Inc./Great Rivers Network, including Presidentand Chief Executive Officer, Great Rivers Network, Chief Operating Officer,Integrated Benefit Services (IBS) and Vice President, Managed Care.

* *

*Steven G. Segal*has been a member of our Board of Directors since October 17,2001.  He is a Partner of J.W. ChildsAssociates, L.P. and has been at J.W. Childs Associates, L.P. since 1995.  Prior to that time, he was an executive atThomas H. Lee Company from 1987, most recently holding the position of ManagingDirector.  Since 2006, Mr. Segal hasbeen an Executive-in-Residence/Lecturer at Boston University’s Graduate School of Management.  He is also a director of The NutraSweetCompany, Fitness Quest Inc., WS Packaging Group, Inc. and Round Grille, Inc.(d/b/a FIRE + iCE).

 

**Audit Committee**

 

The Audit Committee is comprised of James A. Ovenden (Chairman), WayneB. Lowell and Richard Nevins.  The Boardof Directors has concluded that Messrs. Ovenden, Lowell and Nevins areeach “independent” as that term is defined in the rules ofthe NASDAQ Stock Market.  The Board ofDirectors has determined that Messrs. Ovenden and Lowell are each “audit committee financial experts” as that term has been defined by theSEC.  While Mr. Nevins served as ourInterim Chief Executive Officer, Mr. Rechner served on the Audit Committee inplace of Mr. Nevins.

 

The Audit Committee has adopted a written charter,which is available on our website at the following internet address http://www.insighthealth.com/executives.asp?link=executives.  The charter should not be considered as partof this Form 10-K.  The AuditCommittee charter provides that the Audit Committee will:

 

·                  Prepare the audit committee reportrequired by SEC rules to be included in the Company’s annual proxystatement.

 

·                  Assist theBoard of Directors in fulfilling its responsibility to oversee managementregarding:

 

·                  the conduct and integrity ofthe Company’s financial reporting to anygovernmental or regulatory body, stockholders, other users of the Company’s financial reports, and the public;

 

·                  the Company’s legal and regulatory compliance;

 

·                  the qualifications,engagement, compensation, independence, and performance of the Company’s independent registered public accounting firm, itsconduct of the annual audit of the Company’sconsolidated financial statements, and its engagement to provide any otherservices; and

 

·                  the performance of theCompany’s internal audit functionand systems of internal control over financial reporting and disclosurecontrols and procedures.

 

·                  Maintain throughregularly-scheduled meetings, a line of communication between the Board ofDirectors and the Company’s management, internalauditor and the independent registered public accounting firm.

 

The AuditCommittee of the Board of Directors approved PricewaterhouseCoopers LLP (“PWC”) as our independent registered public accountants forthe year ended June 30, 2008 and PWC’s review of our interim condensedconsolidated financial statements for the quarter ending September 30,2008.  PWC has been our independentregistered public accounting firm since 2002.

 

**CompensationCommittee**

 

The Compensation Committee consists of Keith E. Rechner(Chairman), James A. Ovenden and Steven G. Segal.  The Compensation Committee assists the Board of Directors by ensuringthat our executives are compensated in accordance with our total compensationobjectives and executive compensation policy. The Board of Directors has established a 

 

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charter forthe Compensation Committee, which is available on our website at the followinginternet address http://www.insighthealth.com/executives.asp?link=executives.  The charter should not be considered as partof this Form 10-K.  The charterprovides that the Compensation Committee will:

 

·                  review the compensation ofthe Chief Executive Officer;

 

·                  administer the Company’s stock option or other equity-based compensationplans and programs; and

 

·                  oversee the Company’s management compensation and benefits policies,including both qualified and non-qualified plans.

 

**Nomination of Directors**

 

We have not established a Nominating Committee andcurrently have no plans to do so.  Our currentpractice is for the entire Board of Directors to evaluate the merits ofdirector nominees based on the experience of the nominee in our industry, thenominee’s priorexperience as a director of a company similar to ours and on other attributeswe deem desirable in a director of the Company.  Our bylaws also permit our common stockholdersto nominate candidates as directors of the Company.

 

**ITEM11.   EXECUTIVE COMPENSATION**

 

**CompensationDiscussion and Analysis**

** **

**CompensationObjectives**

 

The Compensation Committee believes that compensation paid to ourexecutive officers should be closely aligned with our performance on both ashort-term and long-term basis, linked to specific, measurable results intendedto create value for stockholders, and should assist us in attracting andretaining key executives critical to our long-term success. Accordingly,compensation for all our executive officers is designed to be significantlyperformance-based and provide competitive compensation for targeted performanceand exceptional compensation for exceptional performance.

 

More generally, our compensation program strives to achieve thefollowing objectives:

 

·                  attract and retain individuals ofsuperior ability and managerial talent who can successfully define, implementand execute our corporate strategies and business objectives;

 

·                  provide total executive compensation thatis competitive with our peer group of healthcare services companies ofcomparable size (as discussed below, “our peer group”) in annual base salary and annual and long-termincentives;

 

·                  ensure executive compensation is alignedwith our corporate strategies, business objectives and stockholders;

 

·                  increase the annual and long-termincentives to achieve key strategic and financial performance measures bylinking those incentives to the achievement of such goals; and

 

·                  enhance the long-term incentives toincrease our stock price and maximize stockholder value, as well as promote theretention of key executives, by providing a portion of total executivecompensation in the form of equity awards.

 

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Within our performance-based compensation program, we aim to compensateexecutives in a manner that is tax effective for us. In practice, all of theannual compensation delivered by us is tax-qualified under Section 162(m) ofthe Code.

 

The components of our compensation program include thefollowing:

 

·                  annual base salary;

 

·                  annual cash incentive awards in accordance with our executivemanagement incentive compensation plans;

 

·                  long-term equity awards, in accordance with our 2008 Employee StockOption Plan (“Employee Stock Option Plan”), in an amount of approximately 8% ofthe Company’s issued and outstanding common stock; and

 

·                  additional benefits and perquisites.

 

Each component is further described below.

 

**The Process for Determination of CompensationAwards**

 

The Compensation Committee has the primary authority to determine and,in the case of non-chief executive officer compensation, to recommend to theBoard of Directors the compensation awards to be provided to our executiveofficers. Total compensation is allocated based on the appropriate balancebetween short-term and long-term incentives to align the interests of ourexecutive officers with our corporate strategies, business objectives andstockholders. To aid the Compensation Committee in making its determinations,our President and Chief Executive Officer provides recommendations annually tothe Compensation Committee regarding the compensation of all executiveofficers, excluding himself.

 

In connection with the determination of compensation awards for ourexecutive officers, the performance of each member of our executive managementteam is evaluated by our President and Chief Executive Officer. The performanceof our executive management team, and our President and Chief Executive Officer’sassessment of that performance, is reviewed annually by the CompensationCommittee when making its compensation award determinations.

 

**Compensation Benchmarking and Peer Group**

 

For each executive officer, in determining base salaries and targetincentive award percentages (as described below), the Compensation Committeeconsiders the compensation offered by our peer group. This approach enables usto offer a competitive compensation program to our executive officers to retaintheir services and also ensures that our cost structure will allow us to remaincompetitive in our markets. In determining annual compensation awards, theCompensation Committee aims to provide aggregate compensation that iscompetitive with cash compensation of executive officers performing similar jobfunctions at companies in our peer group.

 

In August 2007, the Compensation Committee retained an independentcompensation consultant, Towers Perrin, to work with management and theCompensation Committee to develop a comprehensive compensation program. Theconsultant engaged by the Compensation Committee is an independent consultantwith expertise regarding compensation matters in the healthcare servicesindustry. The Compensation Committee evaluated a number of factors, includingtotal cash compensation, prior equity awards, and the relative experience andresponsibilities of our executive officers, in determining a compensationprogram for our executive officers relative to the market. The consultantprovided data and analysis to management and the Compensation Committee withrespect to competitive practices and the amounts and nature of compensationpaid to executives in our peer group, which we collectively refer to in thisdiscussion as the 2008 Report. The components of the executive compensationprogram described below were determined in part by our Compensation Committeewith the assistance of the consultant in February 2008. The CompensationCommittee believes that the structure of our executive compensation, includingannual base salary, annual incentive compensation awards and periodic equityawards, is comparable to the compensation structures of our peer group.

 

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The peer group used in the 2008 Report was comprised of the following19 companies: Air Methods Corporation, Alliance Imaging, Inc., AmsurgCorporation, Bio-Reference Laboratories, Inc., Continucare Corp., DialysisCorporation of America, Hanger Orthopedic Group Inc., HealthTronics, Inc.,Healthways Inc., Matria Healthcare, Inc., Medcath Corporation, MEDToxScientific, Inc., NightHawk Radiology Holdings, Inc., Poly-SealCorp., Radiation Therapy Services, Inc., Radnet, Inc., RehabcareGroup Inc., Rural/Metro Corp., and US Physical Therapy Inc. The CompensationCommittee believes that this group of companies provides an appropriate peergroup because the companies are primarily engaged in healthcare services andrelated businesses and the 2006 annual revenues of the companies fell within arange of $62.5 million to $456 million which is comparable to our fiscal 2006revenues ($306 million).

 

**Annual Base Salary**

 

Base salaries for executive officers are established based on the scopeof their responsibilities, individual contribution, prior experience, sustainedperformance, competitive salary levels within our peer group, and our annualoperating plan. Based on the 2008 Report, base salaries for our executiveofficers in fiscal 2008 are competitive to our peer group. Decisions regardingincreases in base salary each year are based significantly on individualperformance, as assessed by the Compensation Committee with input from ourPresident and Chief Executive Officer (with respect to executives other thanhimself and other facts as described above). Any increases approved by theCompensation Committee are discretionary and there are no formulaic base salaryincreases provided to executive officers.

 

Mr. Hallman’s base salary was increased 25% in October 2007when he assumed increased responsibilities as our Interim Chief OperatingOfficer. In setting the compensation of Mr. Hallman when he was appointedour President and Chief Executive Officer in April 2008, the CompensationCommittee reviewed the 2008 Report and used it as a general point of referencein evaluating the competitive market. As a result his base salary was increasedby a further 14%.

 

Our Compensation Committee will review the 2008 Report and use it inconnection with base salary increases for fiscal 2009. No increases in annualbase salaries have been recommended to or approved by the Board of Directorsfor fiscal 2009.

 

In determining the compensation of our executive officers for fiscal2008, the Compensation Committee did not have the benefit of the 2008 Reportand determined on the recommendation of our then President and Chief ExecutiveOfficer, to increase annual base salary levels by 2.25%.

 

**Annual Cash Incentive Awards**

 

*Fiscal 2008 and 2007*.Pursuant to their employment agreements, each executive officer is eligible fora cash incentive award of up to a certain percentage of the executive’s annualbase salary. Historically, the Board of Directors approves annually amanagement incentive compensation plan which is tied directly to key measuresof our annual operating plan. In connection with his appointment as Presidentand Chief Executive Officer and a director of the Company, Mr. Hallman’stargeted cash incentive award was increased to 50% of his annual base salaryfrom 40% of his annual base salary, and for fiscal 2008, the targeted cashincentive award for Mr. Hill and Ms. Blank was equal to 40% of his or herannual base salary. For fiscal 2008, pursuant to the 2008 Executive ManagementIncentive Compensation Plan, 75% of the targeted cash incentive award is basedon the Company’s financial performance, and 25% of the targeted cash incentiveaward is based upon the discretion of the Compensation Committee.  Annual targets for the determination of thecash incentive awards are based on financial performance targets, which havebeen approved by the Compensation Committee and are generally considered by theCompensation Committee to be reasonably attainable.

 

The financial performancetarget for fiscal 2008 was tied to an Adjusted EBITDAL target of $72.7 million.The following table sets forth our Adjusted EBITDAL for the year ended June 30,2008. We define Adjusted EBITDAL as our earnings before interest expense,income taxes, depreciation and amortization, excluding the gain on repurchaseof notes payable, the loss on dissolution of partnership, loss on sales ofcenters, the impairment of goodwill and other intangible assets, reorganizationitems, net and equipment leases. EBITDAL was used as the Company’s financialperformance target for fiscal 2008, because we believe that it is a useful toolfor us to measure 

 

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our ability to providecash flows to meet debt service, capital projects and working capitalrequirements. Our reconciliation of net cash provided by operating activitiesto Adjusted EBITDAL is as follows (amounts in thousands):

 
| ** **                                         | ** ** | **Year Ended**         | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **June 30, 2008** | ** ** |
|                                               |       |                        |       |
| Net cash  provided by operating activities         |       | $                           | 3,564      |   |
| Cash used for  reorganization items                |       | 8,027                       |       |
| Benefit for  income taxes                          |       | (1,947                      | )          |
| Interest  expense, net                             |       | 35,398                      |       |
| Amortization of  bond discount                     |       | (4,522                      | )          |
| Share-based  compensation                          |       | (15                         | )          |
| Amortization of  deferred financing costs          |       | (145                        | )          |
| Equity in  earnings of unconsolidated partnerships |       | 2,065                       |       |
| Distributions  from unconsolidated partnerships    |       | (2,621                      | )          |
| Net change in  operating assets and liabilities    |       | (1,493                      | )          |
| Net change in  deferred income taxes               |       | 1,864                       |       |
| Equipment leases                                   |       | 9,246                       |       |
|                                               |       |                        |       |
| Adjusted EBITDAL                                   |       | $                           | 49,421     |   |

 

For fiscal 2008, 75% ofthe targeted cash incentive awards were only payable if we exceeded 90% of ourfinancial performance target. Since the Company’s Adjusted EBITDAL wasapproximately $49.4 million and thus less than the target of $72.7 million,only the 25% portion is payable at the discretion of the CompensationCommittee. The Compensation Committee has approved discretionary incentive cashawards relative to the 25% portion as described in the Summary CompensationTable below.

 

For fiscal 2007, we wererequired to exceed 90% of the budgeted amount ($72.5 million) in order for theexecutive officers to become eligible for the 75% of the cash incentive awardtied to financial performance target. For fiscal 2007, we achieved approximately 95% of the financialperformance target.  Based on ourperformance, the annual cash incentive awards were paid as described in theSummary Compensation Table below.

 

*Fiscal 2009.*Forthe next three years, our ability to utilize our limited capital resources formaximizing stockholder value is considered by the Board of Directors to be acritical component of our overall strategy. The Compensation Committeedetermined that it was important to change the Company’s cultural andphilosophical bias from historically using EBITDA or EBITDAL as financialperformance targets to a heightened focus on return on capital.

 

Accordingly for fiscal2009, the Board of Directors approved a Three Year Executive IncentiveCompensation Plan (“2009Plan”), in which the executiveofficers will participate, with a performance target based on a “profit after capital charge” or “Company PACC”. Byimplementing the 2009 Plan, the Compensation Committee believes it willmotivate the executive officers to maximize earnings from the Company’s coreassets and focus them on the total capital expended in connection withmaintaining and growing such assets. The annual cash incentive award will be:

 

·            80% based on theexecutive officers’ participation in Company PACC, and

·            20% based on theexecutive officers’ performance relative to quarterly performance managementobjectives (“PMOs”).

 

The portion of theexecutive officers’ awards, based on Company PACC will be calculated by firstdetermining Company PACC and then calculating the executive officers’ percentageparticipation provided certain threshold levels are met.  Company PACC will be calculated by taking theCompany’s EBITDA and subtracting the product of:  

 

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(a) the Company’sweighted average tangible asset base, multipied by (b) 18%, the targetminimum return on capital employed.  TheCompany’s weighted average tangible asset base will be determined at the beginningof each fiscal year and adjusted for asset additions, removals, and straightline depreciation.

 

Individual targeted cash awards will be determined as a percentage ofCompany PACC based on the following participation percentages:  Mr. Hallman - 1.0%, the Executive VicePresident and Chief Financial Officer - 0.55%, and Ms. Blank - 0.50%. TheCompensation Committee currently anticipates that the total participationpercentages of all participants in the 2009 Plan will aggregate approximately4.1%, resulting in an incremental payout of approximately 10% of Company PACCat the maximum performance levels.

 

The portion****of theexecutive officers’ incentive award attributable to meeting financialperformance targets is based on actual Company PACC performance.  In order for the executive officers to beeligible for an award, they must achieve at least 90% of budgeted Company PACCfor fiscal 2009. Above a 90% achievement level and up to 100% achievement, theexecutive officers will receive an award based on a linear payout trend. Shouldthe executive officers exceed 100% of budgeted Company PACC, they will beeligible to share in a portion of the incremental Company PACC above budget.

 

As the 2009 Plan migrates into fiscal 2010, the prior year actualCompany PACC will be raised by 5% to determine the Company PACC for fiscal2010.  A similar adjustment will be madefrom fiscal 2010 to fiscal 2011.

 

As mentioned above, 20% of each executive officer’s incentive awardwill be based on achievement of certain PMOs established over the course of theyear, and approved by the President and Chief Executive Officer with respect toexecutive officers other than himself.  Inthe case of the President and Chief Executive Officer, the Board of Directorsshall approve his PMOs. Eligibility for the PMOs will be based on eachexecutive officer’s achievement of quarterly goals and objectives as determinedby the executive officer and his or her supervisor. The portion of the executiveofficers’ incentive award based on PMO achievement will be the budgeted CompanyPACC multiplied by (a) 20%, (b) the executive officers’ target award percentage(noted above) and (c) the percentage achievement of PMOs (e.g., 95%). 

 

Annual targets for thedetermination of Company PACC have been based on budgeted profitability levels,which have been approved by the Board of Directors and are generally consideredby the Board of Directors to be reasonably attainable while requiringsubstantial effort. The 2009 Plan can be modified at the discretion of theCompensation Committee.

 

**Long-Term Equity Awards**

 

Our executive officersare eligible to receive equity awards. Historically, all equity awards were determinedby the Compensation Committee in its sole discretion with input from ourPresident and Chief Executive Officer. Generally, we awarded an initial stockoption grant upon the hiring of our executive officers and additional stockoption grants were awarded on a periodic basis. In April 2008, the Board of Directors approved the Employee StockOption Plan and on August 19, 2008 granted nonstatutory stock options to Mr. Hallman,Ms. Blank, other executive officers and an officer of a subsidiary, subject to approval by thestockholders of the Employee Stock Option Plan at the Company’s next annualstockholders meeting.  In fiscal 2009, inallocating the equity awards to our executive officers, the CompensationCommittee considered our peer group, the number of shares available for thegrant of options under the Employee Stock Option Plan and the recommendationsof our President and Chief Executive Officer.

 

The Board of Directorsgranted all stock options based on the fair market value as of the date of grant,which is determined using the mean between the bid and ask of the quoted priceper share on the Over-The-Counter Bulletin Board on the date of grant.  Additional grants may be made following asignificant change in job responsibility or in recognition of a significantachievement.

 

The stock option grantsto executive officers under the Employee Stock Option Plan become vested andexercisable if, and only if, a Refinancing Event (as defined in the stockoption agreements) is achieved.  OurCompensation Committee believes that the vesting conditions of our stockoptions will prove an incentive for executive officers to remain with us for areasonable time frame to complete the Refinancing Event.

 

Awards under the EmployeeStock Option Plan are subject to the change of control provisions describedtherein.

 

**Additional Benefits and Perquisites**

 

We also provide the following additional benefits and perquisites as asupplement to other compensation:

 

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·                  Medical Insurance. At our sole cost, we provide to each named executiveofficer and certain other officers and their eligible dependents such health,dental and vision insurance as we may from time to time make available.

 

·                  Life and Long-Term Disability Insurance. At our sole cost, we provideeach named executive officer and certain other officers such long-termdisability and/or life insurance as we in our sole discretion may from time totime make available.

 

·                  401(k) Savings Plan.  Wecurrently make matching contributions to our 401(k) Savings Plan inan amount equal to fifty cents for each dollar of participant contributions, upto a maximum of 6% of the participant’s compensation for each pay period andsubject to certain other limits. Participation is not limited to officers, andall full-time employees are eligible to participate in the 401(k) SavingsPlan.

 

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

 

While Mr. Nevins was serving as our Interim ChiefExecutive Officer we did not provide him with any of the benefits and perquisitesdescribed above.

 

**Employment Agreements**

 

We haveentered into an employment agreement with each of our named executive officers (exceptMr. Nevins) and certain other executives. Each employment agreement with our named executive officers provides fora term of 12 months on a continuing basis, subject to certain terminationrights.  These employment agreementsprovide for an annual salary as well as a cash incentive award of up to acertain percentage of annual base salary. 75% of the cash incentive award isbased on our achievement of budgetary goals, and 25% of the cash incentiveaward is based upon the achievement of other goals (i.e., PMOs) mutually agreedupon by each executive and our President and Chief Executive Officer andapproved by our Board of Directors (except in the case of Mr. Hallman,whose goals are agreed upon by our Board of Directors). These employmentagreements are being amended to change the percentages of cash incentive awardsfrom 75% for budgetary goals and 25% for PMOs to 80% and 20%, respectively.

 

Each executiveofficer with anemployment agreement is provided with a life insurance policy of three timesthe amount of his or her annual base salary and is entitled to participate inthe Company’slife insurance, medical, health and accident and disability plan or program,pension plan or other similar benefit plan and any stock option plans.

 

Eachexecutive officer with an employmentagreement is subject to a noncompetition covenant and nonsolicitationprovisions during the term of his or her employment and continuing for a periodof 12 months after the termination of his or her employment.

 

*The following Compensation Committee Report shallnot be deemed incorporated by reference into any filing under the SecuritiesAct of 1933, as amended, or under the Exchange Act, and shall not otherwise bedeemed filed under either of these Acts.*

 

**Compensation Committee Report**

 

The Compensation Committee has reviewed and discussed the CompensationDiscussion and Analysis with management and, based on such review and discussions,the Compensation 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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**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 years ended June 30, 2008 and 2007 of (1) eachof the persons who served as our principal executive officer during fiscal 2008and (2) the other two most highly compensated executive officers serving asexecutive officers at June 30, 2008. We refer to these officers collectively as the “named executive officers”.

 
| **Name and Principal Position** | ** ** | **Fiscal  Year  Ended  June 30,** | ** ** | **Salary** | ** ** | **Non-Equity  Incentive Plan   Compensation (1)** | ** ** | **All Other  Compensation (2)** | ** ** | **Total  Compensation** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|------------|------------|------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------|------------|
|                                           |       |                                   |       |       |       |                                                             |       |                                      |       |                    |       |
| Bret W.  Jorgensen                             |       | 2008                                   |       | $          | 395,762    |                                                             | $          | —                                    |       | $                       | 44,557     |   | $ | 440,319 |   |
| President and  Chief Executive                 |       | 2007                                   |       | 406,231    |       | 773,050                                                          |       | 76,802                                    |       | 1,256,083               |       |
| Officer (3)                                    |       |                                   |       |       |       |                                                             |       |                                      |       |                    |       |
|                                           |       |                                   |       |       |       |                                                             |       |                                      |       |                    |       |
| Richard Nevins                                 |       | 2008                                   |       | 294,000    |       | —                                                           |       | 21,690                                    |       | 315,690                 |       |
| Interim Chief  Executive                       |       | 2007                                   |       | —     |       | —                                                           |       | —                                    |       | —                  |       |
| Officer (4)                                    |       |                                   |       |       |       |                                                             |       |                                      |       |                    |       |
|                                           |       |                                   |       |       |       |                                                             |       |                                      |       |                    |       |
| Louis E.  Hallman, III                    |       | 2008                                   |       | 333,799    |       | 50,000                                                           |       | 35,406                                    |       | 419,205                 |       |
| President and  Chief Executive                 |       | 2007                                   |       | 279,909    |       | 277,291                                                          |       | 29,253                                    |       | 586,453                 |       |
| Officer (5)                                    |       |                                   |       |       |       |                                                             |       |                                      |       |                    |       |
|                                           |       |                                   |       |       |       |                                                             |       |                                      |       |                    |       |
| Mitch C. Hill                                  |       |                                   |       |       |       |                                                             |       |                                      |       |                    |       |
| Executive Vice  President and                  |       | 2008                                   |       | 286,054    |       | 25,940                                                           |       | 52,932                                    |       | 364,926                 |       |
| Chief Financial  Officer (6)                   |       | 2007                                   |       | 279,284    |       | 423,484                                                          |       | 56,470                                    |       | 759,238                 |       |
|                                           |       |                                   |       |       |       |                                                             |       |                                      |       |                    |       |
| Patricia R.  Blank                             |       | 2008                                   |       | 286,054    |       | 28,822                                                           |       | 38,175                                    |       | 353,051                 |       |
| Executive Vice  President -                    |       | 2007                                   |       | 279,284    |       | 82,000                                                           |       | 39,663                                    |       | 400,947                 |       |
| Revenue Cycle  Management                      |       |                                   |       |       |       |                                                             |       |                                      |       |                    |       |
|                                                |            |                                        |            |            |            |                                                                  |            |                                           |            |                         |            |  |  |  |  |

 

----

(1)          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 the management incentiveplan).  In fiscal 2007, Messrs. Jorgensen,Hallman and Hill received payments under the management incentive plan of$511,250, $210,981 and $351,484, respectively. Annual cash incentive awards are based on our performance, earned andaccrued during the fiscal year and paid subsequent to the end of each fiscalyear.

 

(2)          Amounts of All Other Compensation are comprised of thefollowing perquisites: (i) automobile allowances, (ii) automobileoperating expenses, (iii) the Company’s contributions to our 401(k) SavingsPlan, (iv) specified premiums on executive life insurance arrangements, (v) specifiedpremiums on executive health and disability insurance arrangements, and (vi) certainprofessional membership dues.

 

(3)          Mr. Jorgensen resigned from the Company effectiveNovember 15, 2007. His salary includes $204,500 of consulting fees thatwere paid to him following his resignation. All Other Compensation includes $29,728 and $33,889 in premiums onexecutive health and disability insurance paid by the Company on behalf of Mr. Jorgensenin 2008 and 2007, respectively.

 

(4)          Mr. Nevins was our Interim Chief ExecutiveOfficer from October 26, 2007 until April 7, 2008.  All Other Compensation includes $21,690 paidby the Company for the lease of an apartment close to the Company’s principalexecutive offices for the period Mr. Nevins served as the Company’s InterimChief Executive Officer.

 

(5)          Mr. Hallman became President and Chief ExecutiveOfficer and a director of the Company effective April 7, 2008.

 

(6)          All Other Compensation includes $31,038 and $31,772 inpremiums on executive health and disability insurance paid by the Company onbehalf of Mr. Hill in 2008 and 2007, respectively.  Mr. Hill will be leaving the Companyeffective October 31, 2008.

 

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**Grants ofPlan-Based Awards**

 

Thefollowing table sets forth grants of plan-based awards in fiscal 2008 to thenamed 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 (4)                |       | July 1, 2007                 |       | $                                                                                                | —     |   | $ | — |   |
|                                  |       |                         |       |                                                                                             |       |   |   |
| Richard Nevins                        |       | —                       |       | —                                                                                           |       | — |   |
|                                  |       |                         |       |                                                                                             |       |   |   |
| Louis E.  Hallman, III (5)            |       | July 1, 2007                 |       | 75,000                                                                                           |       | 200,000 |   |
|                                  |       |                         |       |                                                                                             |       |   |   |
| Mitch C. Hill  (6)                    |       | July 1, 2007                 |       | 43,233                                                                                           |       | 115,287 |   |
|                                  |       |                         |       |                                                                                             |       |   |   |
| Patricia R.  Blank                    |       | July 1, 2007                 |       | 43,233                                                                                           |       | 115,287 |   |
|                                       |            |                              |            |                                                                                                  |            |  |  |  |  |

 

----

| (1)    |   | Potential  cash incentive awards were granted as of July 1, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (2)    |   | The  threshold amount assumes that the minimum level of budgetary performance was  met for the cash incentive award, but the personal management objectives were  not achieved.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (3)    |   | The  target/maximum amount assumes that the targeted level of performance (both  targeted Company financial performance and personal management objectives)  was met for the cash incentive awards. The maximum amount is equal to the  target amount because, if the level of performance exceeds the targeted  Company financial performance, the named executive officers may receive a  discretionary award, but the amount of any discretionary award above the  target amount is subject to the discretion of the Compensation Committee. 25%  of the target amount in fiscal 2008 was payable at the discretion of the  Compensation Committee. Actual amounts earned under these granted awards in  fiscal 2008 are reflected in the Non-Equity Incentive Plan Compensation  column of the Summary Compensation Table above. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (4)    |   | Mr. Jorgensen’s award, with a threshold amount of  $75,000 and a target/maximum amount of $200,000, was terminated in connection  with his resignation from the Company effective November 15, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (5)    |   | Mr. Hallman became  President and Chief Executive Officer and a director of the Company effective  April 7, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (6)    |   | Mr. Hill will be  leaving the Company effective October 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

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**OutstandingEquity Awards at Year End**

** **

Thefollowing table contains certain information regarding equity awards held bythe named executive officers as of June 30, 2008:

** **
| **Named Executive Officer** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Unexercisable (1)** | ** ** | **Option  Exercise  Price** | ** ** | **Option  Expiration  Date** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
|                                  |       |                                                                                   |       |                                                                                              |       |                        |       |                         |       |
| Bret W.  Jorgensen (2)                |       | —                                                                                 |       | —                                                                                            |       | $                           | —     |                         | —     |   |
|                                  |       |                                                                                   |       |                                                                                              |       |                        |       |                         |       |
| Richard Nevins  (3)                   |       | —                                                                                 |       | 16,008                                                                                            |       | 1.16                        |       | 4/14/2018                    |       |
|                                  |       |                                                                                   |       | 16,008                                                                                            |       | 1.01                        |       | 4/14/2018                    |       |
|                                  |       |                                                                                   |       |                                                                                              |       |                        |       |                         |       |
| Louis E.  Hallman, III (4)       |       | —                                                                                 |       | —                                                                                            |       | —                      |       | —                       |       |
|                                  |       |                                                                                   |       |                                                                                              |       |                        |       |                         |       |
| Mitch C. Hill                         |       | —                                                                                 |       | —                                                                                            |       | —                      |       | —                       |       |
|                                  |       |                                                                                   |       |                                                                                              |       |                        |       |                         |       |
| Patricia R.  Blank                    |       | —                                                                                 |       | —                                                                                            |       | —                      |       | —                       |       |
|                                       |            |                                                                                        |            |                                                                                                   |            |                             |            |                              |            |  |

 

----

| **(1)**    | ** ** | **The options vest and become  exercisable in increments of one third (1/3rd) (sets of 5,366) on  December 31, 2008, 2009 and 2010.** |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                 |
| **(2)**    | ** ** | **Mr. Jorgensen resigned from  the Company effective November 15, 2007.**                                                        |
| ** ** | ** ** | ** **                                                                                                                                 |
| **(3)**    | ** ** | **Mr. Nevins was our Interim  Chief Executive Officer from October 26, 2007 until April 7, 2008.**                          |
| ** ** | ** ** | ** **                                                                                                                                 |
| (4)        |       | Mr. Hallman became  President and Chief Executive Officer and a director of the Company effective  April 7, 2008.                |

 

Duringfiscal 2008, no stock options were granted to the named executive officersexcept for Mr. Nevins who received stock options as a non-employeedirector on April 14, 2008 under the 2008 Director Stock Option Plan (“DirectorPlan”); however, on August 19, 2008, Mr. Hallman,Ms. Blank, Donald F. Hankus, InSight’s Executive Vice President and ChiefInformation Officer, Bernard J. O’Rourke, the Company’s Executive VicePresident and Chief Operating Officer, and an officer of InSight’s subsidiary,InSight Health Corp., were granted nonstatutory options to purchase 192,000,65,000, 55,000, 85,000 and 50,000 shares of common stock, respectively, at anexercise price of $0.36 per share, pursuant to the Employee Stock Option Plansubject to approval of the Employee Stock Option Plan by the Company’sstockholders.  The options will vest andbecome exercisable, if and only if, a Refinancing Event (as defined in the stockoption agreements) is achieved prior to the expiration of the options.  The options are scheduled to expire on August 19,2018.

 

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** **

**Equity Compensation PlanInformation**

** **

The followinginformation is as of June 30, 2008:

 
| ** **                                                  | ** ** | **Number of securities**   | ** ** | ** **                      | ** ** | ** **                                     | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|------------------------------------------------|------------|
| ** **                                                  | ** ** | **to be issued upon** | ** ** | **Weighted-average**            | ** ** | **Number of securities**             | ** ** |
| ** **                                                  | ** ** | **exercise of**                 | ** ** | **exercise price of** | ** ** | **remaining available for**          | ** ** |
| **Plan Category**                                      | ** ** | **outstanding options**         | ** ** | **outstanding options**    | ** ** | **future issuance under plans** | ** ** |
|                                                        |       |                                 |       |                            |       |                                           |       |
| Equity  Compensation Plans not approved by security holders |       | 192,096                              |       | $1.09                           |       | 768,000                                        |       |

 

**Potential Payments uponTermination or Change of Control**

** **

Underthe terms of each executive’s employment agreement, each executive’semployment will immediately terminate upon his or her death and the executorsor administrators of his or her estate or his or her heirs or legatees (as thecase may be) will be entitled to all accrued and unpaid compensation up to thedate of his or her death. Each executive’s employment agreement willterminate and each of them will be entitled to all accrued and unpaidcompensation, as well as twelve months of compensation at the annual salaryrate then in effect upon the occurrence of the following:

 

(1)               Upon the executive’s permanent and total disabilityi.e., the executive is unable substantially to perform his or her servicesrequired by the employment agreement for three consecutive months or shorterperiods aggregating three months during any twelve month period; provided,however, that our obligation to make payments of twelve months of compensationat 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 the Company’s 30 days’written notice to the executive of the termination of the executive’semployment without cause. The employment agreements generally define cause asthe occurrence of one of the following:

 
| · |   | the  executive has been convicted or pled guilty or no contest to any crime or  offense (other than any crime or offense relating to the operation of an  automobile) which is likely to have a material adverse impact on the business  operations or financial or other condition of our business, or any felony  offense;                                                                                                                                 |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| · |   | the  executive has committed fraud or embezzlement;                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| · |   | the  executive has breached any of his or her obligations under the employment  agreement and failed to cure the breach within 30 business days following  receipt of written notice of such breach;                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| · |   | we,  after reasonable investigation, find that the executive has violated our  material written policies and procedures, including but not necessarily  limited to, policies and procedures pertaining to harassment and  discrimination;                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| · |   | the  executive has failed to obey a specific written direction from the Board of  Directors (unless such specific written instruction represents an illegal  act), provided that (i) such failure continues for a period of 30  business days after receipt of such specific written direction, and  (ii) such specific written direction includes a statement that the  failure to comply therewith will be a basis for termination hereunder; or |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| · |   | any  willful act or omission on the executive’s part which is materially  injurious to the financial condition or business reputation of the Company or  any of its subsidiaries.                                                                                                                                                                                                                                                                       |

 

(3)               If the executive terminates his or her employment withthe Company for good reason. The employment agreements generally define goodreason as:

 
| · |   | the  relocation by the Company, without the executive’s  consent, of the executive’s principal place of employment to a site that is  more than a specified number of miles from the executive’s  principal residence; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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| · |   | a  reduction by the Company, without the executive’s  consent, in the executive’s annual salary, duties and responsibilities, and  title, as they may exist from time to time; or                                                                                                                                                                             |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                    |
| · |   | a  failure by the Company to comply with any material provision of the  employment agreement which is not cured within 30 days after notice of such  noncompliance has been given by the executive, or if such failure is not  capable of being cured in such time, for which a cure shall not have been  diligently initiated by the Company within the 30 day period. |

 

(4)               If the executive’s employment is terminated by theCompany without cause or he or she terminates his or her employment for goodreason within twelve months of a change in control. The consummation of theexchange offer and the plan of reorganization did not constitute a change incontrol under the employment agreements with the named executive officers. Achange in control shall generally be deemed to have occurred if:

 
| · |   | any  person, or any two or more persons acting as a group, and all affiliates of  such person or persons (a “Group”), who prior to such time beneficially owned less  than 50% of the Company’s then outstanding capital stock shall acquire  shares of the Company’s capital stock in one or more transactions or  series of transactions, including by merger, and after such transaction or  transactions such person or group and affiliates beneficially own 50% or more  of the Company’s outstanding capital stock; or |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | the  Company shall sell all or substantially all of its assets to any Group which,  immediately prior to the time of such transaction, beneficially owned less  than 50% of the then outstanding capital stock of the Company.                                                                                                                                                                                                                                                                                                                         |

 

Inaddition, if any employment agreement is terminated pursuant to the foregoing (1) to(4), the Company will maintain at its expense until the earlier of twelvemonths after the date of termination or commencement of the executive’sbenefits pursuant to full-time employment with a new employer under suchemployer’s standard benefits program, all life insurance,medical, health and accident and disability plans or programs, in which theexecutive was entitled to participate immediately prior to the date oftermination.  If an employment agreementis terminated with a named executive officer pursuant to the foregoing (1) to(4) we estimate that the value of the payments and benefits would be asfollows:

** **
| **Named Executive Officer** | ** ** | **Salary** | ** ** | **Benefits (1)** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|------------|------------|-----------------------|------------|-----------|------------|
|                                  |       |       |       |                  |       |      |       |
| Bret  W. Jorgensen (2)                |       | $          | 204,500    |                  | $          | 12,340    |       | $ | 216,840 |   |
|                                  |       |       |       |                  |       |      |       |
| Richard  Nevins (3)                   |       | —     |       | —                |       | —    |       |
|                                  |       |       |       |                  |       |      |       |
| Louis  E. Hallman, III (4)       |       | 400,000    |       | 19,440                |       | 419,440   |       |
|                                  |       |       |       |                  |       |      |       |
| Mitch  C. Hill (5)                    |       | 240,181    |       | 30,927                |       | 271,108   |       |
|                                  |       |       |       |                  |       |      |       |
| Patricia  R. Blank                    |       | 288,217    |       | 18,487                |       | 306,704   |       |
|                                       |            |            |            |                       |            |           |            |  |  |  |

 

----

(1)   For purposes of this table we have assumed that (i) theterminated executive would not commence receiving benefits with a new employeruntil twelve months after the date of termination, and (ii) cost ofbenefits for the twelve month period following termination would be consistentwith the actual costs incurred during fiscal 2008.  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.

 

(2)   Mr. Jorgensen resigned from the Company effectiveNovember 15, 2007. He was paid $204,500 in consulting fees for six monthsafter his resignation.

 

(3)   Mr. Nevins was our Interim Chief ExecutiveOfficer from October 26, 2007 until April 7, 2008.

 

(4)   Mr. Hallman became President and Chief ExecutiveOfficer and a director of the Company effective April 7, 2008.

 

(5)   Mr. Hill will be leaving the Company effective October 31,2008. Pursuant to his separation agreement he will receive 10 months of salarycontinuation and benefits.

 

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**Compensation ofDirectors**

 

Wereimburse our non-employee directors for all out-of-pocket expenses incurred inthe performance of their duties as directors. Each non-employee director of theCompany receives an annual fee of $30,000, a fee of $2,000 for each in-personBoard of Directors meeting and a fee of $1,000 for each telephonic Board ofDirectors meeting. In addition, the Chairman of the Board, the Chairman of theAudit Committee and the Chairman of the Compensation Committee, each receive anadditional annual fee of $20,000, $10,000 and $5,000, respectively. Also, eachAudit and Compensation Committee member receives a fee of $1,000 for eachin-person committee meeting and a fee of $500 for each telephonic committeemeeting. Finally, the Company established the Director Plan, an equity plan forthe non-employee directors in an amount of approximately 2% of the Company’sissued and outstanding common stock.

 

Thefollowing table sets forth the compensation of our non-employee directors forthe year ended June 30, 2008:

 
| ** **           | ** ** | **Fees Earned or Paid** | ** ** | ** **                         | ** ** | **All Other**                          | ** ** | ** **                | ** ** |
|----------------------|------------|----------------------------------------|------------|------------------------------------|------------|---------------------------------------------|------------|---------------------------|------------|
| **Name**             | ** ** | **In Cash**                       | ** ** | **Option Awards (1)(2)** | ** ** | **Compensation**                            | ** ** | **Total**                 | ** ** |
|                 |       |                                   |       |                               |       |                                        |       |                      |       |
| Eugene  Linden       |       | $   45,500              |       | $    2,553     |       | $      — |       | $   48,053 |       |
|                 |       |                                   |       |                               |       |                                        |       |                      |       |
| Wayne  B. Lowell     |       | 71,837                                 |       | 2,553                              |       | —                                      |       | 74,390                    |       |
|                 |       |                                   |       |                               |       |                                        |       |                      |       |
| Richard  Nevins (3)  |       | 39,500                                 |       | 2,553                              |       | —                                      |       | 42,053                    |       |
|                 |       |                                   |       |                               |       |                                        |       |                      |       |
| James  A. Ovenden    |       | 67,163                                 |       | 2,553                              |       | —                                      |       | 69,716                    |       |
|                 |       |                                   |       |                               |       |                                        |       |                      |       |
| Keith  E. Rechner    |       | 62,087                                 |       | 2,553                              |       | —                                      |       | 64,640                    |       |
|                 |       |                                   |       |                               |       |                                        |       |                      |       |
| Steven  G. Segal (4) |       | 50,000                                 |       | 2,553                              |       | —                                      |       | 52,553                    |       |

 

----

(1)   Represents the dollar amount we recognized forfinancial statement reporting purposes in fiscal 2008 in accordance withFinancial Accounting Standards Board Statement No. 123R.  See Note 12 in ourconsolidated financial statements included in this Form10-K.

 

(2)   No options were vested or exercisable at June 30,2008.  On April 14, 2008, each ofthe non-employee directors was granted nonstatutory options to purchase 16,008shares of common stock at $1.01 per share and 16,008 shares of common stock at$1.16 per share pursuant to the Director Plan subject to approval of theDirector Plan by the Company’s stockholders. Each set of options becomesexercisable in increments of one third (1/3) (5,366 per set) on December 31,2008, 2009 and 2010. The options become immediately exercisable prior to achange of control of the Company.  Theoptions are scheduled to expire on August 14, 2018.

 

(3)   Does not include (i) $294,000 which the Companypaid Mr. Nevins while he was serving as the Company’s Interim ChiefExecutive Officer from October 26, 2007 to April 7, 2008 or (ii) $21,690which the Company paid for the lease of an apartment close to the Company’sprincipal executive offices during that same period.

 

(4)   Mr. Segal’s director/committee and meeting feesare paid to J.W. Childs Equity Partners II, L.P.

 

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

 

The following table sets forth certain information regarding beneficialownership of our common stock as of September 15, 2008, by:  (i) eachperson or entity known to us owning beneficially 5% or more of our commonstock; (ii) each member of our Board of Directors; (iii) each of thenamed executive officers; and (iv) all directors and executive officers(as defined by Rule 3b-7 under the Exchange Act) as a group.  At September 15,2008, our outstanding securities consisted of approximately 8,644,444 shares ofcommon stock.  Beneficial ownership ofthe securities listed in the table has been determined in accordance with theapplicable rules and regulations promulgated under the Exchange Act.  The business address of each director andexecutive officer is: c/o InSight Health Services Holdings Corp., 26250Enterprise Court, Suite 100, Lake Forest, California 92630.

 
| ** **                                                            | ** ** | **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                                          |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| Cohanzick  Absolute Return Master Fund, Limited                       |       | 1,159,564                       |       | 13.4                  | %          |
| 427  Bedsford Road                                                    |       |                            |       |                  |       |
| New  York, New York 10022                                             |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| J.W.  Childs Equity Partners II, L.P. (5)                             |       | 687,641                         |       | 8.0                   | %          |
| 111  Huntington Avenue, Suite 2900                               |       |                            |       |                  |       |
| Boston,  Massachusetts 02199                                          |       |                            |       |                  |       |
|                                                                  |       |                            |       |                  |       |
| Eugene  Linden (6)                                                    |       | —                          |       | —                |       |
|                                                                  |       |                            |       |                  |       |
| Wayne  B. Lowell (7)                                                  |       | —                          |       | —                |       |
|                                                                  |       |                            |       |                  |       |
| Richard  Nevins (8)                                                   |       | —                          |       | —                |       |
|                                                                  |       |                            |       |                  |       |
| James  A. Ovenden (9)                                                 |       | —                          |       | —                |       |
|                                                                  |       |                            |       |                  |       |
| Keith  E. Rechner (10)                                                |       | —                          |       | —                |       |
|                                                                  |       |                            |       |                  |       |
| Steven  G. Segal (11)                                                 |       | —                          |       | —                |       |
|                                                                  |       |                            |       |                  |       |
| Louis  E. Hallman, III (12)                                      |       | —                          |       | —                |       |
|                                                                  |       |                            |       |                  |       |
| Patricia  R. Blank (13)                                               |       | —                          |       | —                |       |
|                                                                  |       |                            |       |                  |       |
| Mitch  C. Hill                                                        |       | —                          |       | —                |       |
|                                                                  |       |                            |       |                  |       |
| All directors  and executive officers as a group (12 persons)         |       | —                          |       | —                |       |

 

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(1)     For purposes of this table, a person is deemed to have“beneficial ownership” of any security that such person has the right toacquire within 60 days after September 15, 2008.

 

(2)     Includes 1,206,000 shares of common stock owneddirectly by Bennett Restructuring Fund, L.P., 104,000 shares of common stockowned directly by affiliate BRF High Value, L.P. and 730,000 shares of commonstock owned directly by affiliate Bennett Offshore Restructuring Fund, Inc.  The general partner of Bennett RestructuringFund, L.P. and BRF High Value, L.P. is Restructuring Capital Associates, L.P.,a Delaware limited partnership, and the general partner of RestructuringCapital Associates, L.P. is Bennett Capital Corporation, a Delaware corporation,of which James D. Bennett is President and sole stockholder.  Mr. Bennett, Bennett Capital Corporationand Restructuring 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.is Bennett 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,BT Trust U/D 12/9/2004 and Bennett Offshore Investment Corporation may bedeemed to beneficially own the 730,000 shares of common stock held by BennettOffshore Restructuring Fund, Inc. Each of Mr. Bennett, BT Trust, Restructuring Capital Associates,L.P., Bennett Capital Corporation and Bennett Offshore Investment Corporationspecifically disclaim beneficial ownership of the shares of common stock deemedto be beneficially owned except to the extent of his or its pecuniary interesttherein.

 

(3)     Includes 1,206,000 shares of common stock owneddirectly by Bennett Restructuring Fund, L.P. The general partner of BennettRestructuring Fund, L.P. is Restructuring Capital Associates, L.P., a Delawarelimited 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 Corporationand Restructuring 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, RestructuringCapital Associates, 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 stock owned directlyby 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)     Includes634,130 shares of common stock owned directly by J.W. Childs EquityPartners II, L.P. and 53,511 shares of our common stock owneddirectly by JWC-InSight Co-invest LLC, an affiliate of J.W. Childs EquityPartners II, L.P. The general partner of J.W. Childs EquityPartners II, L.P. is J.W. Childs Advisors II, L.P., a Delawarelimited partnership. The general partner of J.W. Childs Advisors II, L.P.is J.W. Childs Associates, L.P., a Delaware limited partnership. The generalpartner of J.W. Childs Associates, L.P. is J.W. Childs Associates, Inc., aDelaware corporation. J.W. Childs Advisors II, L.P., J.W. ChildsAssociates, 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.Childs Equity Partners II, L.P. and JWC-InSight Co-invest LLC. John W.Childs, Glenn A. Hopkins, Adam L. Suttin, William E. Watts, and DavidFiorentino, as well as Steven G. Segal (as indicated in footnote 11), sharevoting and investment control over, and therefore may be deemed to beneficiallyown, the shares of common stock held by these entities.

 

(6)     As the Chief Investment Strategist of BennettManagement Corporation, an affiliate of James D. Bennett, Mr. Linden maybe deemed to beneficially own the shares of common stock beneficially held by Mr. Bennettand his affiliated entities.  Mr. Lindendisclaims beneficial ownership of such shares. Does not include (i) anoption to purchase 16,008 shares of our common stock at an exercise price of$1.01 per share and (ii) an option to 

 

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purchase 16,008shares of our common stock at an exercise price of $1.16 per share, which arenot currently exercisable. See “Director Compensation” for details regarding the grant of these options.

 

(7)     Doesnot include (i) an option to purchase 16,008 shares of our common stock atan exercise price of $1.01 per share and (ii) an option to purchase 16,008shares of our common stock at an exercise price of $1.16 per share, which arenot currently exercisable. See “DirectorCompensation” for detailsregarding the grant of these options.

 

(8)     Doesnot include (i) an option to purchase 16,008 shares of our common stock atan exercise price of $1.01 per share and (ii) an option to purchase 16,008shares of our common stock at an exercise price of $1.16 per share, which arenot currently exercisable. See “DirectorCompensation” for detailsregarding the grant of these options.

 

(9)     Doesnot include (i) an option to purchase 16,008 shares of our common stock atan exercise price of $1.01 per share and (ii) an option to purchase 16,008shares of our common stock at an exercise price of $1.16 per share, which arenot currently exercisable. See “DirectorCompensation” for detailsregarding the grant of these options.

 

(10)   Does not include (i) anoption to purchase 16,008 shares of our common stock at an exercise price of$1.01 per share and (ii) an option to purchase 16,008 shares of our commonstock at an exercise price of $1.16 per share, which are not currentlyexercisable. See “DirectorCompensation” for detailsregarding the grant of these options.

 

(11)   Asa Special Limited Partner of J.W. Childs Associates, L.P., which manages J.W.Childs Equity Partners II, L.P., and a member of JWC-InSight Co-investLLC, Mr. Segal may be deemed to beneficially own the 634,130 sharesof our common 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. Does notinclude (i) an option to purchase 16,008 shares of our common stock at anexercise price of $1.01 per share and (ii) an option to purchase 16,008shares of our common stock at an exercise price of $1.16 per share, which arenot currently exercisable.  See “Director Compensation” for details regarding the grant ofthese options.

 

(12)         Doesnot include an option to purchase 192,000 shares of our common stock at anexercise price of $0.36 per share, which is not currently exercisable.  See “OutstandingEquity Awards at Year End” fordetails regarding the grant of these options.

 

(13)         Doesnot include an option to purchase 65,000 shares of our common stock at anexercise price of $0.36 per share, which is not currently exercisable.  See “OutstandingEquity Awards at Year End” fordetails regarding the grant of these options.

 

**ITEM 13.****                CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

**CompensationCommittee Interlocks and Insider Participation**

 

Duringfiscal 2008, the Company’s CompensationCommittee comprised of Keith E. Rechner (Chairman), James A. Ovenden and StevenG. Segal.  No member of our CompensationCommittee is or was during fiscal 2008 an employee, or is or has ever been anofficer, of the Company or any of its subsidiaries.  No executive officer of the Company served asa director or a member of the Compensation Committee of another company, one ofwhose executive officers served as a member of the Company’s Board of Directors or the CompensationCommittee.  During fiscal 2008, Mr. Segalwas affiliated  with J.W. Childs EquityPartners II, L.P., which beneficially owns 8.0% of our common stock.  See Item 12. “Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters”.

 

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**Family-MemberRelationship**

 

PatriciaK. Kincaid, M.D. is a sister-in-law of Donald F. Hankus, InSight’sExecutive Vice President and Chief Information Officer, and a principal orpartner of West Rad Medical Group, Inc. (“WRMG”), aprofessional radiology medical group. During the year ended June 30, 2008, we paid WRMG approximately$404,000 in connection with its provision of certain professional services tothree fixed-site centers in California. In addition, an affiliated company ofWRMG’s has economic interest in the joint venture that ownsone of these fixed-site centers. WRMG’s provision of professionalservices to us began more than two years prior to our employment of Mr. Hankus.

 

**Policies andProcedures Regarding Related Persons and Code of Ethical Conduct**

 

We havea written policy that requires all employees to avoid any activity thatconflicts or appears to conflict with our interest.  This policy extends to the family members ofour employees. Each employee is instructed to report any actual or potentialconflict of interest to his or her immediate supervisor.  Conflicts of interest are only permitted uponthe prior written consent of our general counsel.  Conflicts of interest that would involve anemployee taking for himself or herself an opportunity discovered in connectionwith his or her employment require the written consent of our Board ofDirectors.

 

Thispolicy is part of our Code of Ethical Conduct, a copy of which is postedon our website, www.insighthealth.com, under “About InSight Imaging.”  We intend to satisfy the disclosurerequirement under Item 5.05 of Form 8-K relating to amendments to orwaivers of any provision of the Code of Ethical Conduct applicable to ourprincipal executive officer, principal financial officer, principal accountingofficer or controller by posting such information on our website,www.insighthealth.com, under “AboutInSight Imaging.”  Moreover, atleast annually each director and executive officer completes a detailedquestionnaire regarding relationships or arrangements that require disclosureunder the SEC’s rules and regulations.

 

**DirectorIndependence**

 

**The Company**’s common stockdoes not trade on any national securities exchange or any inter-dealerquotation system which has requirements as to the independence of directors;however, in accordance with the rules of the SEC, the following statementsregarding director independence are based on the requirements of the NASDAQStock Market. Based on these independence requirements, we believe that ourdirectors are independent, except for Mr. Hallman, our President and ChiefExecutive Officer, and Mr. Linden.  Mr. Lindenis the Chief Investment Strategist of Bennett Management Corporation, which isan affiliate of James D. Bennett, who through affiliates, is the largestbeneficial holder of the Company’s common stock.

** **

**ITEM 14.    PRINCIPALACCOUNTANT FEES AND SERVICES**

 

**IndependentRegistered Public Accounting Firm**

 

The followingtable presents information about fees that PWC, our independent publicregistered accountants, charged us (1) to audit our annual consolidatedfinancial statements for the years ended June 30, 2008 and 2007, and (2) forother services rendered during those years.

 

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| ** **          | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |
| Audit  Fees (1)     |       | $        | 673,000    |     | $          | 720,000 |   |
|                |       |     |       |     |       |
| Audit  Related Fees |       | —   |       | —   |       |
|                |       |     |       |     |       |
| Tax  Fees (2)       |       | 162,000  |       | 206,884  |       |
|                |       |     |       |     |       |
| Subtotal            |       | $        | 835,000    |     | $          | 926,884 |   |
|                |       |     |       |     |       |
| All  Other Fees     |       | —   |       | —   |       |
|                |       |     |       |     |       |
| Total  Fees         |       | $        | 835,000    |     | $          | 926,884 |   |

 

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(1)  Audit Fees – fees for auditing ourannual consolidated financial statements, reviewing the condensed consolidatedfinancial statements included in our quarterly reports on Form 10-Q andregistration statement related to the exchange offer and other SEC filings.

 

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

 

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**PART IV**

 

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

 

ITEM 15 (a) (1).   FINANCIALSTATEMENTS

 

Included in Part IIof this report:

 

Reports of IndependentRegistered Public Accounting Firm

ConsolidatedBalance Sheets

ConsolidatedStatements of Operations

ConsolidatedStatements of Stockholders’Equity

ConsolidatedStatements of Cash Flows

Notes toConsolidated Financial Statements

 

ITEM 15 (a) (2).   FINANCIALSTATEMENT SCHEDULES

 

Schedule II -Valuation and Qualifying Accounts

 

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

 

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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, previously filed and  incorporated herein by reference from the Company’s Annual Report on  Form 10-K, filed on September 21, 2007.                                                                                                                |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *2.2               |       | Amended Plan Supplement  of the Company, et al. dated July 7, 2007, previously filed and  incorporated herein by reference from the Company’s Annual Report on  Form 10-K, filed on September 21, 2007.                                                                                                                                                                                                      |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *3.1               |       | Amended and Restated  Certificate of Incorporation of the Company, previously filed and  incorporated herein by reference from the Company’s Annual Report on  Form 10-K, filed on September 21, 2007.                                                                                                                                                                                                            |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *3.2               |       | Second Amended and  Restated Bylaws of the Company, previously filed and incorporated herein by  reference from the Company’s Annual Report on Form 10-K, filed on  September 21, 2007.                                                                                                                                                                                                                           |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *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, 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, previously filed and incorporated herein by reference from the  Company’s Annual Report on Form 10-K, filed on September 21, 2007.                                                                                                                                                                 |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *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.                                                                                         |
|                    |            |                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |

 

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| *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, previously filed and incorporated herein by  reference from the Company’s  Annual Report on Form 10-K, filed on September 21, 2007.                                                                                        |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| *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),  previously filed and incorporated herein by reference from the Company’s Annual Report on Form 10-K,  filed on September 21, 2007.                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| *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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.2  |   | 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.                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.3  |   | Executive Employment  Agreement, dated April 7, 2008, among InSight, and Louis E.  Hallman, III, previously filed and incorporated herein by reference from  the Company’s  Current Report on Form 8-K, filed on April 14, 2008.                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.4  |   | 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.                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.5  |   | 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.                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.6  |   | Form of the  Company’s and  InSight’s Indemnification  Agreement, previously filed and incorporated by references from the Company’s  Annual Report Form 10-K filed on September 21, 2007.                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.7  |   | The Company’s 2008 Director Stock Option Plan,  previously filed and incorporated herein by reference from the Company’s Current Report on Form 8-K,  filed on April 18, 2008.                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.8  |   | Form of the Company’s 2008 Director Stock Option Plan  Nonstatutory Stock Option Grant Agreement with an exercise price of $1.01 per  share, previously filed and incorporated herein by reference from the Company’s Current Report on Form 8-K,  filed on April 18, 2008.                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.9  |   | Form of the Company’s 2008 Director Stock Option Plan  Nonstatutory Stock Option Grant Agreement with an exercise price of $1.16 per  share, previously filed and incorporated herein by reference from the Company’s Current Report on Form 8-K,  filed on April 18, 2008.                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.10 |   | The Company’s 2008 Employee Stock Option Plan  previously filed and incorporated herein by reference from the Company’s Current Report on Form 8-K,  filed on April 18, 2008.                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.11 |   | Form of the Company’s 2008 Employee Stock Option Plan  Nonstatutory Stock Option Grant Agreement, previously filed and incorporated  herein by reference from the Company’s Current Report on Form 8-K,  filed on April 18, 2008.                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| *10.12 |   | Executive Employment Agreement dated May 15,  2008, by and between InSight and Bernard J. O’Rourke, previously filed and  incorporated herein by reference from the Company’s Current Report on Form 8-K,  filed on May 21, 2008.                                                                                                                                   |

 

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| *10.13 |   | Resignation Agreement, dated as of October 26,  2007, by and among the Company, InSight and Bret W. Jorgensen, previously  filed and incorporated herein by reference from the Company’s Current Report on Form 8-K,  filed on October 31, 2007. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                 |
| *10.14 |   | Consulting Agreement, dated as of October 26,  2007, by and between the Company and Richard Nevins, previously filed and  incorporated herein by reference from the Company’s Current Report on Form 8-K,  filed on October 31, 2007.            |
|   |   |                                                                                                                                                                                                                                                                 |
| *10.15 |   | Separation Agreement, dated as of May 15, 2008,  among the Company, InSight and Marilyn U. MacNiven-Young, previously filed  and incorporated herein by reference from the Company’s Current Report on Form 8-K,  filed on May 21, 2008.         |
|   |   |                                                                                                                                                                                                                                                                 |
| *10.16 |   | Separation Agreement, dated as of June 27,  2008, among the Company, InSight and Mitch C. Hill, previously filed and  incorporated herein by reference from Holding’s Current Report on  Form 8-K, filed on June 30, 2008.                       |
|   |   |                                                                                                                                                                                                                                                                 |
| 21.1   |   | Subsidiaries of Company,  filed herewith.                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                 |
| 31.1   |   | Certification of Louis E.  Hallman, III, 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 Louis E.  Hallman, III, 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 Actof 1934, the Registrant has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 
|   | INSIGHT HEALTH  SERVICES HOLDINGS CORP. |
|--------|-----------------------------------------|
|   |                                    |
|   | By                                      | /s/ Louis E.  Hallman, III |   |
|   |                                    |  Louis E.  Hallman, III, President and |   |
|   |                                    | Chief  Executive Officer |   |
|   |                                    |   |
|   | Date:                                   |  September 25, 2008 |

 

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/ Louis E. Hallman, III |       | President                      | September 25, 2008 |
| Louis E.  Hallman, III                   |       | and Chief  Executive Officer   |                         |
| ** **                                    | ** ** | and Director                   | ** **                   |
| ** **                                    | ** ** | (Principal  Executive Officer) | ** **                   |
| ** **                                    | ** ** | ** **                     | ** **                   |
| ** **                                    | ** ** | ** **                     | ** **                   |
| /s/ Mitch C. Hill                             | ** ** | Executive Vice  President      | September 25,  2008     |
| Mitch C. Hill                                 | ** ** | and Chief  Financial Officer   | ** **                   |
| ** **                                    | ** ** | (Principal  Financial and      | ** **                   |
| ** **                                    | ** ** | Accounting  Officer)           | ** **                   |
| ** **                                    | ** ** | ** **                     | ** **                   |
| ** **                                    | ** ** | ** **                     | ** **                   |
| /s/  Wayne B. Lowell                          |       | Chairman of the  Board         | September 25,  2008     |
| Wayne  B. Lowell                              |       | and Director                   | ** **                   |
|                                          |       | ** **                     | ** **                   |
|                                          |       | ** **                     | ** **                   |
| /s/  Eugene Linden                            |       | Director                       | September 25,  2008     |
| Eugene  Linden                                |       | ** **                     | ** **                   |
|                                          |       | ** **                     | ** **                   |
|                                          |       | ** **                     | ** **                   |
| /s/  Richard Nevins                           |       | Director                       | September 25,  2008     |
| Richard  Nevins                               |       | ** **                     | ** **                   |
|                                          |       | ** **                     | ** **                   |
|                                          |       | ** **                     | ** **                   |
| /s/  James A. Ovenden                         |       | Director                       | September 25,  2008     |
| James  A. Ovenden                             |       | ** **                     | ** **                   |
|                                          |       | ** **                     | ** **                   |
|                                          |       | ** **                     | ** **                   |
| /s/  Keith E. Rechner                         |       | Director                       | September 25,  2008     |
| Keith  E. Rechner                             |       | ** **                     | ** **                   |
|                                          |       | ** **                     | ** **                   |
|                                          |       | ** **                     | ** **                   |
| /s/  Steven G. Segal                          |       | Director                       | September 25,  2008     |
| Steven  G. Segal                              |       | ** **                     | ** **                   |
|                                               |            |                                |                              |            |            |          |            |  |

 

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**SUPPLEMENTAL INFORMATION TO BEFURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BYREGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OFTHE ACT.**

 

The Company intends to mail to its stockholders this Form 10-K, aproxy statement and a form of proxy to all stockholders in connection with its2008 Annual Meeting of Stockholders.  TheCompany has no class of securities registered pursuant to Section 12(b) ofthe Exchange Act, but intends to voluntarily file its definitive proxystatement with the SEC within 120 days of June 30, 2008.

 

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**SCHEDULE II**

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**VALUATIONAND QUALIFYING ACCOUNTS**

**FORTHE ELEVEN MONTHS ENDED JUNE 30, 2008, ONE MONTH ENDED JULY 31, 2007, AND**

**FORTHE YEARS ENDED JUNE 30, 2007AND 2006**

(amounts inthousands)

 
| ** **                               | ** ** | **Balance at**   | ** ** | ** **          | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | **Balance at** | ** ** |
|------------------------------------------|------------|-----------------------|------------|---------------------|------------|---------------------|------------|------------|------------|------------|------------|---------------------|------------|
| ** **                               | ** ** | **Beginning of** | ** ** | **Charges to** | ** ** | **Charges to** | ** ** | ** ** | ** ** | ** ** | ** ** | **End of**     | ** ** |
| ** **                               | ** ** | **Period**            | ** ** | **Expenses**        | ** ** | **Revenues**        | ** ** | **Other**  | ** ** | ** ** | ** ** | **Period**          | ** ** |
| Successor                                |       |                  |       |                |       |                |       |       |       |       |       |                |       |
| Eleven  months ended June 30, 2008: |       |                  |       |                |       |                |       |       |       |       |       |                |       |
| Allowance  for doubtful accounts         |       | $                     | 12,515     |                | $          | 5,790               |       | $          | —     |       | $          | (9,787              | )          | (A | ) | $ | 8,518 |   |
| Allowance  for contractual adjustments   |       | 21,518                |       | —              |       | 153,002             |       | (159,119   | )          | (B         | )          | 15,401              |       |
|                                     |       | $                     | 34,033     |                | $          | 5,790               |       | $          | 153,002    |       | $          | (168,906            | )          |   |   | $ | 23,919 |   |
|                                     |       |                  |       |                |       |                |       |       |       |       |       |                |       |
| Predecessor                              |       |                  |       |                |       |                |       |       |       |       |       |                |       |
| One  month ended July 31, 2007:     |       |                  |       |                |       |                |       |       |       |       |       |                |       |
| Allowance  for doubtful accounts         |       | $                     | 12,648     |                | $          | 389                 |       | $          | —     |       | $          | (522                | )          | (A | ) | $ | 12,515 |   |
| Allowance  for contractual adjustments   |       | 21,454                |       | —              |       | 14,585              |       | (14,521    | )          | (B         | )          | 21,518              |       |
|                                     |       | $                     | 34,102     |                | $          | 389                 |       | $          | 14,585     |       | $          | (15,043             | )          |   |   | $ | 34,033 |   |
|                                     |       |                  |       |                |       |                |       |       |       |       |       |                |       |
| Year  ended 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 |   |
|                                     |       |                  |       |                |       |                |       |       |       |       |       |                |       |
| Year  ended 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 |   |

 

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(A) Write-off ofuncollectible accounts.

(B) Write-off ofcontractual adjustments, representing the difference between our charge for aprocedure and what we receive from payors.

 

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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,  previously filed and incorporated herein by reference from the Company’s  Annual Report on Form 10-K, filed on September 21, 2007.                                                                                                                |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *2.2               |       | Amended Plan Supplement  of the Company, et al. dated July 7, 2007, previously filed and  incorporated herein by reference from the Company’s Annual Report on  Form 10-K, filed on September 21, 2007.                                                                                                                                                                                                      |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *3.1               |       | Amended and Restated  Certificate of Incorporation of the Company, previously filed and  incorporated herein by reference from the Company’s Annual Report on  Form 10-K, filed on September 21, 2007.                                                                                                                                                                                                            |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *3.2               |       | Second Amended and  Restated Bylaws of the Company, previously filed and incorporated herein by  reference from the Company’s Annual Report on Form 10-K, filed on  September 21, 2007.                                                                                                                                                                                                                           |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *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, 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, previously filed and incorporated herein by  reference from the Company’s Annual Report on Form 10-K, filed on  September 21, 2007.                                                                                                                                                                |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *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.                                                                                         |

 

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| *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, previously filed and incorporated herein by  reference from the Company’s Annual Report on Form 10-K, filed on September 21,  2007.                                                                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| *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),  previously filed and incorporated herein by reference from the Company’s  Annual Report on Form 10-K, filed on September 21, 2007.                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| *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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| *10.2  |   | 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.                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| *10.3  |   | Executive Employment  Agreement, dated April 7, 2008, among InSight and Louis E. Hallman, III,  previously filed and incorporated herein by reference from the Company’s Current Report on Form 8-K,  filed on April 14, 2008.                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| *10.4  |   | 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.                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| *10.5  |   | 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.                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| *10.6  |   | Form of the  Company’s and  InSight’s Indemnification  Agreement, previously filed and incorporated by references from the Company’s  Annual Report Form 10-K filed on September 21, 2007.                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| *10.7  |   | The Company’s 2008 Director Stock Option Plan,  previously filed and incorporated herein by reference from the Company’s  Current Report on Form 8-K, filed on April 18, 2008.                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| *10.8  |   | Form of the Company’s 2008 Director Stock  Option Plan Nonstatutory Stock Option Grant Agreement with an exercise price  of $1.01 per share, previously filed and incorporated herein by reference  from the Company’s Current Report on Form 8-K, filed on April 18,  2008.                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| *10.9  |   | Form of the Company’s 2008 Director Stock  Option Plan Nonstatutory Stock Option Grant Agreement with an exercise price  of $1.16 per share, previously filed and incorporated herein by reference  from the Company’s Current Report on Form 8-K, filed on April 18,  2008.                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| *10.10 |   | The Company’s 2008 Employee Stock Option Plan  previously filed and incorporated herein by reference from the Company’s  Current Report on Form 8-K, filed on April 18, 2008.                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| *10.11 |   | Form of the Company’s 2008 Employee Stock  Option Plan Nonstatutory Stock Option Grant Agreement, previously filed and  incorporated herein by reference from the Company’s Current Report on  Form 8-K, filed on April 18, 2008.                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                        |
| *10.12 |   | Executive Employment Agreement dated May 15,  2008, by and between InSight and Bernard J. O’Rourke, previously filed and  incorporated herein by reference from the Company’s Current Report on  Form 8-K, filed on May 21, 2008.                                                                                                                                  |

 

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| *10.13 |   | Resignation Agreement, dated as of October 26,  2007, by and among the Company, InSight and Bret W. Jorgensen, previously  filed and incorporated herein by reference from the Company’s Current Report  on Form 8-K, filed on October 31, 2007. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                 |
| *10.14 |   | Consulting Agreement dated as of October 26,  2007, by and between the Company and Richard Nevins, previously filed and  incorporated herein by reference from the Company’s Current Report on  Form 8-K, filed on October 31, 2007.             |
|   |   |                                                                                                                                                                                                                                                                 |
| *10.15 |   | Separation Agreement, dated as of May 15, 2008,  among the Company, InSight and Marilyn U. MacNiven-Young, previously filed  and incorporated herein by reference from the Company’s Current Report on  Form 8-K, filed on May 21, 2008.         |
|   |   |                                                                                                                                                                                                                                                                 |
| *10.16 |   | Separation Agreement, dated as of June 27,  2008, among the Company, InSight and Mitch C. Hill, previously filed and  incorporated herein by reference from the Company’s Current Report on  Form 8-K, filed on June 30, 2008.                   |
|   |   |                                                                                                                                                                                                                                                                 |
| 21.1   |   | Subsidiaries of Company,  filed herewith.                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                 |
| 31.1   |   | Certification of Louis E.  Hallman, III, 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 Louis E.  Hallman, III, 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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