**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-K**

 

**(Mark One)**

 

**ý****  ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

 

**FORTHE FISCAL YEAR ENDED JUNE 30, 2003**

 

**OR**

 

**o****  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**FORTHE TRANSITION PERIODFROM                   TO                   **

 

**COMMISSIONFILE NUMBER 333-75984**

 

**INSIGHTHEALTH SERVICES HOLDINGS CORP.**

(Exact name of Registrant as specified in itscharter)

 

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

 

**(949)282-6000**

(Registrant’s telephone number including areacode)

 

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

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

(Title of Class)

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  ý  No  o

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  ý

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein and will not be contained,to the best of the Registrant’s knowledge, in definitive proxy or informativestatements incorporated by reference in Part III of this Form 10-K or any amendmentto this Form 10-K.   ý

 

The aggregatemarket value of the voting stock held by non-affiliates of the Registrant as ofAugust 29, 2003 (based on the price at which the common stock was valuedon that date) was $141,347.  The numberof shares outstanding of the Registrant’s common stock as of August 29,2003 was 5,468,814.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Certain exhibitsare incorporated herein by reference as set forth in Item 15(a) (3), Exhibits,in Part IV.

 

 

----

 

**PART I**

 

**ITEM 1.  BUSINESS**

 

**ORGANIZATIONAND ACQUISITION**

 

InSight Health Services Holdings Corp. (“Company”), a Delaware corporation, was incorporated on June 13, 2001 underthe name JWC/Halifax Holdings Corp.  The Company was funded through an equity contribution from J.W. ChildsEquity Partners II, L.P., Halifax Capital Partners, L.P. and certain of theiraffiliates.  On June 29, 2001, theCompany’s name was changed toInSight Health Services Holdings Corp. The Company and its former wholly owned subsidiary, InSight HealthServices Acquisition Corp. (“AcquisitionCorp.”), were created to acquireall the outstanding shares of InSight Health Services Corp. (“InSight”).

 

On October 17, 2001, the Companyacquired InSight pursuant to an agreement and plan of merger datedJune 29, 2001, as amended, among the Company, Acquisition Corp. andInSight (the “Acquisition”). Acquisition Corp. was merged with and into InSight, with InSight beingthe surviving corporation and becoming a wholly owned subsidiary of theCompany.  The consolidated operations ofthe Company after the Acquisition are substantially consistent with theoperations of InSight prior to the Acquisition.  In addition, the Company has no operations other than itsinvestment in InSight.  As such, InSightis considered the predecessor to the Company in accordance with RegulationS-X.  Unless the context requiresotherwise, references in this report on Form 10-K to the Company generally willbe to the Company and its subsidiaries, principally InSight.

 

The principalexecutive offices of the Company are located at 26250 Enterprise Court, Suite100, Lake Forest, California 92630, and its telephone number is (949) 282-6000.

 

**CENTERS IN OPERATION**

 

The Company, through InSight and its subsidiaries, provides diagnosticimaging, treatment and related management services in 29 states throughout theUnited States.  The Company has tworeportable segments:  Mobile Divisionand Fixed-Site Division.  The Company’sservices are provided through a network of 86 mobile magnetic resonance imaging(“MRI”) facilities, 11 mobile positron emission tomography (“PET”) facilities,three mobile lithotripsy facilities (collectively, “Mobile Facilities”), 52fixed-site MRI facilities (“Fixed Facilities”), 32 multi-modality fixed-siteimaging centers (“Centers”), two PET fixed-site centers, one LeksellStereotactic Gamma Knife fixed-site treatment center and one radiation oncologyfixed-site center.  An additionalradiation oncology fixed-site center is operated by the Company as part of oneof its Centers.  The Company has asubstantial presence in California, Arizona, New England, the Carolinas,Florida and the Mid-Atlantic states.  Information related to these facilities and the Division in which theyare located as of June 30, 2003 is set forth below:

 
|                   |   | **Mobile Division** |   | **Fixed-Site Division** |   |
|------------------------|--------|---------------------|--------|-------------------------|--------|
| Mobile  MRI facilities |   | 83                  |   | 3                       |   |
| Mobile  PET facilities |   | 10                  |   | 1                       |   |
| Fixed  MRI facilities  |   | 20                  |   | 32                      |   |
| Centers                |   | —              |   | 32                      |   |
| Other  facilities      |   | 4                   |   | 3                       |   |

 

The Mobile Division includes 20 parked Mobile Facilities, each of whichserves a single customer.  TheFixed-Site Division includes four Mobile Facilities as part of the Company’sFixed-Site Division operations in Maine.

 

Subsequent to June 30, 2003, the Company completed an acquisitionof 14 mobile MRI facilities, four mobile PET facilities, three mobile computedtomography (“CT”) facilities and one mobile lithotripsy facility primarilylocated in the Mid-Atlantic states.

 

Certain financial information regarding the Company’s reportablesegments is included within Note 17 of the Notes to the Consolidated FinancialStatements, which are a part of this report.

 

2

----

 

At its Centers, the Companytypically offers other services in addition to MRI, including CT, diagnosticand fluoroscopic x-ray, mammography, diagnostic ultrasound, nuclear medicine,bone densitometry, nuclear cardiology, and cardiovascular services.

 

**DIAGNOSTIC IMAGINGAND TREATMENT TECHNOLOGY**

 

During approximately the last 30 years there has been a major effortundertaken by the medical and scientific communities to develop cost-effectivediagnostic imaging technologies and to minimize the risks associated with theapplication of such technologies. The major categories of diagnostic imagingsystems currently offered in the medical marketplace are MRI systems, CTscanners, PET scanners, digital ultrasound systems, computer-based nucleargamma cameras, conventional x-ray and radiography/fluoroscopy systems, each ofwhich (other than conventional x-ray) represents the marriage of computertechnology and various medical imaging modalities.  Patients exposed to x-rays and to gamma rays employed in nuclearmedicine receive potentially harmful ionizing radiation.  Much of the thrust of product developmentduring the period has been to reduce the hazards associated with conventionalx-ray and nuclear medicine techniques and to develop new, virtually harmlessimaging technologies such as ultrasound and MRI.

 

MRI:Magnetic resonance imaging is a technique that utilizes low energy radiowavesto manipulate protons (usually hydrogen) in the body. MRI systems generate amagnetic field.  Once patients areplaced in the magnetic field, the protons in a patient’s body will tend toalign with the magnetic field.  Radiofrequency (“RF”) waves, produced by a radio antenna coil, which surrounds thebody part to be imaged, are “pulsed” against the magnetic field.  The RF energy is then turned off, and theprotons are observed for different types of behavior, movement or“relaxation.”  Different tissues havedifferent relaxation times, depending on the amount of hydrogen or water ineach proton.  The data on each proton’sbehavior is collected digitally by the system’s computer and then reconstructedinto cross-sectional images in three-dimensional planes of orientation.  The resulting image reproduces soft tissueanatomy (as found in the brain, spinal cord and interior ligaments of bodyjoints such as the knee) with superior clarity, not available by any other currentlyexisting imaging modality.  A typicalMRI examination takes from 20 to 45 minutes. MRI systems are typically pricedin the range of $0.9 million to $2.0 million each, depending upon the systemconfiguration, magnet design and field strength.

 

There are no known hazards tothe general population from magnetic and RF fields of the intensity to which apatient is exposed in a clinical MRI system. Equipment literature recommends that, until further information isavailable, pregnant women should be scanned only under limited circumstances.  Furthermore, MRI magnets may disrupt theoperation of cardiac pacemakers and internal cardio-defibrillators, and mayreact with metal implants utilized in various surgical procedures.  Additionally, some MRI examinations requireinjection of a paramagnetic contrast material, allowing for bettervisualization of the anatomy.  Althoughit is unusual, some patients may develop a significant adverse reaction tothese contrast materials; however, chances of fatalities as a result of suchreaction are remote.  Patients arescreened to safeguard against potential risks, but screening may neverthelessfail to identify the hazard.

 

Because the signals used toproduce magnetic resonance images contain both chemical and structuralinformation, the Company believes this technique has the greatest potential fordiagnostic applications compared to other imaging technology currently inuse.  While existing MRI systemsdemonstrate excellent portrayals of anatomical structures within the humanbody, of even greater significance is the fact that MRI is also sensitive tosubtle differences between tissues. Thus, MRI offers not only the opportunity for highly effective classicaldiagnosis, but also the potential for future monitoring of chemical processeswithin the body.  Recent technologicaladvancements include:  (i) magneticresonance spectroscopy, which can differentiate malignant from benign lesionsin the brain and prostate; (ii) magnetic resonance angiography, which canproduce non-invasive images of blood vessels and obviate the need for invasiveconventional x-ray angiography procedures; and (iii) recent Federal DrugAdministration ("FDA") approval of ultra-high field MRI systems thatoperate at 3.0 Tesla, twice the magnetic field strength compared to the previouslyFDA approved 1.5 Tesla MRI systems. Currently, ultra-high field MRI systems arepredominately in use at major academic centers performing neurologic research(e.g., spectroscopy, magnetic resonance angiography, and brain mapping). Theincreased magnetic field strength provides physicians: (i) improved imagedetail and clarity; (ii) higher magnetic field strength to perform functionalimaging of the neurologic system; and (iii) decreased time necessary to imagethe patient. The clinical applications are continuing to expand as researchcontinues. It is expected in the near future that ultra-high field MRI systemswill be installed in community based imaging centers. Ultra-high field MRIsystems are typically priced in the range of $3.0 million to $3.5 million each,depending upon the system configuration, magnet design and software options.

 

OPEN MRI: Technological advances in software and gradient coil technology for MRIsystems have allowed equipment with lower magnetic field strength and openarchitecture design to offer significantly improved image quality.  Most Open MRI systems use permanentelectromagnetic technology, which substantially lowers both siting and servicecosts, but does not provide images as efficiently as high-field MRIsystems.  The open design allows forstudies not normally possible in conventional MRI systems, includingexaminations of infants, pediatric patients, claustrophobic patients, large orobese patients and patients suffering from post-traumatic stress syndrome.  Open

 

3

----

 

MRI is also capable of conducting musculoskeletal exams that requirethe patient to move or flex, such as kinematic knee studies.  A typical Open MRI non-kinematic exam takesfrom 45 to 90 minutes.  Open MRI systemsare priced in the range of $0.6 million to $1.3 million each.

 

PET: PET scanning involves the administration of a radiopharmaceutical agentwith a positron-emitting isotope and the measurement for the distribution ofthat isotope to create images for diagnostic purposes.  PET scans provide the capability todetermine how metabolic activity impacts other aspects of physiology in thedisease process by correlating the reading from the PET study with otherstudies such as CT or MRI.  PETtechnology has been found highly effective and appropriate in certain clinicalcircumstances for the detection and assessment of tumors throughout the body,the evaluation of certain cardiac conditions and the assessment of epilepsyseizure sites.  The information providedby PET technology often obviates the need to perform further highly invasiveand/or diagnostic surgical procedures. Interest in PET scanning has increased in recent years due to severalfactors including: (i) the expansion of available post processing fusionsoftware that combines a PET image with a CT scan; (ii) increased payorcoverage and reimbursement; (iii) the availability of the isotopes without anin-house cyclotron; and (iv) a growing recognition by clinicians that PET is apowerful diagnostic tool that can be used to evaluate and guide management of apatient’s disease.  PET scanners aretypically priced in the range of $1.0 million to $1.5 million each.  Radiopharmaceutical distribution networkshave been established across the United States to ensure consistentavailability of and access to the isotopes. The development of these networks has made mobile PET a viablebusiness.  There have been recentdevelopments from the equipment manufacturers to integrate a conventional PETscanner with a conventional CT scanner. This new technology is referred to as a"hybrid" PET/CT scanner or a "fusion" scanner. This newtechnology makes it possible to collect both anatomical and biologicalinformation during a single examination. The integrated information improvesthe accuracy of tumor detection and localization compared to a conventional PETor CT scan. PET/CT scanners are typically priced in the range of $1.8 millionto $2.7 million each, depending on system configuration and software options.

 

CT:  CT technology consists of a doughnut-shapedgantry structure into which a patient, resting on a remotely controlled couchassembly, is positioned to scan the anatomical region of interest.  The scanning process is performed by therotation of a high output x-ray tube around the patient.  The x-ray tube emits a thin fan-shaped beamof x-rays that passes through the patient and is absorbed by an array of x-raydetectors located on the opposite side of the patient from the x-ray tube.  The detected x-rays are then converted intodigital measurements of x-ray intensity directly proportional to the density ofthe portion of the patient through which the beam passes.  These digital measurements of x-rayintensity are then processed by a specialized image reconstruction computersystem into a cross-sectional image of the anatomical region of interest.  The patient is then indexed on the couch andanother scan is performed and then another, creating a “stack” ofcross-sectional images constituting the complete diagnostic imagingprocedure.  In the last two years, CTtechnology has made significant advancements by decreasing the slice thicknessof tissue, reducing radiation exposure to the patient, and reducing the time ittakes to acquire the images.  Theadvancements are referred to as multi-detector computerized technology(“MDCT”).  The new MDCT systems permithigh resolution imaging of organs, blood vessels, and coronary arteries.

 

Typical scanning times for a single cross-sectional image are in thehalf second to six second range, depending on the type of CT system andspecific technique being performed.  Acomplete CT examination takes from 10 to 45 minutes, depending on thecomplexity of the examination and number of individual cross-sectional imagesrequired.  CT systems are typicallypriced in the range of $0.3 million to $1.4 million each, depending upon thespecific performance characteristics of the systems.  Based on the fact that CT systems have been commercially marketedfor approximately 30 years, the Company believes that CT is a relatively maturetechnology and, therefore, not subject to significant risk of obsolescence.

 

Certain CT examinations require the injection of aniodine/non-iodine-based contrast material, allowing for better visualization ofthe anatomy.  Although it is veryunusual, some patients may develop a significant adverse reaction to thiscontrast material.  Fatalities as aresult of such reaction have occurred, but are rare.  In an effort to scan only appropriate patients, all patients arerequired to answer a questionnaire, which helps to identify those patients whomay suffer an adverse reaction to this contrast material.

 

ULTRASOUND: Ultrasound systems emit, detect and process high frequency sound wavesto generate images of soft tissues and internal body organs.  The sound waves used in ultrasound do notinvolve ionizing radiation and are not known to cause any harmful effects tothe patient.

 

NUCLEAR MEDICINE:  Nuclear medicine gamma cameras, which are based upon thedetection of gamma radiation generated by radioactive pharmaceuticals injectedor inhaled into the body, are used to provide information about organ functionas opposed to anatomical structure.

 

4

----

 

X-RAY:  X-ray is the most common energy source used in imaging the body and isnow employed in the following three imaging modalities: (i) conventional x-raysystems, the oldest method of imaging, are typically used to image bones andcontrast-enhanced vasculature and organs and constitute the largest number ofinstalled systems; (ii) CT scanners utilize computers to producecross-sectional images of particular organs or areas of the body; and (iii)digital x-ray systems add computer image processing capability to conventionalx-ray systems.

 

MAMMOGRAPHY: Mammography is a low-level conventional examination of the breasts.  Its primary purpose is to detect lesions(abnormal growths) in the breast that may be too small or deeply buried to befelt in regular breast examination. Mammography is also used to detect breast implant ruptures.  The benefits of digital mammography arelower radiation doses to the breast, higher sensitivity to lesions, and reducedprocedure times compared to conventional film mammography.

 

RADIATION ONCOLOGY:  Radiation oncology generally uses external beam radiation from alinear accelerator to treat cancer with ionizing radiation of the same type,but at higher doses, as used for diagnostic x-rays.  In addition to x-rays, certain linear accelerators have the capacityto produce electrons.  While x-rayradiation can penetrate the body a certain distance before delivering itsmaximum dose, and therefore can treat internal structures, electrons have lesspenetrating ability and permit the clinician to treat superficial lesions.  Radiation oncology also includesbrachytherapy, which implants radioactive sources directly into or near atumor.

 

LITHOTRIPSY: Lithotripsy is a non-invasive procedure for the treatment of kidneystones, typically performed on an outpatient basis, that eliminates the needfor lengthy hospital stays and extensive recovery periods associated withsurgery.  Lithotripters shatter kidneystones through the use of extracorporeal shockwaves, following which theresulting kidney stone fragments pass out of the body naturally.

 

BONE DENSITOMETRY:  Bone densitometry, using an advanced technology called DEXA(dual-energy x-ray absorptiometry), safely, accurately and painlessly measuresbone density and the mineral content of bone for the diagnosis of osteoporosisand other bone diseases.  Bonedensitometry uses an extremely low level of radiation and gives a quantifiablemeasurement of the patient’s bone mass. When detected in its earlier stages, osteoporosis and other bonediseases can be treated with new drug therapies that have been shown toeffectively slow or reverse the bone-loss process.

 

GAMMA KNIFE: The Gamma Knife is a radiosurgical device used to treat intracranialneoplasms and vascular anomalies, which are inaccessible or unsuitable for conventionalinvasive surgery.  The Gamma Knife wasdesigned to provide neurosurgeons and radiation therapists with the ability toperform radiosurgery, using high-energy gamma rays, instead of conventionalinvasive techniques (open surgery), thereby generally eliminating the risk ofinfection and intracerebral bleeding. The Gamma Knife delivers a single high dose of ionizing radiationemanating from 201 individual Cobalt 60 sources focused on a common targetproducing an intense concentration of radiation at the target site, destroyingthe lesion while spreading the entry radiation dose uniformly and harmlesslyover the patient’s skull.  The GammaKnife treatment requires no open surgical intervention, no lengthy hospitalstay and no risk of post-surgical bleeding or infection.  When compared to the average length of stayand costs associated with conventional surgery, the Gamma Knife greatly reducesthe cost of neurosurgical treatment. Typical treatment time is approximately 10 to 15 minutes per area ofinterest.  In addition, otherapplications for the Gamma Knife include treatment of patients for chronic painand motion disorders such as Parkinson’s disease, epilepsy and trigeminalneuralgia.  A Gamma Knife systemtypically costs approximately $3.0 million.

 

**BUSINESS DEVELOPMENT**

 

The Company’s objective is to be the leading provider of outsourceddiagnostic imaging services in its target markets by further developing andexpanding its regional diagnostic imaging networks that emphasize quality ofcare, produce cost-effective diagnostic information and provide superiorservice and convenience to its customers. The strategy is focused on three components.   Firstly, the Company intends to maximize utilization of itsexisting facilities by:  (i) broadeningits physician referral base and generating new sources of revenues throughselective marketing activities; (ii) focusing its marketing efforts onattracting additional managed care customers; (iii) focusing on its ability toconvert Mobile Facilities to Fixed Facilities; (iv) expanding current imagingapplications of existing modalities to increase overall procedure volume; (v)adding new modalities such as CT, ultrasound and bone densitometry at some ofits existing facilities to realize economies of scale and increase overallprocedure

 

5

----

 

volume; and (vi) maximizing cost efficiencies through increasedpurchasing power and continued reduction of expenses.

 

Secondly, the Company intends to pursue expansion opportunities withinits existing regional networks by opening new Fixed Facilities, Centers anddeveloping Mobile Facilities where attractive returns on investment can beachieved and sustained.  In addition,management believes that Mobile PET Facilities present a growth opportunity dueto increased physician acceptance of PET as a diagnostic tool, expandedMedicare coverage of PET procedures and favorable reimbursement levels.  The Company also intends to pursue joint ventureopportunities with hospitals because management believes that they have thepotential to provide the Company with a steady source of procedure volume.  Management believes that this will be anarea for additional growth because the Company expects hospitals and otherhealth care providers to respond to recent federal health care regulatorychanges by outsourcing radiology services to imaging centers that are jointlyowned and managed with third parties, notwithstanding the Special AdvisoryBulletin issued by the Office of the Inspector General ("OIG") onApril 23, 2003 that raised concerns throughout the health care industryabout the legality of provider joint ventures and other contractualagreements.  According to the OIGBulletin, the suspect arrangement involves a health care provider expandinginto a related service line by contracting with an existing provider of thatservice (“Supplier”) to serve the provider’s existing patient population.  In the OIG’s view, the provider contractsout the entire operation of a related line of business to what would otherwisebe a competitor.  The OIG asserts thatthe provider’s share of the profits from the new venture constitutesremuneration for the referral of the provider’s Medicare/Medicaid patients tothe Supplier and may violate the federal anti-kickback statute.  The Company believes that providerscontemplating participation in joint ventures will be carefully reviewing theOIG’s Bulletin to ensure compliance, but that the Bulletin will not have theeffect of prohibiting joint ventures between providers.

 

Finally, the Company intends to continue to increase its marketpresence in its existing regional markets where it can increase economies ofscale or new markets where it believes it can establish a strong regionalnetwork, through disciplined and strategic acquisitions.  The Company believes it is well positionedto capitalize on the ongoing consolidation of the imaging industry.  The Company believes that the expansion ofits business through such acquisitions is a key factor in improving profitability.  Generally, acquisition opportunities areaimed at increasing revenues and operating income, and maximizing utilizationof existing capacity and increasing economies of scale.  Incremental operating income resulting fromfuture acquisitions will vary depending on geographic location, whetherfacilities are Mobile or Fixed, the range of services provided and theCompany’s ability to integrate the acquired businesses into its existinginfrastructure.  Since 1996, the Companyhas completed 14 acquisitions.  Noassurance can be given, however, that the Company will be able to identifysuitable acquisition candidates and thereafter complete such acquisitions onterms acceptable to the Company.   Inconnection with the Acquisition and related financing transactions discussedbelow, InSight had a $75 million delayed draw term loan facility which was usedto complete the acquisitions discussed below. Additionally, the Company has a $50 million second delayed-draw termloan facility available until January 31, 2005 to pursue acquisitionopportunities.  As of August 29,2003, there was $25 million of availability under this facility to completeacquisitions.

 

In fiscal 2001, InSight opened a joint venture Fixed Facility in MarinaDel Rey, California, which was financed with internally generated funds and acapital lease; and a joint venture PET fixed-site center in Louisville,Kentucky, which was financed with outside financing.  In fiscal 2003, the Company sold its interest in the PETfixed-site center.

 

In fiscal 2002, InSight opened a joint venture Fixed Facility in Largo,Florida, which was financed with an operating lease; and a joint venture FixedFacility in Bangor, Maine, which was financed with internally generated funds.

 

In fiscal 2003, the Company opened a joint venture Fixed Facility inEncinitas, California, which was financed with internally generated funds and acapital lease; a Fixed Facility in Lemont, Illinois, which was financed withinternally generated funds; a Fixed Facility in Fremont, California, which wasfinanced with internally generated funds; and a joint venture Fixed Facility inBrunswick, Maine, which was financed with internally generated funds.

 

In fiscal2003, the Company acquired 13 diagnostic imaging centers located in SouthernCalifornia.  The acquisition consistedof certain tangible and intangible assets, including diagnostic imagingequipment, customer contracts and other agreements.  The aggregate purchase price was approximately $47 million, whichincluded approximately $39 million paid to the seller and the payment of debtand transaction costs of approximately $8 million, and is

 

6

----

 

subject tocertain post-closing adjustments.  TheCompany borrowed $50 million under its $75 million delayed-draw term loanfacility to fund the purchase price and future capital expenditures related tothe acquisition.

 

OnAugust 1, 2003, the Company acquired 22 Mobile Facilities primarilylocated in the Mid-Atlantic states.  Theacquisition consists of certain tangible assets, including diagnostic imagingequipment, customer contracts and other agreements.  The aggregate purchase price was approximately $48.5 million,which includes approximately $28.1 million paid to the seller and the paymentof debt and transaction costs of approximately $20.4 million, and is subject tocertain post-closing adjustments.  TheCompany borrowed the remaining $25 million under its $75 million delayed-drawterm loan facility and $25 million under the $50 million second delayed-drawterm loan facility to fund the purchase price and future capital expendituresrelated to the acquisition.

 

On August 29, 2003, theCompany acquired a CT Fixed Facility located in Hammonton, New Jersey, whichwas financed with internally generated funds.

 

**GOVERNMENT REGULATION**

 

The health care industry ishighly regulated and changes in laws and regulations can be significant.Changes in the law or new interpretation of existing laws can have a materialeffect on permissible activities of the Company, the costs of doing businessand the amount of reimbursement by government and private payors.  The federal government and all states inwhich the Company operates regulate various aspects of the Company’s business.Failure to comply with these laws could adversely affect the Company’s abilityto receive reimbursement for its services and could subject the Company and itsofficers and agents to civil and criminal penalties.

 

FEDERAL FALSECLAIMS ACT: There has been an increase in actions brought under the federal FalseClaims Act and, in particular, under the Act’s *qui tam or*“whistleblower”provisions.  These provisions allow aprivate individual to initiate an action in the name of the government allegingthat the defendant has submitted false claims seeking payment from the federalgovernment.  After the whistleblowerinitiates the lawsuit, the government must decide whether to intervene and takeover prosecution of the case.   Duringthe period when the government is determining whether to intervene, allpleadings remain under seal and the pendency of the lawsuit is kept secret,even from the named defendants.  If thegovernment declines to join the lawsuit, the whistleblower may choose to pursuethe case without the government’s assistance.  In that event, however, the government must be kept apprised ofthe progress of the lawsuit, and retains the right to intervene at a laterstage.

 

An entity found to have violated the federal False Claims Act must paythree times the actual damages sustained by the government, plus civilpenalties of $5,500 to $11,000 for each separate false claim, as well as thegovernment’s attorneys’ fees.  Toestablish liability, the government (or the whistleblower) must prove that thedefendant acted “knowingly.”  Under theAct, false claims are submitted knowingly when the provider has actualknowledge of their falsity or acts with deliberate ignorance or recklessdisregard of their truth or falsity. Simple negligence, however, should not give rise to liability. Thus, ifan entity knowingly submits or causes another person to submit a false claim tothe government, it may be liable under the Act.  Assuming the government could prove the requisite intent on thepart of the Company, examples of actions which may lead to potential FalseClaims Act exposure are:  (i) failure tocomply with the many technical billing requirements applicable to the Company’sMedicare and Medicaid business; (ii) failure to comply with Medicare requirementsconcerning the circumstances under which a hospital, rather than the Company,must bill Medicare for diagnostic imaging services the Company provides tooutpatients treated by the hospital; (iii) failure of the Company’s hospitalcustomers to accurately identify and report the Company’s reimbursable andallowable services to Medicare; (iv) failure to comply with the prohibitionagainst billing for services ordered or supervised by a physician who isexcluded from any federal health care programs, or the prohibition againstemploying or contracting with any person or entity excluded from any federalhealth care programs; (v) failure to comply with the Medicare physiciansupervision requirements for the services the Company provides, or the Medicaredocumentation requirements concerning such physician supervision; (vi)violations of the Anti-kickback Statute or Stark Law (see “Anti-kickbackStatutes” and “Stark II; State Physician Self-Referral Laws”); and (vii) thepast conduct of the businesses the Company has acquired.

 

Whether or not the federal government intervenes in the False ClaimsAct lawsuit, it is entitled to the lion’s share of any recovery.   In a successful action, the whistlebloweris generally awarded no less than 15%, but no more than

 

7

----

 

30%, of the recovery.  Thepercentage to which the whistleblower is entitled varies, depending on whetherthe government intervened in the case and other factors.

 

Recently, the number of False Claims Act suits brought against healthcare providers by government regulators and private individuals has increasedsubstantially. In addition, various states are considering or have enacted lawsmodeled after the federal False Claims Act. If a False Claims Act case is brought against the Company, even if it isdismissed with no judgment or settlement, the Company could incur substantiallegal fees and other costs relating to an investigation or litigation. TheCompany strives to ensure that its documentation is complete, its billing andcoding are accurate, and that all aspects of its operations are consistent withregulatory requirements.  See “Item1.  Business - Compliance Program.”  However, the costs of defending False ClaimsAct lawsuits, as well as the sanctions that may be imposed under the Act andthe diversion of management resources could adversely affect the Company’sbusiness, financial condition and results of operations.

 

ANTI-KICKBACK STATUTES:  The Company is subject to numerous federaland state laws governing financial and other arrangements between and amonghealth care providers, payors and other industry participants.   One of the most prominent of these laws isthe federal anti-kickback statute.  Thisstatute prohibits the knowing and willful solicitation, offer, payment oracceptance of any remuneration, direct or indirect, in cash or in kind, inreturn for, or to induce the referral of items or services covered by Medicare,Medicaid and certain other governmental health care programs.  To establish anti-kickback liability thegovernment must prove that the defendant acted intentionally.  Violation of the anti-kickback statute mayresult in criminal and civil penalties and exclusion from Medicare, Medicaidand other federal health care programs.

 

As noted above, some courts have permitted False Claims Actwhistleblowers to file actions based on alleged anti-kickback violations.  In addition, many states have enactedsimilar statutes, applying the kickback prohibitions outside the context offederally sponsored health care benefit programs.

 

In recent years, there has been increasing scrutiny by law enforcementauthorities, the Department of Health and Human Services (“HHS”), the courtsand Congress of financial arrangements between health care providers andpotential referral sources to ensure that such arrangements do not violate theanti-kickback statute.   The statute isbroadly worded and several courts have liberally construed its provisions.  Consequently, many common industry practicescould violate the statute if undertaken with the requisite intent to induce thereferral of Medicare or Medicaid business.

 

Not surprisingly, the anti-kickback statute has been applied to a widerange of financial arrangements, including under certain circumstances:  (i) distributions of partnership andcorporate profits to investors who refer federal health care program patientsto a corporation or partnership in which they have an ownership interest; and(ii) service contracts and equipment leases that are intended, even if only inpart, to provide direct or indirect remuneration for patient referrals orsimilar opportunities to furnish items or services reimbursable by a federalhealth care program. The anti-kickback statute, however, does containexceptions and the Secretary of HHS has promulgated several regulatory “safeharbors”.  Arrangements that meet thespecific requirements of a safe harbor are protected from liability under theanti-kickback statute.  These safe harborsare narrowly drawn and many financial relationships common in the industry donot qualify for protection.  The failureof an arrangement to fit within a safe harbor, however, does not mean that thearrangement is illegal.  Rather, sucharrangements are subject to a traditional facts and circumstances analysis todetermine whether they run afoul of the anti-kickback statute’s prohibitions.

 

The Company believes that its operations materially comply with thefederal anti-kickback statute and similar regulatory prohibitions.  However, because of the breadth of thestatute and the narrowly drawn exceptions and safe harbors, not all of theCompany’s arrangements fit within an exception or qualify for safe harborprotection.  Compliance with the safeharbor requirements, however, is not mandatory and the Company believes thatits arrangements that do not fit within a safe harbor are nonethelessappropriate.  Because the anti-kickbackstatute and similar laws have been broadly interpreted, there can be noassurance that law enforcement officials or others will not challenge theCompany’s operations under these statutes. Should any anti-kickback investigation be initiated or claim filed, itwould divert the attention of management, negatively affecting theCompany.  Moreover, the costs ofdefending such a claim, as well as any sanctions that may be imposed on theCompany, could adversely affect the Company’s business, financial condition andresults of operations.

 

8

----

 

CIVIL MONEY PENALTY LAW AND OTHER FEDERAL STATUTES:  The Civil Money Penalty (“CMP”) law covers avariety of practices.  It provides ameans of administrative enforcement of the anti-kickback statute, and prohibitsfalse claims, claims for medically unnecessary services, violations of Medicareparticipating provider or assignment agreements and other practices.  The statute gives the OIG the power to seeksubstantial civil fines, exclusion and other sanctions against providers orothers who run afoul of the CMP prohibitions.

 

In addition to the anti-fraud statutes described above, in 1996,Congress created the new federal crimes of health care fraud and making falsestatements relating to health care matters.  The health care fraud statute prohibits knowingly and willfullyexecuting a scheme to defraud any health care benefit program, includingprivate payors.  A violation of thisstatute is a felony and may result in fines, imprisonment or exclusion fromgovernment sponsored programs such as the Medicare and Medicaid programs.  The false statements statute prohibitsknowingly and willfully falsifying, concealing or covering up a material factor making any materially false, fictitious or fraudulent statement inconnection with the delivery of or payment for health care benefits, items orservices, including those provided by private payors.  A violation of this statute is a felony and may result in finesor imprisonment.

 

The Company believes that its operations materially comply with the CMPlaw and the new health care fraud statutes. These prohibitions, however, are broadly worded and there is limitedauthority interpreting their parameters. Therefore, there can be no assurance that the government will not pursuea claim against the Company based on these statutes.  Such a claim would divert the attention of management and could resultin substantial penalties which could adversely affect the Company’s business,financial condition and results of operations.

 

HEALTHINSURANCE PORTABILITY AND ACCOUNTABILITY ACT (“HIPAA”):  In 1996, Congress passed HIPAA.  Although the main focus of HIPAA was to makehealth insurance coverage portable, HIPAA has become a short-hand reference tonew standards for electronic transactions and privacy and security obligationsimposed on providers and others who handle personal health information.    HIPAA requires most health care providersto adopt standard formats for common electronic transactions with health plans,and to maintain the privacy and security of individual patients’ healthinformation.  The privacy standards wentinto effect on April 14, 2003, the electronic standards for transactionswill go into effect on October 16, 2003 and the security standards will gointo effect by February 2005.  Aviolation of HIPAA’s privacy provisions may result in criminal and civilpenalties, which could adversely affect the Company’s business, financialcondition and results of operations.

 

In connection with the implementation of the electronic transactions,security and privacy standards mandated by HIPAA, the Company expects to spendapproximately $1.5 million (of which approximately $0.5 million had been spentas of June 30, 2003) to make necessary software upgrades to its radiologyinformation system to make the system conform (i) with the privacy standards(which upgrades were completed in April 2003), (ii) with the electronicstandards by October 2003, and (iii) with the security standards byFebruary 2005.

 

STARK II;STATE PHYSICIAN SELF-REFERRAL LAWS:  The federal Physician Self-Referral or“Stark” law prohibits a physician from referring Medicare patients for certain“designated health services” (“DHS”) to an entity with which the physician (oran immediate family member of the physician) has a financial relationshipunless an exception applies.  Inaddition, the receiving entity is prohibited from billing for services providedpursuant to the prohibited referral.

 

DHS under Stark includeradiology services (MRI, CT, x-ray, ultrasound and others), radiation therapy,inpatient and outpatient hospital services and several other services.  A violation of the Stark law does notrequire a showing of intent.  If aphysician has a financial relationship with an entity that does not qualify foran exception, the referral of Medicare patients to that entity for DHS is prohibitedand, if the entity bills for such services, the Stark sanctions apply.

 

Sanctions for violating Starkinclude denial of payment, mandatory refunds, civil money penalties and /orexclusion from the Medicare program. In addition, some courts have allowedfederal False Claims Act lawsuits premised on Stark Law violations.

 

The federal Stark Lawprohibition is expansive, its statutory language ambiguous, and the guidancefrom the regulators often contradictory. Consequently the statute has been notoriously difficult to interpret.   In 1995, the

 

9

----

 

Health Care FinancingAdministration (recently renamed the Centers for Medicare and Medicaid Services(“CMS”)) published final regulations interpreting the Stark prohibition asapplied to clinical laboratory services. In 1998, CMS released proposed regulations interpreting Stark as appliedto all DHS.  In 2001, CMS finallypublished a portion of the final Stark regulations.  These regulations went into effect in January 2002.  On May 27, 2003, HHS announced thatthey may propose a rule to amend the definition of “radiology and certain otherimaging services” and “radiation therapy services and supplies” in reference toDHS, to include diagnostic and therapeutic nuclear medicine and supplies, andthat this expansion of DHS would become effective with the publication of thesecond phase of the final Stark regulations in July 2003.  The second phase of the final Starkregulations has yet to be published, and CMS has not given a definitive datefor publication.  With each set ofregulations, CMS’ interpretation of the statute has evolved.  This has resulted in considerable confusionconcerning the scope of the referral prohibition and the requirements of thevarious exceptions. It is noteworthy, however, that the agency has taken theposition that the Stark Law is self-effectuating and does not requireimplementing 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 directlyprohibit referral of Medicaid patients, but rather denies federal financialparticipation to state Medicaid programs for services provided pursuant to atainted referral.  Thus, Medicaidreferrals are subject to whatever sanctions the relevant state hasadopted.  Several states in which theCompany operates have enacted or are considering legislation that prohibits“self-referral” arrangements or requires physicians or other health careproviders to disclose to patients any financial interest they have in a healthcare provider to whom they refer patients. Possible sanctions for violating these state statutes include loss oflicensure, civil fines and criminal penalties. The laws vary from state to state and seldom have been interpreted bythe courts or regulatory agencies. Nonetheless, strict enforcement of these requirements is likely.

 

The Company believes itsoperations materially comply with the federal and state physician self-referrallaws.  However, given the ambiguity ofthese statutes, the uncertainty of the regulations and the lack of judicialguidance on many key issues, there can be no assurance that the Stark Law orother physician self-referral regulations will not be interpreted in a mannerthat could adversely affect the Company’s business, financial condition andresults of operations.

 

CORPORATE PRACTICE OF MEDICINE; FEE-SPLITTING:  Some states prohibit the practice ofmedicine or the sharing or splitting of professional revenues by non-physiciansor entities other than licensed facilities or professional corporations.  While some states have repealed theseprohibitions, others have reaffirmed maintenance of such prohibitions.  The Company believes that the structure andnature of its relationships and arrangements materially comply with the statelaws prohibiting the “corporate practice of medicine” and fee-splitting in thestates in which the Company does business; however, given the ambiguity of manyof these statutes and the lack of judicial guidance in many states, there canbe no assurance that any of these prohibitions could adversely affect theCompany’s business, financial condition and results of operations.

 

FDA:  FDA has issued requisite approvals for allof the MRI, CT, PET, lithotripsy and Gamma Knife systems used by theCompany.  With the exception of certainmammography facilities, the Company believes that no further FDA approval isrequired in connection with equipment currently in operation or proposed to beoperated. Under regulations issued by the FDA pursuant to the MammographyQuality Standards Act of 1992, all mammography facilities must have acertificate issued by the FDA.  In orderto obtain a certificate, mammography facilities must be accredited by an FDAapproved accreditation body (a private, non-profit organization or stateagency) or other entity designated by the FDA.

 

Mammography facilities must also comply with FDA’s mammographystandards, which include annual inspections by an FDA approved accreditation bodyor FDA designated entity.  Compliancewith FDA mammography quality standards, which apply to diagnostic and screeningmammography, is also required for Medicare reimbursement.  Congress has extended Medicare benefits toinclude coverage of screening mammography.

 

Although all of the Company’s facilities that provide mammographyservices currently are accredited by the Mammography Accreditation Program ofthe American College of Radiology, an FDA approved accreditation body,

 

10

----

 

and the Company anticipates continuing to meet the requirements foraccreditation, the withdrawal of such accreditation could result in revocationor suspension of certification by the FDA, ineligibility for Medicarereimbursement and sanctions, including monetary penalties.

 

RADIOLOGIST AND FACILITY LICENSING:  The radiologists with whom the Companycontracts to provide professional services are subject to licensing and relatedregulations by the states, including registrations relating to the use ofradioactive materials.  The Companyrequires its radiologists to maintain appropriate licensure andregistrations.  In addition, some statesalso impose licensing or other requirements on the Company or its facilities,and other states may impose similar requirements in the future.  Some local authorities also require theCompany to obtain various licenses, permits and approvals.  The Company believes that it has obtainedall material licenses and permits; however, no assurance can be made eitherthat the criteria governing licensing or permitting will not evolve or thatadditional laws and licensing requirements governing the Company’s facilitieswill not be enacted.  Such changes couldadversely affect the Company’s business, financial condition and results ofoperations.

 

LIABILITY INSURANCE:  The hospitals and physicians who use the Company’s diagnosticimaging systems are involved in the delivery of health care services to thepublic and, therefore, are exposed to the risk of liability claims. TheCompany’s position is that it does not engage in the practice of medicine.  The Company provides only the equipment andtechnical components of diagnostic imaging, including certain limited nursingservices, and has not experienced any material losses due to claims formalpractice.  Nevertheless, claims formalpractice have been asserted against the Company in the past and any futureclaims, if successful, could entail significant defense costs and result insubstantial damage awards to the claimants, which may exceed the limits of anyavailable insurance coverage.  TheCompany maintains professional liability insurance in amounts it believes areadequate for its business of providing diagnostic imaging, treatment andmanagement services.  In addition, theradiologists or other health care professionals with whom the Company contractsare required by their contracts to carry adequate medical malpracticeinsurance.  Successful malpracticeclaims asserted against the Company, to the extent not covered by the Company’sliability insurance, could adversely affect the Company’s business, financialcondition and results of operations.

 

INDEPENDENTDIAGNOSTIC TREATMENT FACILITIES:  CMS has established a category of Medicareprovider referred to as Independent Diagnostic Treatment Facilities(“IDTFs”).  Under the IDTF regulations,imaging centers have the option to participate in the Medicare program aseither IDTFs or medical groups.  Most ofthe Company’s Centers and Fixed Facilities are IDTFs.  In addition, since the IDTF designation is relatively new, it isunclear to what extent and in what manner IDTFs will be monitored by CMS, butit is probable that CMS will exercise increased oversight of IDTFs.   This could adversely affect the Company’sbusiness, financial condition and results of operations.

 

CERTIFICATESOF NEED:  Somestates require hospitals and certain other health care facilities and providersto obtain a certificate of need (“CON”) or similar regulatory approval before:(i) establishing certain health care operations or services; (ii) incurringcertain capital expenditures; and/or (iii) the acquisition of major medicalequipment including MRI, PET and Gamma Knife systems. CON regulations may limitor preclude the Company from providing diagnostic imaging services or systemsin certain states. The Company believes it has complied or will comply withapplicable CON requirements in those states where it operates.  Nevertheless, a significant increase in thenumber of states regulating the Company’s business within the CON or statelicensure framework could adversely affect the Company’s business, financialcondition and results of operations. Conversely, repeal of existing CON regulations in jurisdictions wherethe Company has obtained or operates under a CON could also adversely affectthe Company’s business, financial condition and results of operations asbarriers to entry are reduced or removed. This is an area of continuing legislative activity, and there can be noassurance that the CON and licensing statutes will not be modified in thefuture in a manner which could adversely affect the Company’s business,financial condition and results of operations.

 

**REIMBURSEMENT OF HEALTH CARE COSTS**

 

MEDICARE: The Medicare program is a federal health insurance program that providescertain health care benefits to beneficiaries who are 65 years of age or older,disabled or otherwise qualified to receive coverage.  “Part A” of the Medicare program provides reimbursement forinpatient hospital and other facility services and “Part B” of the

 

11

----

 

program provides reimbursement for certain physician, diagnostic andother outpatient services.    Providersare paid by the federal government in accordance with regulations promulgatedby the HHS.  Generally, providers mustaccept Medicare payments as payment in full and can recover only limiteddeductible and co-insurance amounts from Medicare beneficiaries.  Under Medicare Part B, the reimbursementavailable for radiology services includes a component for the professionalservices (the “professional component”) as well as a “technical component” foroverhead expenses such as the facilities, equipment and non-physician staff.

 

CMS has implemented a newprospective payment system for hospital outpatient services (“OPPS”). EffectiveAugust 1, 2000, Medicare began paying hospitals for outpatient servicesbased on ambulatory payment classification (“APC”) groups rather than on ahospital’s costs.  Because the new OPPSappeared to have a severe adverse economic effect on hospitals, Congressenacted additional legislation in the Balanced Budget Refinement Act of 1999(“BBA”) to soften the negative financial effects for a specific period of time(through 2003).   Under the BBA,hospitals may receive additional payments for new technologies, transitionalpass-through payments for innovative medical devices, drugs and biologics,outlier adjustments and transitional payment corridors.

 

As the BBA transitionalpayments phase out or expire, some of the Company’s hospital customers maydecide to discontinue or restructure their arrangements with providers ofdiagnostic imaging services.  This mayhave a material adverse effect on the Company’s operations.   In addition, the Benefits Improvement andProtection Act of 2000 (“BIPA”) included certain provisions requiring CMS torevise the APCs to separate contrast-enhanced diagnostic imaging proceduresfrom those that are not contrast-enhanced. Effective January 1, 2002, CMS reduced payment for unenhanceddiagnostic procedures and increased payment for contrast-enhanced diagnosticprocedures.  The extent to which thisdisparity in reimbursement will continue is unclear.

 

Congressional and regulatory actions reflect industry-wide cost containmentpressures which the Company believes will affect all health care providers forthe foreseeable future. CMS has indicated that it will continue to evaluatediagnostic imaging technical component reimbursement.  There can be no assurance that Medicare Part B payments fordiagnostic imaging services will not be further reduced in the future, whichcould adversely affect the Company’s business, financial condition and resultsof operations.

 

In order for the Company’shospital customers to receive payment from Medicare with respect to theCompany’s Mobile Facilities, the services must be furnished in a“provider-based” department or be a covered service furnished “underarrangements.”  On April 7, 2000,Medicare published new rules establishing financial, clinical andadministrative criteria for “provider-based” departments, as well as newrequirements for management contracts for “provider-based” departments. Theserules were amended on August 1, 2002 and impose stricter standards forservices provided offsite of a hospital than for services provided on ahospital campus.  The Company’s servicesto hospitals may not meet Medicare’s new standards for being a “provider-based”service.  If the Company’s services tohospital customers are not furnished in a “provider-based” setting, theservices would not be covered by Medicare unless they are found to be a servicefurnished “under arrangements” to a hospital. The extent to which “under arrangements” services may be covered byMedicare when they do not meet the “provider-based” standards is unclear.  In BIPA, Congress “grandfathered” untilOctober 1, 2002 all sites that were paid as “provider-based” sites as ofOctober 1, 2000.  TheAugust 2002 revisions to the regulations extended the compliance deadlinefor “existing services” to the first cost reporting period for a hospital thatbegins after July 1, 2003.  Duringthe extended grandfather period, existing services continue to be treated as“provider-based” and are not subject to penalties for past non-compliance solong as they either have a prior written determination of “provider-based”status, or apply for “provider-based” status before expiration of the extendedgrandfather period.  As the Medicarerules are clarified it may be necessary for the Company to modify the contractsit has with hospital customers or to take other steps that may affect theCompany’s contract services revenues or the manner in which the Companyfurnishes services to its hospital customers. These changes could adversely affect the Company’s business, financialcondition and results of operations.

 

MEDICAID: The Medicaid program is a jointly-funded federal and state programproviding coverage for low-income persons.  Apart from certain federally mandated basic services, the servicesoffered and reimbursement methods vary from state to state. In many states,Medicaid reimbursement is patterned after the Medicare program; however, anincreasing number of states have established or are establishing paymentmethodologies intended to provide health care services to Medicaid patientsthrough managed care organizations.  Inaddition, in a number of

 

12

----

 

states, state Medicaid agencies have refused to permit entitiesorganized as IDTFs (such as most of the Company’s Centers and Fixed Facilities)to participate in the Medicaid program because the volume of services that theCompany provides to Medicaid patients is limited.

 

MANAGED CARE:Health maintenance organizations (“HMOs”), preferred provider organizations(“PPOs”) and other managed care organizations attempt to control the cost ofhealth care services, including imposing lower payment rates, limiting servicesor mandating less costly treatment alternatives.  Managed care contracting has become very competitive andreimbursement schedules are at or below Medicare reimbursement levels.  The development and expansion of HMOs, PPOsand other managed care organizations within the Company’s regional networkswill increase payor control over patients’ access to diagnostic imagingservices, the selection of the service provider and the amount ofreimbursement.  This could have anegative impact on utilization of the Company’s services in certain markets and/oraffect the revenue per procedure which the Company can collect.  The competition among health care providersfor contracts with all types of managed care organizations has resulted in anaverage term of such contracts of between one and three years.  See “Item 1.  Business - Customers and Contracts”.

 

Some states have adopted expanded laws or regulations restricting theassumption of financial risk by health care providers contracting with healthplans.  While the Company is notcurrently subject to such regulations, it or its customers may in the future berestricted in their ability to assume financial risk, or may be subjected toreporting requirements if they do so. Any such restrictions could negatively affect the Company’s contractingrelationships with health plans and could adversely affect the Company’sbusiness, financial condition and results of operations.

 

PRIVATE INSURANCE:  Private health insurance programs generally have authorizedpayment for the Company’s services on satisfactory terms.  If Medicare reimbursement is reduced, theCompany believes it is likely that private health insurance programs willfollow suit, which could adversely affect the Company’s business, financialcondition and results of operations.

 

**SALES AND MARKETING**

 

The Company selectively invests in marketing activities to obtain newsources of revenues for the Company, expand business relationships, growrevenues at its existing facilities and maintain present business alliances andcontractual relationships.  Marketingactivities for the Company’s Centers and Fixed Facilities include educationprograms for physicians and physician offices on new applications and uses oftechnology, customer service programs and contracting with insurance payors forvolume discounts.  Marketing activitiesfor the Company’s Mobile Facilities include direct marketing to hospitals anddeveloping leads through current customers, equipment manufacturers and othervendors, and education programs for physicians associated with hospitalcustomers.

 

**COMPETITION**

 

The health care industry in general, and the market for diagnosticimaging services in particular, is highly competitive and fragmented, with onlya few national providers.  The Companycompetes principally on the basis of its reputation for productive andcost-effective quality services.  TheCompany’s operations must compete with groups of radiologists, establishedhospitals and certain other independent organizations, including equipmentmanufacturers and leasing companies that own and operate imagingequipment.  The Company will continue toencounter substantial competition from hospitals and independent organizations,including Alliance Imaging, Inc., Shared Medical Services, Cardinal Health,Inc., HealthSouth Corporation, Medical Resources, Inc., MedQuest, Inc.,Radiologix, Inc., and certain of their affiliates.  Some of the Company’s direct competitors that provide contractdiagnostic imaging services may have access to greater financial resources thanthe Company.

 

Certain hospitals, particularly the larger hospitals, may be expectedto directly acquire and operate imaging and treatment equipment on-site as partof their overall inpatient servicing capability, assume the associatedfinancial risk, employ the necessary technologists and satisfy applicable CONand licensure requirements, if any. Historically, smaller hospitals have been reluctant to purchase imagingand treatment equipment.  Thisreluctance, however, has in the past encouraged the entry of start-up venturesand other established business operations into the diagnostic imagingbusiness.  As a result, there have beenperiods in the recent past when there has been significant excess capacity inthe diagnostic imaging business in the United States, which can negativelyaffect utilization and

 

13

----

 

reimbursement.   In addition,some physician practices that have not purchased imaging equipment may decideto do so, in light of the flexibility provided by the final PhysicianSelf-Referral regulations adopted in January 2001 and the increasedavailability of lower-cost specialty MRI systems and in so doing would competewith the Company.

 

**CUSTOMERS ANDCONTRACTS**

 

The Company’s revenues areprimarily generated from contract services and patient services.  Contract services revenues are generallyearned from services billed to a hospital or other health care provider whichinclude: (i) fee for-service arrangements in which revenues are based upon acontractual rate per procedure; (ii) equipment rental in which revenues are generallybased upon a fixed rental amount; and (iii) management fees.   Contract services revenues are primarilyearned through Mobile Facilities and are generally paid pursuant to contractswith a life span of up to five years.

 

Patient services revenues aregenerally earned from services billed directly to patients or third-partypayors (generally managed care organizations, Medicare, Medicaid, commercialinsurance carriers and workers’ compensation funds), on a fee-for-service basisand are primarily earned through Centers, Fixed Facilities and certain MobileFacilities.

 

The Company’s Fixed Facilitiesand Centers are principally dependent on the Company’s ability (either directlyor indirectly through its hospital customers) to attract referrals from physiciansand other health care providers representing a variety of specialties.  The Company’s eligibility to provide servicein response to a referral is often dependent on the existence of a contractualarrangement with the referred patient’s insurance carrier (primarily if theinsurance is provided by a managed care organization).  The Company currently has in excess of 1,000contracts with managed care organizations for diagnostic imaging servicesprovided at the Company’s Fixed Facilities and Centers primarily on adiscounted fee-for-service basis. Managed care contracting has become very competitive and reimbursementschedules are at or below Medicare reimbursement levels.  A significant decline in referrals and/orreimbursement rates would adversely affect the Company’s business, financialcondition and results of operations. See “Item 1.  Business - Reimbursement of Health Care Costs” and “ManagedCare”.

 

**DIAGNOSTIC IMAGINGAND OTHER EQUIPMENT**

 

As of June 30, 2003, the Company has technologically advanced,state-of-the-art diagnostic imaging equipment. The Company owns or leases 218 diagnostic imaging and treatment systems,of which 152 are conventional MRI systems, 23 are Open MRI systems, 24 are CTscanners, 13 are PET scanners, three are lithotripters, two are radiationoncology systems, and one is a Gamma Knife. The Company owns 191 of its imaging and treatment systems, has capitalleases for 25 systems and has operating leases for the remaining two systems.  Of the Company’s 152 conventional MRI systems,80% have magnet strength of 1.5 Tesla and 16% have magnet strength of 1.0Tesla.  Currently, the industry standardmagnet strength for fixed and mobile MRI systems is 1.5 Tesla.  The Company is in the process of upgradingor replacing its remaining conventional MRI systems from magnet strengths ofless than 1.0 Tesla to magnet strengths of at least 1.0 Tesla.

 

The Company continues to evaluate the mix of its diagnostic imagingequipment in response to changes in technology and to the surplus capacity inthe marketplace.  The overalltechnological competitiveness of the Company’s equipment continues to improvethrough upgrades, disposal and/or trade-in of older equipment and the purchaseor execution of leases for new equipment.

 

Several substantial companies are presently engaged in the manufactureof MRI (including Open MRI), PET, CT and other diagnostic imaging equipment,including General Electric Company (“GE”), Hitachi Medical Systems, SiemensMedical Systems, and Phillips Medical Systems. The Company maintains goodworking relationships with many of the major manufacturers to better ensure anadequacy of supply as well as access to those types of diagnostic imagingsystems which appear most appropriate for the specific diagnostic or treatmentcenter to be established.

 

14

----

 

**COMPLIANCE PROGRAM**

 

The Company voluntarily implemented a program to monitor compliancewith federal and state laws and regulations applicable to health careentities.  The Company has appointed acompliance officer who is charged with implementing and supervising thecompliance program, which includes a code of ethical conduct for the Company’semployees and affiliates and a process for reporting regulatory or ethicalconcerns to the compliance officer, including a toll-free telephonehotline.  Management believes that theCompany’s compliance program meets the relevant standards provided by theOIG.  An important part of thecompliance program consists of conducting periodic reviews of various aspectsof the Company’s operations.  Thecompliance program also contemplates mandatory education programs designed tofamiliarize the Company’s employees with the regulatory requirements andspecific elements of the compliance program.

 

**EMPLOYEES**

 

As of August 29, 2003, theCompany had approximately 1,400 full-time, 200 part-time and 400 per diememployees.  None of the Company’semployees are covered by a collective bargaining agreement. Management believesits employee relations to be satisfactory.

 

**FORWARD-LOOKINGSTATEMENTS DISCLOSURE**

 

This report on Form 10-Kincludes “forward-looking statements,” Forward-looking statements include statements concerning the Company’splans, objectives, goals, strategies, future events, future revenues orperformance, capital expenditures, financing needs, plans or intentionsrelating to acquisitions, its competitive strengths and weaknesses, itsbusiness strategy and the trends the Company anticipates in the industry andeconomies in which the Company operates and other information that is nothistorical information and, in particular, appear under “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” and“Item 1.  Business.”  When used in this report the words “estimates,”“expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” andvariations of such words or similar expressions are intended to identifyforward-looking statements.  Allforward-looking statements, including, without limitation, the Company’sexamination of historical operating trends, are based upon the Company’scurrent expectations and various assumptions. The Company’s expectations, beliefs and projections are expressed ingood faith, and the Company believes there is a reasonable basis for them, butthere can be no assurance that the Company’s expectations, beliefs andprojections will be realized.

 

There are a number of risks anduncertainties that could cause the Company’s actual results to differmaterially from the forward-looking statements contained in this report.  Important factors that could cause theCompany’s actual results to differ materially from the forward-lookingstatements made in this report are set forth in this report, including thefactors described in the section entitled “Risk Factors,” and thefollowing:

 

•                  limitations and delays inreimbursement by third-party payors;

•                  contract renewals and financialstability of customers;

•                  conditions within the health careenvironment;

•                  adverse utilization trends for certaindiagnostic imaging procedures;

•                  the Company’s ability to successfullyintegrate acquisitions;

•                  market competition;

•                  the potential for rapid andsignificant changes in technology and their effect on the Company’s operations;

•                  operating, legal, governmental andregulatory risks; and

•                  economic, political and competitiveforces affecting the Company’s business.

 

If any of these risks oruncertainties materialize, or if any of the Company’s underlying assumptionsare incorrect, the Company’s actual results may differ significantly from theresults that it expresses in or implies by any of its forward-lookingstatements.  The Company does notundertake any obligation to revise these forward-looking statements to reflectfuture events or circumstances.

 

15

----

 

**RISK FACTORS**

 

RISKS RELATINGTO THE COMPANY AND THE DIAGNOSTIC IMAGING INDUSTRY

 

**Changesin the rates or methods of third-party reimbursements for diagnostic imagingand therapeutic services could result in reduced demand for the Company’sservices or create downward pricing pressure, which would result in a declinein the Company’s revenues and harm its financial position.**

 

The Company derives approximately 53% of its revenues from directbillings to patients and third-party payors such as Medicare, Medicaid, managedcare and private health insurance companies. Changes in the rates or methods of reimbursement for the services theCompany provides could have a significant negative impact on those revenues.Moreover, the Company’s health care provider customers on whom the Companydepends for approximately 47% of its revenues generally rely on reimbursementfrom third-party payors.  In the past,initiatives have been proposed and implemented which have had the effect ofdecreasing reimbursement rates for diagnostic imaging services provided atnon-hospital facilities.  Similarinitiatives enacted in the future may have an adverse impact on the Company’sfinancial condition and operations.  See“Item 1. Business - Reimbursement of Health Care Costs.”

 

Any changes in the rates of or conditions for reimbursement couldsubstantially reduce the number of procedures for which the Company or itscustomers can obtain reimbursement or the amounts reimbursed the Company or theCompany’s customers for services provided by the Company.  If third-party payors reduce the amount oftheir payments to the Company’s customers, its customers may seek to reducetheir payments to the Company or seek an alternate supplier of diagnosticimaging services.  Because unfavorablereimbursement policies have constricted and may continue to constrict theprofit margins of the hospitals and clinics the Company bills directly, theCompany has lowered and may continue to need to lower its fees to retainexisting customers and attract new ones. These reductions could have a significant adverse effect on theCompany’s revenues and financial results by decreasing demand for its servicesor creating downward pricing pressure.

 

**TheCompany**’**s revenues mayfluctuate or be unpredictable and this may harm its financial results.**

 

The amount and timing of revenues that the Company may derive from itsbusiness will fluctuate based on:

 

•                  variations inthe rate at which customers renew their contracts;

 

•                  the extent to which the Company’smobile customers convert into a fixed-site operation and choose not to continueusing its services;

 

•                  changes in thenumber of days of service the Company can offer with respect to a givendiagnostic imaging or therapeutic system due to equipment malfunctions orseasonal factors; and

 

•                  the mix ofcontract services and patient services billing.

 

The Company may not be able to reduce its expenses, including its debtservice obligations, quickly enough to respond to these declines in revenues,which would make its business difficult to operate and would harm its financialresults.

 

**A failure to meet the Company**’**s capital expenditure requirements can adverselyaffect its business.**

 

The Company operates in a capital intensive, high fixed cost industrythat requires significant amounts of capital to fund operations, particularlythe initial start-up and development expenses of de novo centers, or newoperations, and the acquisition of additional businesses and new imaging equipment.  The Company incurs capital expenditures to,among other things:

 

•                  upgradeits imaging systems and software;

 

•                  purchasesystems upon termination of operating leases; and

 

16

----

 

•                  purchasenew systems.

 

To the extent the Company is unable to generate sufficient cash fromits operations or funds are no longer available under its credit facilities, itmay be unable to meet its capital expenditure requirements and therefore unableto achieve the Company’s estimates of operating income growth.  Furthermore, there can be no assurance thatthe Company will be able to raise any necessary additional funds through bankfinancing or the issuance of equity or debt securities on terms acceptable toit, if at all.

 

**The Company may experience competition fromother diagnostic imaging companies and this competition could adversely affectits revenues and business.**

 

The market for diagnostic imaging services and systems iscompetitive.  If the Company is unableto successfully compete, its customer base would decline and its business,financial condition and results of operations would be harmed.  See “Item 1. Business - Competition”.

 

**Managed care organizations may prevent healthcare providers from using the Company**’**s services, causing it to lose current and prospectivecustomers.**

 

Health care providers participating as providers under managed careplans may be required to refer diagnostic imaging procedures to specificimaging service providers depending on the plan in which each covered patientis enrolled.  These requirementscurrently inhibit health care providers from using the Company’s diagnosticimaging services in some cases.  Theproliferation of managed care may prevent an increasing number of health careproviders from using the Company’s services in the future, which would causeits revenues to decline.

 

**The Company**’**s fixed-site centers depend on physician referrals andcontractual arrangements with insurance carriers for their business.**

 

The Company’s fixed-site centers are principally dependent on theirability to attract referrals from physicians and other health care providersrepresenting a variety of specialties. The Company’s eligibility to provide service in response to a referralis often dependent on the existence of a contractual arrangement with thereferred patient’s health plan.  TheCompany currently has in excess of 1,000 contracts with managed careorganizations for diagnostic imaging services provided at the Company’sfixed-site centers, primarily on a discounted fee-for-service basis.  A significant decline in referrals wouldhave a material adverse effect on the Company’s business, financial conditionand results of operations.

 

**The Company may be unable to renew ormaintain its customer contracts, which would harm its business and financialresults.**

 

Upon expiration of the Company’s customer contracts, it is subject tothe risk that customers will cease using its imaging services and purchase orlease their own imaging systems or use the Company’s competitors’ imagingsystems.  Approximately one-third of theCompany’s MRI contracts will expire in the fiscal year ending June 30,2004.  If these contracts are not renewedor are renewed at lower prices, the Company could experience a significant negativeimpact on its business.  The Company’smobile contract renewal rate for the fiscal year ended June 30, 2003 wasapproximately 80%.  It is not alwayspossible to immediately obtain replacement customers, and historically manyreplacement customers have been smaller facilities which have a lower number ofscans than lost customers.  Although thenon-renewal of a single customer contract would not have a material impact onthe Company’s contract services revenues, non-renewal of several contractscould have a material impact on contract services revenues.

 

**The Company may be subject to professionalliability risks which could be costly and negatively impact its business andfinancial results.**

 

The Company has not experienced any material losses due to claims formalpractice.  However, claims formalpractice have been asserted against the Company 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. While the Company maintains professional liability insurance, there canbe no assurance that any claim against it will not exceed the amount of itsinsurance.  Successful malpractice

 

17

----

 

claims asserted against the Company, to the extent not covered by theCompany’s liability insurance, could have a material adverse effect on itsbusiness, financial condition and results of operations.

 

In addition to being exposed to claims for malpractice, there are otherprofessional liability risks to which the Company is exposed through itsoperation of diagnostic imaging systems.  See “Item 1.  Business -Diagnostic Imaging and Treatment Technology.”

 

To protect against possible professional liability either frommalpractice claims or the other risks described above, the Company maintainsprofessional liability insurance. However, if the Company is unable to maintain insurance in the future atan acceptable cost or at all or if its insurance does not fully cover it, and asuccessful malpractice or other professional liability claim was made againstthe Company, the Company could incur substantial losses.  Any successful malpractice or otherprofessional liability claim made against the Company not fully covered byinsurance could be costly to defend against, result in a substantial damageaward against the Company and divert the attention of its management from itsoperations, which could have a material adverse effect on its business,financial condition and results of operations.

 

**Technological change in the Company**’**s industry could reduce the demand for its servicesand require it to incur significant costs to upgrade its equipment.**

 

Technological change in the MRI industry has been gradual since thelast technological advancements were made in 1994.  Although the Company believes that substantially all of its MRIand other diagnostic imaging systems are upgradeable to maintain theirstate-of-the-art character, the development of new technologies or refinementsof existing ones might make its existing systems technologically oreconomically obsolete, or cause a reduction in the value of, or reduce the needfor, its systems.  MRI and otherdiagnostic imaging systems are currently manufactured by numerouscompanies.  Competition amongmanufacturers for a greater share of the MRI and other diagnostic imagingsystems market may result in technological advances in the speed and imagingcapacity of these new systems.  Consequently,the obsolescence of the Company’s systems may be accelerated.  Although the Company is aware of no imminentsubstantial technological changes other than ultra-high field MRI systems andPET/CT or "fusion" scanners, should such changes occur, there can beno assurance that it would be able to acquire the new or improved systems.

 

The development of new scanning technology or new diagnosticapplications for existing technology may require the Company to adapt itsexisting technology or acquire new or technologically improved systems in orderto successfully compete.  In the future,however, it may not have the financial resources to do so, particularly givenits indebtedness.  In addition,advancing technology may enable hospitals, physicians or other diagnosticservice providers to perform procedures without the assistance of diagnosticservice providers such as the Company.

 

**The Company**’**s failure to effectively make or integrateacquisitions and establish joint venture arrangements through partnerships withhospitals and other health care providers could impair its business.**

 

As part of the Company’s business strategy, it has pursued and intendsto continue to pursue strategic acquisitions and establish arrangements throughpartnerships and joint ventures with hospitals and other health careproviders.  It is continuouslyevaluating acquisition opportunities and consolidation possibilities, and, atany given time, may be in various stages of due diligence or preliminarydiscussions with respect to a number of potential transactions.  There can be no assurance that the Companywill succeed in identifying suitable acquisition or co-sourcing candidates orin consummating any such acquisitions or joint venture arrangements.  The Company’s acquisition and joint venturestrategies require substantial capital which may exceed the funds available toit from internally generated funds and under the Company’s creditfacilities.  There can be no assurancethat the Company will be able to raise any necessary additional funds throughbank financing or through the issuance of equity or debt securities on termsacceptable to it, if at all.

 

Additionally, acquisitions involve the integration of acquiredoperations with the Company’s operations. Integration involves a number of risks, including:

 

•                  demandson management related to the increase in the Company’s size after anacquisition;

 

•                  thediversion of the Company’s management’s attention from the management of dailyoperations to the integration of new operations;

 

18

----

 

•                  integrationof information systems;

 

•                  difficultiesin the assimilation and retention of employees;

 

•                  potentialadverse effects on operating results; and

 

•                  challengesin retaining customers and referral sources.

 

Although the Company believes that it has successfully integratedacquisitions in the past, there can be no assurance that it will be able tosuccessfully integrate the operations of any future acquisitions.  If it does not successfully integrateacquisitions, the Company may not realize anticipated operating advantages,economies of scale and cost savings. Also, the Company may not be able to maintain the levels of operatingefficiency acquired companies will have achieved or might achieve separately.  Successful integration of each of theiroperations will depend upon the Company’s ability to manage those operationsand to eliminate redundant and excess costs.

 

**Loss of key executives and failure to attractqualified managers, technologists and salespersons could limit the Company**’**s growth and negatively impact its operations.**

 

The Company depends upon its management team to a substantialextent.  As the Company grows, it willincreasingly require field managers and salespersons experienced in itsindustry and skilled technologists to operate its diagnostic equipment.  It is impossible to predict the availabilityof qualified field managers, salespersons and technologists or the compensationlevels that will be required to hire them. In particular, there is a very high demand for qualified technologistswho are necessary to operate the Company’s systems.  The Company may not be able to hire and retain a sufficientnumber of technologists, and it may be required to pay bonuses and highersalaries to its technologists, which would increase its expenses.  The loss of the services of any member ofthe Company’s senior management or the Company’s inability to hire qualifiedfield managers, salespersons and skilled technologists at economically reasonablecompensation levels could adversely affect its ability to operate and grow itsbusiness.

 

**The Company**’**s PET services and some of its other imaging servicesrequire the use of radioactive materials, which could subject the Company toregulation, related costs and delays and potential liabilities for injuries orviolations of environmental, health and safety laws.**

 

The Company’s PET services and some of its other imaging andtherapeutic services require radioactive materials.  While this radioactive material has a short half-life, meaning itquickly breaks down into inert, or non-radioactive substances, storage, use anddisposal of these materials present the risk of accidental environmentalcontamination and physical injury.  TheCompany is subject to federal, state and local regulations governing storage,handling and disposal of these materials and waste products.  Although the Company believes that itssafety procedures for storing, handling and disposing of these hazardousmaterials comply with the standards prescribed by law and regulation, it cannotcompletely eliminate the risk of accidental contamination or injury from thosehazardous materials.  In the event of anaccident, the Company would be held liable for any resulting damages, and anyliability could exceed the limits of or fall outside the coverage of itsinsurance.  The Company may not be ableto maintain insurance on acceptable terms, or at all.  The Company could incur significant costs and the diversion ofits management’s attention in order to comply with current or futureenvironmental, health and safety laws and regulations.

 

**The Company may be unable to effectivelymaintain its imaging and therapeutic systems or generate revenues when itssystems are not fully operational.**

 

Timely, effective service is essential to maintaining the Company’sreputation and high utilization rates on its imaging systems.  Repairs to one of its systems can take up totwo weeks and result in a loss of revenues. The Company’s warranties and maintenance contracts do not compensate itfor loss of revenues when its systems are not fully operational.  The principal components of its operatingcosts include depreciation, salaries paid to technologists and drivers, annualsystem maintenance costs, insurance and transportation costs.  Because the majority of these expenses arefixed, a reduction in the number of scans performed due to out-of-serviceequipment will result in lower revenues and margins.  Repairs of the Company’s equipment are performed for it by the equipmentmanufacturers.  These manufacturers maynot be able to perform repairs or supply needed parts in a timely manner.

 

19

----

 

Thus, if the Company experiences more system malfunctions thananticipated or if it is unable to promptly obtain the service necessary to keepits systems functioning effectively, its revenues could decline and its abilityto provide services would be harmed.

 

**The Company**’**s substantial indebtedness could adversely affect itsfinancial health and prevent the Company from fulfilling its obligations underInSight**’**s 9 7/8% Series B seniorsubordinated notes.**

 

At June 30, 2003, the Company had total indebtedness ofapproximately $446.1 million.  TheCompany’s substantial indebtedness could have important consequences to theCompany.  For example, it could:

 

•                  makeit more difficult for the Company to satisfy its obligations with respect tothe notes;

 

•                  increasethe Company’s vulnerability to general adverse economic and industry conditions;

 

•                  requirethe Company to dedicate a substantial portion of its cash flow from operationsto payments on its indebtedness, thereby reducing the availability of its cashflow to fund working capital, capital expenditures, acquisitions andinvestments and other general corporate purposes;

 

•                  limitthe Company’s flexibility in planning for, or reacting to, changes in itsbusiness and the markets in which it operates;

 

•                  placethe Company at a competitive disadvantage compared to its competitors that haveless debt; and

 

•                  limit,among other things, the Company’s ability to borrow additional funds.

 

In addition, the Company may be able to incur substantial additionalindebtedness in the future.  The termsof the indenture governing the notes and the Company’s credit agreement allowit to issue and incur additional debt upon satisfaction of certainconditions.  If new debt is added tocurrent debt levels, the related risks described above could intensify.

 

RISKS RELATINGTO GOVERNMENT REGULATION OF THE COMPANY’S BUSINESS

 

**Complying with federal and state regulationsis an expensive and time-consuming process, and any failure to comply couldresult in substantial penalties.**

 

The Company is directly or indirectly through its customers subject toextensive regulation by both the federal government and the states in which itconducts its business, including:

 

•                  thefederal False Claims Act;

 

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

 

•                  thefederal Civil Money Penalty Law;

 

•                  thefederal HIPAA;

 

•                  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;

 

•                  federalFDA requirements;

 

•                  statelicensing and certification requirements; and

 

•                  federaland state laws governing the diagnostic imaging and therapeutic equipment usedin the Company’s business concerning patient safety, equipment operatingspecifications and radiation exposure levels.

 

20

----

 

If the Company’s operations are found to be in violation of any of thelaws and regulations to which it or its customers are subject, it may besubject to the applicable penalty associated with the violation, includingcivil and criminal penalties, damages, fines and the curtailment of itsoperations.  Any penalties, damages,fines or curtailment of the Company’s operations, individually or in theaggregate, could adversely affect the Company’s ability to operate theCompany’s business and its financial results. The risks of the Company being found in violation of these laws andregulations is increased by the fact that many of them have not been fullyinterpreted by the regulatory authorities or the courts, and their provisionsare open to a variety of interpretations. Any action brought against the Company for violation of these laws orregulations, even if the Company successfully defends against it, could causeit to incur significant legal expenses and divert its management’s attentionfrom the operation of its business.  Fora more detailed discussion of the various state and federal regulations towhich the Company is subject, see “Item 1. Business - Government Regulation.”

 

21

----

 

**ITEM 2.  PROPERTIES**

 

The Company leases approximately: (i) 48,000 square feet of officespace for its executive offices and a billing office in Lake Forest,California, under a lease expiring in 2007; (ii) 13,000 square feet of officespace for a billing office in Farmington, Connecticut, under a lease expiringin 2004; (iii) 4,400 square feet of office space for a billing office inMerrillville, Indiana, under a lease expiring in 2004; (iv) 6,000 square feetof office space for a billing office in Santa Ana, California, under a leaseexpiring in 2004, which is currently vacant; (v) 3,000 square feet of office space for a billing office inScarborough, Maine, under a lease expiring in 2006, and (vi) 1,000 square feetof office space for a billing office in Wilkes-Barre, Pennsylvania, under alease expiring in 2004.  The Companybelieves its facilities are adequate for its reasonably foreseeable needs.  In addition, the following table sets forththe other principal properties used as imaging or treatment facilities by theCompany in the Fixed-Site Division (except where otherwise indicated) as ofJune 30, 2003:

 
| **NAME OF FACILITY**                                     |   | **APPROXIMATE  SQUARE FEET** |   | **LOCATION**               |
|----------------------------------------------------------|--------|------------------------------|--------|----------------------------|
|                                                     |   |                         |   |                       |
| OWNED:                                                   |   |                         |   |                       |
| Northern Indiana Oncology Center                         |   | 800                          |   | Valparaiso, Indiana        |
| Sun Coast Imaging Center (1) (2)                         |   | 1,000                        |   | Largo, Florida             |
| Open MRI Center at Granada Hills Community Hospital(1)   |   | 1,100                        |   | Granada Hills, California  |
| Thorn Run MRI (1)                                        |   | 1,300                        |   | Coraopolis, Pennsylvania   |
| Marina MRI Center (1)                                    |   | 1,400                        |   | Marina Del Rey, California |
| Greater Waterbury Imaging Center (1)                     |   | 3,700                        |   | Waterbury, Connecticut     |
| Berwyn Magnetic Resonance Center (1)                     |   | 3,800                        |   | Berwyn, Illinois           |
| Garfield Imaging Center (1)                              |   | 5,000                        |   | Monterey Park, California  |
| Wilkes-Barre Imaging Center (1)                          |   | 8,200                        |   | Wilkes-Barre, Pennsylvania |
| LAC/USC Imaging Sciences Center (1)                      |   | 8,500                        |   | Los Angeles, California    |
| InSight Diagnostic Center - Eighth Avenue                |   | 10,000                       |   | Ft. Worth, Texas           |
| Chattanooga Outpatient Center                            |   | 14,700                       |   | Chattanooga, Tennessee     |
| Harbor/UCLA Diagnostic Imaging Center (1)                |   | 15,000                       |   | Torrance, California       |
| Diagnostic Outpatient Center (1)                         |   | 17,800                       |   | Hobart, Indiana            |
|                                                     |   |                         |   |                       |
| LEASED:                                                  |   |                         |   |                       |
| San Fernando Valley Regional PET Center                  |   | 300                          |   | Van Nuys, California       |
| Northtowns Imaging – Maple Road                     |   | 500                          |   | Williamsville, New York    |
| Valley Open MRI                                          |   | 1,000                        |   | Sherman Oaks, California   |
| Central Maine Imaging Center                             |   | 1,000                        |   | Auburn, Maine              |
| Orange County Regional PET Center                        |   | 1,500                        |   | Irvine, California         |
| Open MRI of Fullerton                                    |   | 1,600                        |   | Fullerton, California      |
| Open MRI of Laguna Hills                                 |   | 1,700                        |   | Laguna Hills, California   |
| Open MRI of Encino                                       |   | 1,800                        |   | Encino, California         |
| InSight Diagnostic Imaging Center – Thomas Road MRI |   | 1,800                        |   | Phoenix, Arizona           |
| InSight MRI of Indianapolis                              |   | 1,900                        |   | Indianapolis, Indiana      |
| Valencia MRI                                             |   | 2,200                        |   | Valencia, California       |
| Lockport MRI                                             |   | 2,400                        |   | Lockport, New York         |
| Open MRI of Southern Regional                            |   | 2,400                        |   | Clarksville, Indiana       |
| Downey MRI Center                                        |   | 2,600                        |   | Downey, California         |
| Advanced MRI of Fremont                                  |   | 2,700                        |   | Fremont, California        |
| Redwood City MRI                                         |   | 2,900                        |   | Redwood City, California   |
| Whitney Imaging Center                                   |   | 2,900                        |   | Hamden, Connecticut        |
| Encinitas MRI Center                                     |   | 3,500                        |   | Encinitas, California      |
| Lemont MRI Center                                        |   | 3,500                        |   | Lemont, Illinois           |
| Northtowns Imaging – Sheridan Drive                 |   | 3,800                        |   | Tonawanda, New York        |
| Dublin Diagnostic Imaging Center                         |   | 3,900                        |   | Dublin, Ohio               |
| Northtowns Imaging – Youngs Road                    |   | 4,000                        |   | Williamsville, New York    |

 

22

----

 
| **NAME OF FACILITY**                                      |   | **APPROXIMATE  SQUARE FEET** |   | **LOCATION**                 |
|-----------------------------------------------------------|--------|------------------------------|--------|------------------------------|
|                                                      |   |                         |   |                         |
| Open MRI of Bangor                                        |   | 4,000                        |   | Bangor, Maine                |
| South Coast MRI Center                                    |   | 4,000                        |   | Santa Ana, California        |
| Open MRI of Brunswick                                     |   | 4,300                        |   | Brunswick, Maine             |
| Open MRI of Pleasanton                                    |   | 4,400                        |   | Pleasanton, California       |
| InSight Diagnostic Imaging Center – Camelback        |   | 4,600                        |   | Phoenix, Arizona             |
| Marshwood Imaging Center                                  |   | 5,000                        |   | Scarborough, Maine           |
| Washington Magnetic Resonance Center                      |   | 5,000                        |   | Whittier, California         |
| Northtowns Imaging – Transit Road                    |   | 5,200                        |   | East Amherst, New York       |
| Advanced Diagnostic Center of Thousand Oaks               |   | 5,400                        |   | Thousand Oaks, California    |
| Encino Diagnostic Imaging Center                          |   | 5,600                        |   | Encino, California           |
| Medical Imaging Center of Huntington Beach                |   | 5,600                        |   | Huntington Beach, California |
| InSight Diagnostic Center – Preston Road             |   | 5,800                        |   | Dallas, Texas                |
| InSight Diagnostic Imaging Center – West Thunderbird |   | 5,800                        |   | Peoria, Arizona              |
| InSight Diagnostic Imaging Center – Country Club     |   | 5,800                        |   | Phoenix, Arizona             |
| Parkway Imaging Center                                    |   | 5,800                        |   | Henderson, Nevada            |
| The Imaging Center of Murfreesboro                        |   | 6,000                        |   | Murfreesboro, Tennessee      |
| Westlake Diagnostic Center                                |   | 6,100                        |   | Westlake Village, California |
| Open MRI of Hayward                                       |   | 6,500                        |   | Hayward, California          |
| Broad Street Imaging Center                               |   | 6,600                        |   | Columbus, Ohio               |
| San Fernando Valley MRI Center                            |   | 7,800                        |   | Van Nuys, California         |
| Ocean Medical Imaging Center                              |   | 8,500                        |   | Tom’s River, New Jersey |
| Central Maine Imaging Center                              |   | 8,700                        |   | Lewiston, Maine              |
| St. John’s Regional Imaging Center                   |   | 10,000                       |   | Oxnard, California           |
| InSight Diagnostic Imaging Center –Thomas Imaging    |   | 10,600                       |   | Phoenix, Arizona             |
| InSight Diagnostic Center – Forest Lane              |   | 18,500                       |   | Dallas, Texas                |
| InSight Mountain Diagnostics                              |   | 20,000                       |   | Las Vegas, Nevada            |

 

----

(1)           The Company owns thebuilding and holds the related land under a long-term lease.

(2)           This facility isincluded in the Company’s Mobile Division.

 

**ITEM 3.  LEGAL PROCEEDINGS**

 

The Company is engaged from time to time in the defense of lawsuitsarising out of the ordinary course and conduct of its business and hasinsurance policies covering such potential insurable losses where such coverageis cost-effective.  The Company believesthat the outcome of any such lawsuits will not have a material adverse impacton the Company’s business, financial condition and results of operations.

 

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

 

None.

 

23

----

 

**PARTII**

 

**ITEM5.****                             MARKETFOR REGISTRANT**’**S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

The Company’s common stock is not publicly traded on any exchange or inany market.  At August 29, 2003,the Company had six record holders of its common stock.  The Company has never paid a cash dividendon its common stock and does not expect to do so in the foreseeablefuture.  The Company’s credit agreementgoverning its existing credit facilities and the indenture governing the 9 7/8%Series B senior subordinated notes contain restrictions on its ability to paydividends on its common stock.

 

Informationregarding securities authorized for issuance under the Company’s equitycompensation plans is set forth under “Item 12.  Security Ownership of Certain Beneficial Owners and Management.”

 

The following is alist of securities sold by the Company during the period covered by this reporton Form 10-K which, pursuant to the exemption provided under Section 4(2)of the Securities Act of 1933, as amended (“Securities Act”), were notregistered under the Securities Act:

 

On May 14, 2003, the Company issued to TinaLewis, a former employee of the Company, 50 shares of Company common stockpursuant to the exercise of a stock option at a price of $18.00 per share.

 

24

----

 

**ITEM6.  SELECTED FINANCIAL DATA**

 

The selectedconsolidated financial data presented as of and for the years endedJune 30, 2003 and 2002, the period from July 1, 2001 toOctober 17, 2001, and for the years ended June 30, 2001, 2000 and1999, has been derived from the audited consolidated financial statements andshould be read in conjunction with the consolidated financial statements andrelated notes as of June 30, 2003 and 2002 and for the years ended June 30,2003 and 2002, the period from July 1, 2001 to October 17, 2001, andfor the year ended June 30, 2001, and “Item 7.  Management’s Discussion and Analysis of Financial Condition andResults of Operations,” included elsewhere in this report on Form 10-K.  The consolidated operations of the Companyafter the Acquisition are substantially consistent with the operations ofInSight.  The Company has no operationsother than its investment in InSight. InSight is considered the predecessor to the Company in accordance withRegulation S-X.

 
|                             |   |                                               |    |                 |   | **Predecessor**               |   |
|----------------------------------|--------|----------------------------------------------------|---------|----------------------|--------|-------------------------------|--------|
|                             |   |                                               |    |                 |   | **Period from**               |   |   |   |   |   |   |   |
|                             |   | **Company**                                        |    | **July 1 to**   |   |                          |   |   |   |   |   |
|                             |   | **Years Ended June 30,**                      |    | **October 17,** |   | **Years Ended June 30,** |   |
|                             |   | **2003**                                           |    | **2002 (4)**         |   | **2001**                      |   | **2001** |   | **2000** |   | **1999** |   |
|                             |   | **(Amounts in thousands, except per  share data)** |    |
| STATEMENT  OF INCOME DATA:       |   |                                               |    |                 |   |                          |   |   |   |   |   |   |   |
| Revenues                         |   | $                                                  | 237,752 |                 | $      | 155,407                       |   | $ | 63,678 |   | $ | 211,503 |   | $ | 188,574 |   | $ | 161,992 |   |
| Operating  income (loss) (1) (2) |   | 45,702                                             |    | 32,555               |   | (427                          | )      | 39,819 |   | 27,016 |   | 17,422 |   |
| Interest  expense, net           |   | 37,514                                             |    | 32,546               |   | 6,321                         |   | 23,394 |   | 18,696 |   | 14,500 |   |
| Net  income (loss) (3) (5)       |   | 4,922                                              |    | 9                    |   | (4,648                        | )      | 13,801 |   | 7,189 |   | 6,112 |   |
|                                  |        |                                                    |         |                      |        |                               |        |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                  |   | **June 30,** |       |     |   | **June 30,** |   |
|---------------------------------------|--------|-------------------|------------|----------|--------|-------------------|--------|
|                                  |   | **2003**          | ** ** | **2002** |   |              |   | **2001** | ** ** | **2000** | ** ** | **1999** |   |
| BALANCE  SHEET DATA:                  |   |              |       |     |   |              |   |   |   |   |   |   |   |
| Working  capital                      |   | $                 | 32,580     |     | $      | 35,907            |   |   |   | $ | 16,791 |   | $ | 20,814 |   | $ | 24,651 |   |
| Property  and equipment, net          |   | 219,121           |       | 172,056  |   |              |   | 148,255 |   | 148,469 |   | 90,671 |   |
| Goodwill  and other intangible assets |   | 260,292           |       | 234,644  |   |              |   | 89,202 |   | 93,930 |   | 80,327 |   |
| Total  assets                         |   | 577,317           |       | 499,401  |   |              |   | 321,056 |   | 328,872 |   | 238,304 |   |
| Total  long-term liabilities          |   | 442,484           |       | 378,234  |   |              |   | 197,388 |   | 221,307 |   | 161,266 |   |
| Stockholders’  equity            |   | 91,614            |       | 87,376   |   |              |   | 65,471 |   | 51,487 |   | 44,106 |   |
|                                       |        |                   |            |          |        |                   |        |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Includes a provision forreorganization and other costs of $3.3 million in 1999.

(2) Includes an acquisitionrelated compensation charge of $15.6 million in the period from July 1,2001 to October 17, 2001.

(3) Includes an income taxbenefit of $2.1 million in the period from July 1, 2001 toOctober 17, 2001 and $3.5 million in 1999.

(4) Includes the results ofoperations of InSight from the date of the Acquisition.

(5) No cash dividends havebeen paid on the Company’s or InSight’s common stock for the periods indicatedabove.

 

25

----

 

**ITEM7.****         MANAGEMENT**’**S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Management’s discussionand analysis of financial condition, results of operations, liquidity andcapital resources contained within this report on Form 10-K is more clearlyunderstood when read in conjunction with the Notes to the ConsolidatedFinancial Statements.  The Notes to theConsolidated Financial Statements elaborate on certain terms that are usedthroughout this discussion and provide information about the Company and thebasis of presentation used in this report on Form 10-K.  This report contains forward-lookingstatements that involve risks and uncertainties.  The Company’s actual results may differ materially fromthose indicated in forward-looking statements. See “Item 1.  Business - Forward-LookingStatements Disclosure and Risk Factors.”

 

**ACQUISITION ANDRELATED FINANCING TRANSACTIONS**

 

The Company was incorporated on June 13,2001 under the name JWC/Halifax Holdings Corp.   The Company was funded through an equity contribution from J.W.Childs Equity Partners II, L.P., Halifax Capital Partners, L.P. and certain oftheir affiliates.  On June 29,2001, the Company’s namewas changed to InSight Health Services Holdings Corp.  The Company and its former wholly owned subsidiary, Acquisition Corp.were created to acquire all the outstanding shares of InSight.

 

On October 17, 2001, the Companyacquired InSight pursuant to an agreement and plan of merger datedJune 29, 2001, as amended, among the Company, Acquisition Corp. andInSight.  Acquisition Corp. was mergedwith and into InSight, with InSight being the surviving corporation andbecoming a wholly owned subsidiary of the Company.  The consolidated operations of the Company after the Acquisitionare substantially consistent with the operations of InSight prior to theAcquisition.  In addition, the Companyhas no operations other than its investment in InSight.  As such, InSight is considered thepredecessor to the Company in accordance with Regulation S-X.

 

Following the Acquisition, the common stockof InSight was delisted from the NASDAQ Small Cap Market.  Pursuant to the terms of the mergeragreement, each of InSight’s stockholders received $18.00 in cash for each share of common stockowned prior to the Acquisition.  Holdersof options and warrants, which prior to the Acquisition were exercisable forInSight common stock, received the difference between $18.00 and the exerciseprice of each share of common stock the holder could have acquired pursuant tothe terms of the options and warrants, and the options and warrants wereterminated.  This resulted in a chargeof approximately $15.6 million, which is reflected in the accompanyingstatement of operations of InSight for the period from July 1, 2001 toOctober 17, 2001.  In addition,certain members of senior management rolled a portion of their InSight commonstock options into stock options of the Company.  InSight’sstockholders, option holders and warrant holders received aggregate cashconsideration of approximately $187.7 million as a result of the Acquisition.

 

Concurrently with the Acquisition,InSight:  (i) repurchased by tenderoffer all of its 9 5/8% senior subordinated notes due 2008 in an aggregateprincipal amount of $100 million; (ii) repaid its then outstanding seniorcredit facilities and certain other indebtedness; and (iii) paid fees andexpenses relating to the Acquisition and related financing transactions.

 

These transactions were financed through:

 

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

 

•                  A $200 million senior subordinated bridgefinancing; and

 

•                  The investment by the Company, before equityissuance costs, of $98.1 million; management options and common stock rolloverwith a total net value of approximately $1.9 million.

 

On October 30, 2001, the Company, through InSight, issued new 97/8% senior subordinated notes due 2011(“Notes”) in the aggregate principal amount of $225million.  The net proceeds from theissuance of the Notes was approximately $211.5 million, $200 million of which wasused to retire in full the senior subordinated bridge financing and the balanceof which was used for general corporate purposes.  As a result, the Company wrote-off debt issuance costs ofapproximately $7.4 million related to the senior subordinated bridge financing,which are

 

26

----

 

classified within interest expense for the year ended June 30,2002.  This amount was originallyrecorded as an extraordinary loss on debt extinguishment, net of taxes but wasreclassified as a result of the Company’s adoption of SFAS 145 on July 1, 2002 as described below.

 

**BUSINESS DEVELOPMENT**

 

The Company’s objective is to be the leading provider of outsourceddiagnostic imaging services in its target markets by further developing andexpanding its regional diagnostic imaging networks that emphasize quality ofcare, produce cost-effective diagnostic information and provide superiorservice and convenience to its customers. The strategy is focused on three components.   Firstly, the Company intends to maximize utilization of itsexisting facilities by:  (i) broadeningits physician referral base and generating new sources of revenues throughselective marketing activities; (ii) focusing its marketing efforts onattracting additional managed care customers; (iii) focusing on its ability toconvert developing Mobile Facilities to Fixed Facilities; (iv) expandingcurrent imaging applications of existing modalities to increase overallprocedure volume; (v) adding new modalities such as CT, ultrasound and bonedensitometry at some of its existing facilities to realize economies of scaleand increase overall procedure volume; and (vi) maximizing cost efficienciesthrough increased purchasing power and by continued reduction of expenses.

 

 Secondly, the Company intendsto pursue expansion opportunities within its existing regional networks byopening new Fixed Facilities, Centers and developing Mobile Facilities whereattractive returns on investment can be achieved and sustained.  In addition, management believes that MobilePET Facilities present a growth opportunity due to increased physicianacceptance of PET as a diagnostic tool, expanded Medicare coverage of PETprocedures and favorable reimbursement levels. The Company also intends to pursue joint venture opportunities withhospitals because management believes that they have the potential to providethe Company with a steady source of procedure volume.  Management believes that this will be an area for additionalgrowth because the Company expects hospitals and other health care providers torespond to recent federal health care regulatory changes by outsourcingradiology services to imaging centers that are jointly owned and managed withthird parties, notwithstanding the Special Advisory Bulletin issued by the OIGon April 23, 2003 that raised concerns throughout the health care industryabout the legality of provider joint ventures and other contractualagreements.  According to the OIGBulletin, the suspect arrangement involves a health care provider expandinginto a related service line by contracting with an existing provider of thatservice (“Supplier”) to serve the provider’s existing patient population.  In the OIG’s view, the provider contractsout the entire operation of a related line of business to what would otherwisebe a competitor.  The OIG asserts thatthe provider’s share of the profits from the new venture constitutesremuneration for the referral of the provider’s Medicare/Medicaid patients tothe Supplier and may violate the federal anti-kickback statute.  The Company believes that providerscontemplating participation in joint ventures will be carefully reviewing theOIG’s Bulletin to ensure compliance, but that the Bulletin will not have theeffect of ending joint ventures between providers.

 

Finally, the Company intends to continue to increase its marketpresence in its existing regional markets where it can increase economies ofscale or new markets where it believes it can establish a strong regionalnetwork, through disciplined and strategic acquisitions.  The Company believes it is well positionedto capitalize on the ongoing consolidation of the imaging industry.  The Company believes that the expansion ofits business through such acquisitions is a key factor in improvingprofitability.  Generally, acquisitionopportunities are aimed at increasing revenues and operating income, andmaximizing utilization of existing capacity and increasing economies of scale.  Incremental operating income resulting fromfuture acquisitions will vary depending on geographic location, whetherfacilities are Mobile or Fixed, the range of services provided and theCompany’s ability to integrate the acquired businesses into its existinginfrastructure.  Since 1996, the Companyhas completed 14 acquisitions.  Noassurance can be given, however, that the Company will be able to identifysuitable acquisition candidates and thereafter complete such acquisitions onterms acceptable to the Company.   Inconnection with the Acquisition and related financing transactions discussedbelow, InSight had a $75 million delayed draw term loan facility which was usedto complete the acquisitions discussed below. Additionally, the Company has a $50 million second delayed-draw termloan facility available until January 31, 2005 to pursue acquisitionopportunities.  As of August 29,2003, there was $25 million of availability under this facility to completeacquisitions.

 

In fiscal 2001, InSight opened a joint venture Fixed Facility in MarinaDel Rey, California, which was financed with internally generated funds and acapital lease; and a joint venture PET fixed-site center in Louisville,Kentucky,

 

27

----

 

which was financed with outside financing.  In fiscal 2003, the Company sold its interest in the PETfixed-site center.

 

In fiscal 2002, InSight opened a joint venture Fixed Facility in Largo,Florida, which was financed with an operating lease; and a joint venture FixedFacility in Bangor, Maine, which was financed with internally generated funds.

 

In fiscal 2003, the Company opened a joint venture Fixed Facility inEncinitas, California, which was financed with internally generated funds and acapital lease; a Fixed Facility in Lemont, Illinois, which was financed withinternally generated funds; a Fixed Facility in Fremont, California, which wasfinanced with internally generated funds; and a joint venture Fixed Facility inBrunswick, Maine, which was financed with internally generated funds.

 

In fiscal2003, the Company acquired 13 diagnostic imaging centers located in SouthernCalifornia.  The acquisition consistedof certain tangible and intangible assets, including diagnostic imagingequipment, customer contracts and other agreements.  The aggregate purchase price was approximately $47 million, whichincluded approximately $39 million paid to the seller and the payment of debtand transaction costs of approximately $8 million, and is subject to certainpost-closing adjustments.  The Companyborrowed $50 million under its $75 million delayed-draw term loan facility tofund the purchase price and future capital expenditures related to theacquisition.

 

OnAugust 1, 2003, the Company acquired 22 Mobile Facilities primarilylocated in the Mid-Atlantic states.  Theacquisition consists of certain tangible assets, including diagnostic imagingequipment, customer contracts and other agreements.  The aggregate purchase price was approximately $48.5 million,which includes approximately $28.1 million paid to the seller and the paymentof debt and transaction costs of approximately $20.4 million, and is subject tocertain post-closing adjustments.  TheCompany borrowed the remaining $25 million under its $75 million delayed-drawterm loan facility and $25 million under the $50 million second delayed-drawterm loan facility to fund the purchase price and future capital expendituresrelated to the acquisition.

 

On August 29, 2003, the Company acquired a CT Fixed Facilitylocated in Hammonton, New Jersey, which was financed with internally generatedfunds.

 

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES**

 

The Company operates in a capital intensive, high fixed cost industrythat requires significant amounts of working capital to fund operations,particularly the initial start-up and development expenses of new operationsand yet is constantly under external pressure from both customers andcompetitors to contain costs and reduce prices.

 

In connection with the Acquisition, InSight entered into new creditfacilities with Bank of America, N.A. and a syndication of other lendersconsisting of:  (i) a $150 million termloan B, (ii) a $75 million delayed-draw term loan facility; and (iii) a $50million revolving credit facility (“Credit Facilities”).  In January 2003, the Company enteredinto an amendment to the Credit Facilities to add a $50 million seconddelayed-draw term loan facility.  Theentire $150 million term loan B was used to consummate the Acquisition.  Borrowings under the Credit Facilities bearinterest at LIBOR plus 3.5% to 3.75%. The Company is required to pay an annual unused facility fee of between0.5% and 2.5%, payable quarterly, on unborrowed amounts under bothfacilities.  The Company paidapproximately $1.9 million during the year ended June 30, 2003 for unusedfacility fees on unborrowed amounts under the facilities.  The Company used the entire $75 milliondelayed-draw term loan facility and $25 million of the second delayed-draw loanfacility to complete the acquisitions discussed above.  The Company expects to use the remaining $25million under the second delayed-draw facility, which is available throughJanuary 31, 2005 to fund future acquisitions and capitalexpenditures.  The Company expects to usethe revolving credit facility primarily to fund its future working capitalneeds.  As of August 29, 2003,there were no borrowings under the revolving credit facility.

 

The Credit Facilities contain various restrictive covenants whichprohibit the Company from prepaying other indebtedness, including the Notes,and require the Company to maintain specified financial ratios and satisfyfinancial condition tests.  In addition,the Credit Facilities prohibit the Company from declaring or paying anydividends and prohibit it from making any payments with respect to the Notes ifthe Company fails to perform its obligations under, or fails to meet theconditions of, the Credit Facilities or if payment creates a default under theCredit Facilities.

 

28

----

 

In addition to the indebtedness under the Credit Facilities, theCompany, through InSight, has outstanding $225 million of 9 7/8% seniorsubordinated Notes.  The Notes mature inNovember 2011, with interest payable semi-annually and are redeemable atthe option of the Company, in whole or in part, on or after November 1,2006.  At any time prior toNovember 1, 2004, the Company may redeem up to 35% of the Notes at aspecified redemption price if the Company is involved in an initial publicoffering of its capital stock.  TheNotes are unsecured senior obligations of the Company and are subordinated inright of payment to all existing and future indebtedness, as defined in theindenture, of the Company, including borrowings under the Credit Facilitiesdescribed above.  The indenturegoverning the Notes among other things: (i) restricts the ability of InSight and certain subsidiaries, includingthe guarantors of the Notes, to incur additional indebtedness, issue shares ofpreferred stock, incur liens, pay dividends or make certain other restrictedpayments and enter into certain transactions with affiliates; (ii) placescertain restrictions on the ability of certain subsidiaries, including theguarantors of the Notes, to pay dividends or make certain payments to InSight;and (iii) places restrictions on the ability of InSight and certainsubsidiaries, including the guarantors of the Notes, to merge or consolidatewith any other person or sell, assign, transfer, lease, convey or otherwisedispose of all or substantially all of the assets of InSight.

 

Net cash providedby operating activities was approximately $61.8 million for the year endedJune 30, 2003.  Cash provided byoperating activities resulted primarily from net income before depreciation andamortization, (approximately $54.3 million), an increase in accounts payableand other accrued expenses (approximately $4.8 million), and a decrease inother current assets (approximately $4.9 million), partially offset by anincrease in trade accounts receivables, net (approximately $2.2 million).

 

Net cash used in investing activities was approximately $102.7 millionfor the year ended June 30, 2003. Cash used in investing activities resulted primarily from the Companypurchasing or upgrading diagnostic imaging equipment at its existing facilities(approximately $57.0 million) and the Company's acquisition of Centers andFixed Facilities, (approximately $46.3 million).

 

Net cash provided by financing activities was approximately $42.7million for the year ended June 30, 2003, resulting primarily fromborrowings of notes payable (approximately $50.0 million), partially offset byprincipal payments of notes payable and capital lease obligations(approximately $7.5 million).

 

The Company has committed to purchase or lease in connection with thedevelopment of new Fixed and Mobile Facilities and replacement of diagnosticimaging equipment at Centers, Fixed and Mobile Facilities, at an aggregate costof approximately $1.3 million, two diagnostic imaging systems for delivery throughSeptember 2003.  The Companyexpects to use either internally generated funds, its Credit Facilities orleases to finance the purchase of such equipment.  The Company may purchase, lease or upgrade other diagnosticimaging systems as opportunities arise to place new equipment into service whennew contract services agreements are signed, existing agreements are renewed,acquisitions are completed, or new Centers, Fixed and Mobile Facilities aredeveloped in accordance with the Company’s business strategy.

 

Effective June 27, 2002, the Company purchased nine pieces ofdiagnostic imaging equipment from GE which had been financed through operatingleases.  The total purchase price wasapproximately $14.2 million.  EffectiveJuly 1, 2002, the Company purchased 13 pieces of diagnostic imagingequipment from GE by converting operating leases to capital leases.  The capital leases bear interest at 7.84%,have 66 month terms and contain a $1.00 buy-out at the end of each lease.  The total purchase price was approximately$23.6 million.  As a result, annualequipment lease expense was reduced by approximately $7.8 million anddepreciation and interest was increased by approximately the same amount.  In the future, the Company intends tofinance purchase of diagnostic imaging equipment primarily with capital leases,internally generated funds, and its Credit Facilities, although the Company maychoose to enter into operating leases for certain diagnostic imaging equipment.

 

29

----

 

The Company’s contractual obligations for long-term debt, includingcapital lease obligations and noncancellable leases are as follows (amounts inthousands):

 
|                           |   |      |    | **Payments Due by Period** |   |
|--------------------------------|--------|-----------|---------|----------------------------|--------|
|                           |   | **Total** |    | **Less than  1 Year**      |   | **1-3  Years** |   | **4-5  Years** |   | **After  5 Years** |   |
| Notes  payable                 |   | $         | 422,248 |                       | $      | 2,009 |   | $ | 4,018 |   | $ | 144,043 |   | $ | 272,178 |   |
| Capital  lease obligations     |   | 28,333    |    | 7,401                      |   | 12,040 |   | 8,566 |   | 326 |   |
| Operating  lease obligations   |   | 38,276    |    | 6,531                      |   | 11,969 |   | 9,453 |   | 10,323 |   |
| Total  contractual obligations |   | $         | 488,857 |                       | $      | 15,941 |   | $ | 28,027 |   | $ | 162,062 |   | $ | 282,827 |   |

 

In addition, in connection with the implementation of the electronictransactions, security and privacy standards mandated by HIPAA, the Companyexpects to spend approximately $1.5 million (of which approximately $0.5million had been spent as of June 30, 2003) to make necessary softwareupgrades to its radiology information system to make the system conform (i)with the privacy standards (which upgrades were completed in April 2003),(ii) with the electronic standards by October 2003, and (iii) with thesecurity standards by February 2005.

 

The Companybelieves that, based on current levels of operations and anticipated growth,its cash from operations, together with other available sources of liquidity,will be sufficient through June 30, 2004 to fund anticipated capitalexpenditures and make required payments of principal and interest on its debt,including payments due on the Notes and obligations under the CreditFacilities.  In addition, the Companycontinually evaluates potential acquisitions and expects to fund suchacquisitions from its available sources of liquidity, as discussed above.  The Company’s acquisition strategy mayrequire sources of capital in addition to that currently available to theCompany.   No assurance can be giventhat such necessary additional funds will be available to the Company on termsacceptable to the Company or at all.

 

**RESULTS OF OPERATIONS**

 

The Company’s revenues are primarily generated from contract servicesand patient services revenues.  Contractservices revenues are generally earned from services billed to a hospital orother health care provider which include: (i) fee for-service arrangements inwhich revenues are based upon a contractual rate per procedure; (ii) equipmentrental in which revenues are generally based upon a fixed monthly rental; and(iii) management fees.  Contractservices revenues are primarily earned through Mobile Facilities and aregenerally paid pursuant to hospital contracts with a life span of up to fiveyears.

 

Patient services revenues are generally earned from services billeddirectly to patients or third-party payors (generally managed careorganizations, Medicare, Medicaid, commercial insurance carriers and workers’compensation funds), on a fee-for-service basis and are primarily earnedthrough Centers, Fixed Facilities, and certain Mobile Facilities.

 

The Company’s revenues are also affected by seasonality.  Revenues for the second and third fiscalquarters can be affected by holidays and inclement weather in certain areas ofthe United States where the Company has Centers, Fixed Facilities and MobileFacilities, which can result in fewer patient procedures during theperiod.  Due to the fixed nature ofcertain of the Company’s costs, lower procedure volume directly impacts theCompany’s operating income.

 

Set forth below are the results of operations for the years endedJune 30, 2003, 2002 and 2001.  Theresults of operations of the Company for the year ended June 30, 2002 havebeen derived by combining the results of operations of the Company for the yearended June 30, 2002 with the results of operations of InSight fromJuly 1, 2001 to October 17, 2001, the date of the Acquisition.  The Company has no operations other than itsinvestment in InSight.  The results ofoperations of InSight prior to the Acquisition incorporated in this discussionare the historical results of InSight, the predecessor to the Company.  InSight’s results do not reflect anypurchase accounting adjustments included in the results of the Company afterthe Acquisition, and thus are not directly comparable.  Because of the effects of purchaseaccounting applied as a result of the Acquisition and the additional interestexpense associated with the debt incurred to finance the Acquisition, theresults of operations of the Company are not comparable in all respects to theresults of operations of InSight prior to the Acquisition.  However, the Company’s management believes a

 

30

----

 

discussion of the operations by combining the results of the Companyand InSight is more meaningful as the Company’s operating revenues and expenseshave not been affected by the Acquisition and splitting up the results betweenpre- and post-Acquisition periods would make comparisons of the operatingtrends to the prior year very different. These combined results of operations have been prepared for comparativepurposes only and do not purport to be indicative of what results of operationswould have been (amounts in thousands):

 
|                                               |   | **Years Ended June 30,** |    |
|----------------------------------------------------|--------|-------------------------------|---------|
|                                               |   | **2003**                      |    | **2002** |   | **2001** |   |
|                                               |   | **(unaudited)**               |    |
| Revenues                                           |   | $                             | 237,752 |   | $ | 219,085 |   | $ | 211,503 |   |
| Costs  of operations                               |   | 180,044                       |    | 161,271 |   | 161,872 |   |
| Gross  profit                                      |   | 57,708                        |    | 57,814 |   | 49,631 |   |
| Corporate  operating expenses                      |   | 13,750                        |    | 10,889 |   | 10,783 |   |
| Income  from company operations                    |   | 43,958                        |    | 46,925 |   | 38,848 |   |
| Equity  in earnings of unconsolidated partnerships |   | 1,744                         |    | 819 |   | 971 |   |
| Acquisition  related compensation charge           |   | —                        |    | (15,616 | ) | — |   |
| Operating  income                                  |   | 45,702                        |    | 32,128 |   | 39,819 |   |
| Interest  expense                                  |   | 37,514                        |    | 38,867 |   | 23,394 |   |
| Income  (loss) before income taxes                 |   | 8,188                         |    | (6,739 | ) | 16,425 |   |
| Provision  (benefit) for income taxes              |   | 3,266                         |    | (2,100 | ) | 2,624 |   |
| Net  income (loss)                                 |   | $                             | 4,922   |   | $ | (4,639 | ) | $ | 13,801 |   |

 

The Company has two reportable segments: the Mobile Division and Fixed-Site Division, which are business unitsdefined primarily by the type of service provided.  The Mobile Division operates primarily Mobile Facilities whilethe Fixed-Site Division operates primarily Centers and Fixed Facilities,although each Division generates both contract services and patient servicesrevenues.  The Company does not allocatecorporate and billing related costs, depreciation related to the Company’s billing system and amortization related toother intangible assets to the two segments. The Company also does not allocate income taxes to the twosegments.  The Company manages cashflows and assets on a consolidated basis, and not by segment, and does notallocate or report assets and capital expenditures by segment.

 

**YEARS ENDEDJUNE 30, 2003 AND 2002**

 

REVENUES: Revenues increased approximately 8.5% from approximately $219.1 millionfor the year ended June 30, 2002, to approximately $237.8 million for theyear ended June 30, 2003.  Thisincrease was due primarily to an increase in revenues at the Mobile Division(approximately $6.0 million) and an increase in revenues at the Fixed-SiteDivision (approximately $12.5 million).  Revenues for the Mobile Division and the Fixed-Site Division representedapproximately 41% and 59%, respectively, of total revenues for the year endedJune 30, 2003.  However, thepercentages will be affected by future acquisitions and the establishment ofCenters, Fixed, and Mobile Facilities.

 

Revenues at the Mobile Division increased approximately 6.5% fromapproximately $91.9 million for the year ended June 30, 2002, toapproximately $97.9 million for the year ended June 30, 2003.  The increase was due to higher utilizationat the Company’s Mobile Facilities and an increase in the number of MRI and PETMobile Facilities in operation during the year ended June 30, 2003(approximately six Mobile Facilities).

 

Revenues at the Fixed-Site Division increased approximately 9.6% fromapproximately $127.3 million for the year ended June 30, 2002, toapproximately $139.8 million for the year ended June 30, 2003.  The increase was due primarily to (i) thefiscal 2003 acquisition discussed above (approximately $6.5 million); (ii)revenues at the opened Fixed Facilities and (iii) higher utilization(approximately 6%), partially offset by a nominal decrease in reimbursementfrom third-party payors (approximately 1%).

 

31

----

 

Approximately 47% of the Company’s total revenues for the year endedJune 30, 2003 were generated from contract services revenues.  Contract services revenues for the MobileDivision and Fixed-Site Division represented approximately 86% and 14%,respectively, of contract services revenues for the year ended June 30,2003.  However, the percentages will beaffected by future acquisitions and the establishment of Centers, Fixed, andMobile Facilities.  Each yearapproximately one-third of the contract services agreements are subject torenewal.  It is expected that some highvolume customer accounts will elect not to renew their contracts and insteadwill purchase or lease their own diagnostic imaging equipment and somecustomers may choose an alternative services provider.  In the past, where agreements have not beenrenewed, the Company has been able to obtain replacement contracts.  While some replacement accounts haveinitially been smaller than the lost accounts, such replacement accounts’revenues have generally increased over the term of the agreement.  The nonrenewal of a single customeragreement would not have a material adverse impact on the Company’s contractservices revenues; however, non-renewal of several contracts could have amaterial adverse impact on contract services revenues.

 

In addition, recent legislative intiatives in Florida may requireMobile Facilities operating in Florida, to be accredited by one of threenational accreditation organizations and subject to certain quarterly reportsas to the location of the Mobile Facilities. The Company believes that these additional regulatory requirements willnot have a material impact on contract services revenues.

 

As a result of the implementation of the new OPPS for outpatientservices, effective August 1, 2000 Medicare began paying hospitals foroutpatient services based on APC groups rather than on a hospital’s costs.  Because the new OPPS appeared to have asevere adverse economic effect on hospitals, Congress enacted additionallegislation in the BBA to soften the negative financial effects for a specificperiod of time (through 2003).  Underthe BBA, hospitals may receive additional payments for new technologies,transitional pass-through for innovative medical devices, drugs and biologics,outlier adjustments and transitional payment corridors.  In addition, the BIPA included certainprovisions requiring CMS to revise the APCs to separate contrast-enhanceddiagnostic imaging procedures from those that are not contrast-enhanced.   Effective January 1, 2002, CMS reducedthe payment for unenhanced diagnostic procedures and increased payment forcontrast-enhanced diagnostic procedures. The extent to which this disparity in reimbursement will continue isunclear.

 

As a result of the implementation of the new OPPS, the Company believesthat its hospital customers may seek reductions in contractual rates to theextent the hospital believes it will pay more to the Company than it willreceive from Medicare and other third-party payors.  To date, no material reductions have been sought.  The reduction of contractual rates for asingle customer or loss of a single customer to a competitor prepared to reducecontractual rates would not have a material adverse impact on the Company’scontract services revenues; however, the reduction in contractual rates forseveral customers or loss of several contracts could have a material adverseimpact on the Company’s business, financial condition and results ofoperations.

 

On the other hand, the Company believes that the impact of the new OPPSon hospital payments for diagnostic imaging services, especially for MRI and CTservices, may cause hospitals to consider restructuring their diagnosticoutpatient imaging services as freestanding centers which are unaffected by thenew OPPS.  Notwithstanding to the OIG’sSpecial Advisory Bulletin discussed above, this may provide the Company withadditional opportunities for its radiology co-source product which involves thejoint ownership and management of single and multi-modality imaging centerswith hospitals.  Given the infancy andcomplexity of the new OPPS, it is difficult to determine whether hospitals willbe receiving less from Medicare (after they take advantage of the transitionalpayments that may be available under the BBA) and to what extent they willattempt to renegotiate existing contractual arrangements.

 

Approximately 53% of the Company’s total revenues for the year endedJune 30, 2003 were generated from patient services revenues. Patientservices revenues for the Mobile Division and Fixed-Site Division representedapproximately 2% and 98%, respectively, of patient services revenues for theyear ended June 30, 2003.  However,the percentages will be affected by future acquisitions and the establishmentof Centers, Fixed, and Mobile Facilities. The Company believes its patient services revenues received fromMedicare will not be materially impacted by the new OPPS because it primarilyoperates freestanding Fixed Facilities and Centers which are unaffectedthereby.

 

32

----

 

The Company’s Fixed Facilities and Centers are principally dependent onthe Company’s ability (either directly or indirectly through its hospitalcustomers) to attract referrals from physicians and other health care providersrepresenting a variety of specialties. The Company’s eligibility to provide service in response to a referralis often dependent on the existence of a contractual arrangement with thereferred patient’s insurance carrier (primarily if the insurance is provided bya managed care organization).  TheCompany currently has in excess of 1,000 contracts with managed careorganizations for diagnostic imaging services provided at the Company’s FixedFacilities and Centers primarily on a discounted fee-for-service basis.  Managed care contracting has become verycompetitive and reimbursement schedules are at or below Medicare reimbursementlevels.  A significant decline inreferrals and/or reimbursement rates would adversely affect the Company’sbusiness, financial condition and results of operations.

 

Management believes that any future increases in revenues can only beachieved by higher utilization and not by increases in procedure prices;however, slower start-ups of new operations, excess capacity of diagnosticimaging equipment, competition, and the expansion of managed care may impactutilization and make it difficult for the Company to achieve revenue increasesin the future, absent the execution of provider agreements with managed carecompanies and other payors, and the execution of the Company’s businessstrategy, particularly acquisitions.

 

COSTS OF OPERATIONS:  Costs of operations increased approximately 11.6% fromapproximately $161.3 million for the year ended June 30, 2002, toapproximately $180.0 million for the year ended June 30, 2003.  This increase was due primarily to (i) thefiscal 2003 acquisition discussed above (approximately $4.7 million), and (ii)increased costs at existing facilities (approximately $14.0 million). Theincrease at existing facilities is due primarily to higher salaries andbenefits, occupancy, equipment maintenance costs and depreciation, partiallyoffset by reduced equipment lease costs. The increase in depreciation and the reduction of equipment lease costsare due primarily to the buyout of operating leases and the conversion ofoperating leases to capital leases discussed above and to the Company’s capitalexpenditures in fiscal 2003.

 

Costs of operations at the Mobile Division increased approximately 5.2%from approximately $63.5 million for the year ended June 30, 2002, toapproximately $66.8 million for the year ended June 30, 2003.  The increase was due primarily to equipmentcosts related to the additional Mobile Facilities discussed above, highersalaries and benefits and an increase inthe Company’s mobile salespersonnel.

 

Costs of operations at the Fixed-SiteDivision increased approximately 11.0% from approximately $89.9 million for theyear ended June 30, 2002, to approximately $99.8 million for the yearended June 30, 2003.  The increasewas due primarily to the fiscal 2003 acquisition discussed above (approximately$4.7 million), higher salaries and benefits, partially offset by reducedequipment maintenance costs at the Company’s existing facilities.

 

Costs of operations, as a percentage of total revenues, increased toapproximately 75.9% for the year ended June 30, 2003, from approximately73.6% for the year ended June 30, 2002. The percentage increase is primarily due to the a higher percentage ofFixed Facilities and Centers as a result of the acquisition discussed above andto depreciation and amortization expense, partially offset by reduced equipmentlease costs.

 

CORPORATE OPERATING EXPENSES:  Corporate operating expenses increasedapproximately 26.6% from approximately $10.9 million for the year endedJune 30, 2002, to approximately $13.8 million for the year endedJune 30, 2003. The increase was due primarily to higher salaries andbenefits and consulting costs associated with the Company’s acquisition anddevelopment activities, additional information systems costs to make theCompany’s systems conform with HIPAA requirements and to higher salaries andbenefits related to one-time severance payments for certain terminatedemployees.  Corporate operatingexpenses, as a percentage of total revenues, increased from approximately 5.0%for the year ended June 30, 2002, to approximately 5.8% for the year endedJune 30, 2003.

 

ACQUISITION RELATED COMPENSATION CHARGE:  Holders of options and warrants, which priorto the Acquisition were exercisable for InSight common stock, received thedifference between $18.00 and the exercise price of each share of common stockthe holder could have acquired pursuant to the terms of the options andwarrants, and the options and warrants were terminated.  This resulted in a charge of approximately$15.6 million, which is reflected in the statement of operations of InSight forthe period from July 1, 2001 to October 17, 2001.

 

INTEREST EXPENSE, NET:  Interest expense, net decreasedapproximately 3.6% from approximately $38.9 million for the year endedJune 30, 2002, to approximately $37.5 million for the year endedJune 30, 2003.  This

 

33

----

 

decrease was due primarily to: (i) the elimination of the write-off ofdebt issuance costs as a result of the refinancing of the senior subordinatedbridge financing in the year ended June 30, 2002 discussed above(approximately $7.4 million), (ii) a reduction in the Company’s effectiveinterest rate on its variable rate debt, and (iii) principal payments on theCredit Facilities, partially offset by (i) additional debt related to theconversion of operating leases to capital leases discussed above, and (ii)additional debt related to the fiscal 2003 acquisition discussed above.

 

PROVISION FOR INCOME TAXES: Provision for income taxes changed from a benefit of approximately $2.1million for the year ended June 30, 2002, to a provision of approximately$3.3 million for the year ended June 30, 2003.  For the year ended June 30, 2003, the provision is due tothe Company recording a tax provision at the statutory rate of 40%.  For the year ended June 30, 2002, thebenefit was due to InSight recording a benefit to recognize the utilization ofcertain operating loss carrybacks.  ** **At the beginning of each fiscalyear, the Company estimates its effective tax rate for the fiscal year.  In addition, the Company periodicallyreviews the effective tax rate in light of certain factors, including actualoperating income, acquisitions completed and new facilities opened, and theeffects of benefits from the Company’s net operating loss carryforwards.  The Company expects its effective tax ratewill be approximately 40% in the future.

 

EBITDA: Earnings before interest, taxes, depreciation and amortization includingthe acquisition related compensation charge (EBITDA) increased approximately13.1% from approximately $84.0 million for the year ended June 30, 2002,to approximately $95.0 million for the year ended June 30, 2003.  This increase was primarily due to:  (i) increased operating income at theCompany’s existing facilities, (ii) the buyout of operating leases and theconversion of operating leases to capital leases discussed above and (iii) theacquisition discussed above (approximately $2.2 million).  EBITDA for the Fixed-Site Division increasedapproximately 10.3% from approximately $53.6 million for the year endedJune 30, 2002, to approximately $59.1 million for the year ended June 30,2003.  EBITDA for the Mobile Divisionincreased approximately 25.0% from approximately $44.4 million for the yearended June 30, 2002, to approximately $55.5 million for the year endedJune 30, 2003.  EBITDA has beenincluded because management believes that it is a useful tool for investors andmanagement to measure the Company’s ability to meet debt service, capitalexpenditure and working capital requirements. EBITDA should not be considered an alternative to, or more meaningfulthan, income from company operations or other traditional indicators ofoperating performance and cash flow from operating activities determined inaccordance with accounting principles generally accepted in the UnitedStates.  While EBITDA is used as ameasure of operations and the ability to meet debt service requirements, it isnot necessarily comparable to other similarly titled captions of othercompanies due to differences in methods of calculations.  The calculation of EBITDA is as follows (inthousands):

 
|                                     |   | **Years Ended June 30,** |   |
|------------------------------------------|--------|-------------------------------|--------|
|                                     |   | **2003**                      |   | **2002** |   |
|                                     |   | **(unaudited)**               |   |
| Net  income (loss), as reported          |   | $                             | 4,922  |   | $ | (4,639 | ) |
| Provision  (benefit) for income taxes    |   | 3,266                         |   | (2,100 | ) |
| Interest  expense                        |   | 37,514                        |   | 38,867 |   |
| Acquisition  related compensation charge |   | —                        |   | 15,616 |   |
| Depreciation  and amortization           |   | 49,345                        |   | 36,285 |   |
| EBITDA                                   |   | $                             | 95,047 |   | $ | 84,029 |   |

 

**YEARS ENDEDJUNE 30, 2002 AND 2001**

 

REVENUES: Revenues increased approximately 3.6% from approximately $211.5 millionfor the year ended June 30, 2001, to approximately $219.1 million for theyear ended June 30, 2002.  Thisincrease was due primarily to the opened Fixed Facilities discussed above(approximately $1.0 million) and an increase in contract services, patientservices and other revenues (approximately $6.6 million) at existingfacilities, resulting from sales efforts and incentive initiatives implementedat existing facilities.  Revenues forthe Mobile and Fixed-Site Division represented approximately 42% and 58%,respectively, of total revenues for the year ended June 30, 2002.

 

Contract services revenues increased approximately 1.6% fromapproximately $103.4 million for the year ended June 30, 2001, toapproximately $105.1 million for the year ended June 30, 2002.  The increase was due to a

 

34

----

 

combination of higher utilization and more fixed monthly fee contractsat the Company’s existing mobile customer base, partially offset by the loss ofseveral high volume customers which were replaced by contracts which initiallyhave lower volumes.  Contract servicesrevenues for the Mobile and Fixed-Site Division represented approximately 85%and 15%, respectively, of contract services revenues for the year endedJune 30, 2002.  However, thepercentages will be affected by future acquisitions and the establishment ofCenters, Fixed and Mobile Facilities.

 

Patient services revenues, primarily earned by the Company’s FixedFacilities and Centers, represented approximately 52% of total revenues for theyear ended June 30, 2002.  Patientservices revenues increased approximately 5.5% from approximately $107.5million for the year ended June 30, 2001, to approximately $113.4 millionfor the year ended June 30, 2002. This increase was due primarily to the opened Fixed Facilities discussedabove (approximately $1.0 million) and an increase in revenues at existingfacilities (approximately $4.9 million). The increase at existing facilitieswas due to higher utilization (approximately 7%), and a nominal increase inreimbursement from third-party payors. Patient services revenues for the Mobile and Fixed-Site Divisionrepresented approximately 2% and 98%, respectively, of patient servicesrevenues for the year ended June 30, 2002.

 

COSTS OF OPERATIONS:  Costs of operations decreased approximately 0.4% fromapproximately $161.9 million for the year ended June 30, 2001, toapproximately $161.3 million for the year ended June 30, 2002.  This decrease was due primarily to theelimination of goodwill amortization as a result of the adoption of SFAS 142discussed below, net of amortization as a result of the Acquisition(approximately $4.4 million), substantially offset by costs related to theopened Fixed Facilities discussed above (approximately $1.1 million) andincreased costs at existing facilities (approximately $2.7 million).  The increase at existing facilities was dueprimarily to higher salaries, benefits, and insurance partially offset by lowerdepreciation, equipment maintenance and supply expenses.

 

Costs of operations, as a percentage of total revenues, decreased toapproximately 73.6% for the year ended June 30, 2002 from approximately76.5% for the year ended June 30, 2001. The percentage decrease is primarily due to the elimination of goodwillamortization and reduced costs in depreciation, equipment maintenance andsupply costs, partially offset by higher salary and benefit costs.

 

CORPORATE OPERATING EXPENSES:  Corporate operating expenses increasedapproximately 0.9% from approximately $10.8 million for the year endedJune 30, 2001, to approximately $10.9 million for the year ended June 30,2002. The increase was due primarily to higher occupancy, legal and businessdevelopment costs, partially offset by reduced information systems costs.   Corporate operating expenses, as apercentage of total revenues, decreased from approximately 5.1% for the yearended June 30, 2001, to approximately 5.0% for the year endedJune 30, 2002.

 

ACQUISITION RELATED COMPENSATION CHARGE:  Holdersof options and warrants, which prior to the Acquisition were exercisable forInSight common stock, received the difference between $18.00 and the exerciseprice of each share of common stock the holder could have acquired pursuant tothe terms of the options and warrants, and the options and warrants wereterminated.  This resulted in a chargeof approximately $15.6 million, which is reflected in the statement ofoperations of InSight for the period from July 1, 2001 to October 17,2001.

 

INTEREST EXPENSE, NET:  Interest expense, net increasedapproximately 66.2% from approximately $23.4 million for the year ended June 30,2001, to approximately $38.9 million for the year ended June 30,2002.  This increase was due primarilyto the write-off of debt issuance costs as a result of the refinancing of thesenior subordinated bridge financing (approximately $7.4 million) and toadditional debt related to the Acquisition and related financing activitiesdiscussed above and the unused facility fee payments discussed above, partiallyoffset by reduced interest as a result of principal payments of long-term debt.

 

PROVISION FOR INCOME TAXES: Provision for income taxes changed from approximately $2.6 million forthe year ended June 30, 2001, to a benefit of approximately $2.1 millionfor the year ended June 30, 2002. For the year ended June 30, 2002, the benefit is due to InSightrecording a benefit to recognize the utilization of certain operating losscarrybacks.  For the year endedJune 30, 2001, the provision is due to InSight recording a tax provisionat the statutory rate of 40%, partially offset by a reduction in the valuationallowance attributed to the utilization of net operating loss carryforwards andthe effect of permanent differences.

 

EBITDA: Earnings before interest, taxes, depreciation and amortization includingthe acquisition related compensation charge increased approximately 3.7% fromapproximately $81.0 million for the year ended June 30,

 

35

----

 

2001, to approximately $84.0 million for the year ended June 30,2002.  This increase was primarily dueto higher revenues at existing facilities, partially offset by higher costs ofservices.   EBITDA for the Fixed-SiteDivision increased approximately 5.9% from approximately $50.6 million for theyear ended June 30, 2001, to approximately $53.6 million for the year endedJune 30, 2002.  EBITDA for theMobile Division decreased approximately 6.1% from approximately $47.3 millionfor the year ended June 30, 2001, to approximately $44.4 million for theyear ended June 30, 2002.  Thereduction in EBITDA in the Mobile Division was due primarily to higher costs ofservices and to start-up costs relating to certain Mobile PET Facilities.  EBITDA has been included because managementbelieves that it is a useful tool for measuring the Company’s ability to meetdebt service, capital expenditure and working capital requirements.  EBITDA should not be considered analternative to, or more meaningful than, income from company operations orother traditional indicators of operating performance and cash flow fromoperating activities determined in accordance with accounting principlesgenerally accepted in the United States. While EBITDA is used as a measure of operations and the ability to meetdebt service requirements, it is not necessarily comparable to other similarlytitled captions of other companies due to differences in methods ofcalculations.  The calculation of EBITDAis as follows (in thousands):

 
|                                     |   | **Years Ended June 30,** |   |
|------------------------------------------|--------|-------------------------------|--------|
|                                     |   | **2002**                      |   | **2001** |   |
|                                     |   | **(unaudited)**               |   |
| Net  income (loss), as reported          |   | $                             | (4,639 | ) | $ | 13,801 |   |
| Provision  (benefit) for income taxes    |   | (2,100                        | )      | 2,624 |   |
| Interest  expense                        |   | 38,867                        |   | 23,394 |   |
| Acquisition  related compensation charge |   | 15,616                        |   | — |   |
| Depreciation  and amortization           |   | 36,285                        |   | 41,134 |   |
| EBITDA                                   |   | $                             | 84,029 |   | $ | 80,953 |   |

 

**NEW PRONOUNCEMENTS**

 

In June 2001, the Financial Accounting Standards Board (FASB)issued SFAS No. 143, “Accounting for Asset Retirement Obligations.”  SFAS 143 addresses financial accounting andreporting for obligations associated with the retirement of tangible long-livedassets and the associated asset retirement costs. It applies to legalobligations associated with the retirement of long-lived assets that resultfrom the acquisition, construction, development and/or the normal operation ofa long-lived asset, except for certain obligations of lessees.  SFAS 143 requires that the fair value of aliability for an asset retirement obligation be recognized in the period inwhich it is incurred if a reasonable estimate of fair value can be made.  The associated asset retirement costs arecapitalized as part of the carrying amount of the long-lived asset. The Companyadopted SFAS 143 on July 1, 2002, which did not have an impact on theCompany’s financial condition and results of operations.

 

In July 2001, the Company and InSight adopted SFAS No. 141, “BusinessCombinations”.   SFAS 141 eliminates thepooling-of-interests method of accounting and further clarifies the criteriafor recognition of intangible assets separately from goodwill.   In accordance with SFAS 141, the Companyengaged a valuation specialist to assist the Company in identifying acquiredintangible assets, their respective fair values and amortization periodsrelated to the Acquisition.  The Companyhas made an allocation of values to these identifiable intangible assets basedon a third-party valuation.

 

In July 2001, the Company and InSight adopted SFAS No. 142,“Goodwill and Other Intangible Assets”. SFAS 142 eliminates the amortization of goodwill, permitsindefinite-lived intangible assets and initiates an annual review for impairment.  Identifiable intangible assets with adeterminable useful life will continue to be amortized.  Impairment results when the fair value ofthe Company’s reporting units, including goodwill, is less than its carryingvalue.  The Company completed a reviewof impairment for goodwill and other intangible assets, indicating noimpairment as of January 1, 2003.

 

In August 2001, the FASB issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” SFAS 144 addresses financial accounting and reporting for the impairmentor disposal of long-lived assets.  SFAS144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived

 

36

----

 

Assets to Be Disposed Of,” and the accounting and reporting provisionsof APB Opinion No. 30, “Reporting the Results of Operations – Reporting theEffects and Transactions,” for the disposal of a segment of a business (aspreviously defined in that Opinion). The Company adopted SFAS 144 on July 1, 2002, which did not have animpact on the Company’s financial condition and results of operations.

 

In April 2002, the FASB issued SFAS No. 145, “Revision of SFASNos. 4, 44, and 64, Amendment of FASB No. 13 and Technical Corrections.” SFAS145 rescinds, amends or makes various technical corrections of certain existingauthoritative pronouncements.  TheCompany adopted SFAS 145 on July 1, 2002. As a result, the extraordinary loss from the extinguishment of debt ofapproximately $7.4 million will no longer be considered extraordinary, and hasbeen classified as interest expense for the year ended June 30, 2002.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” SFAS 146 addresses financial accounting and reporting for costsassociated with exit or disposal activities. SFAS 146 is effective for exit or disposal activities initiated afterMarch 31, 2003.  The Company doesnot expect the adoption of SFAS 146 to have an impact on its financialcondition and results of operations.

 

In December 2002, the FASB issued SFASNo. 148, “Accounting for Stock-Based Compensation — Transitionand Disclosure — an Amendment of FASB Statement No. 123.”  SFAS 148 amends SFAS No. 123, “Accounting forStock-Based Compensation,” to provide alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation.  In addition,SFAS 148 amends the disclosure requirements of SFAS 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results.  The Company adoptedthe disclosure requirements of SFAS 148 on January 1, 2003.  The adoption of SFAS 148 did not have amaterial effect on the Company’s financial condition and results ofoperations.  As permitted under bothSFAS 123 and SFAS 148, the Company continues to follow the intrinsic valuemethod of accounting under Accounting Principles Board No. 25 “Accounting forStock Issued to Employees. “

 

In January 2003, the FASB issued FIN 46, “Consolidation ofVariable Interest Entities-an interpretation of ARB No. 51.”  FIN 46 addresses consolidation by businessenterprises of variable interest entities, which have one or both of thefollowing characteristics:  (i) theequity investment at risk is not sufficient to permit the entity to finance itsactivities without additional subordinated financial support from otherparties, which is provided through other interests that will absorb some or allof the expected losses of the entity, and (ii) the equity investors lack anessential characteristic of a controlling financial interest.  FIN 46 applies to variable interest entitiesestablished after December 31, 2002. The Company does not expect the adoption of FIN 46 to have a materialimpact on its financial condition and results of operations.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of StatementNo. 133 on Derivative Instruments and Hedging Activities.”  SFAS 149 is effective for contracts enteredinto or modified after June 30, 2003 and for hedging relationshipsdesignated after June 30, 2003. SFAS 149 amends and clarifies financial accounting and reporting forderivative instruments, including certain derivative instruments embedded inother contracts and for hedging activities. SFAS 149 amends SFAS 133 for decisions made as part of the Derivatives ImplementationGroup process that effectively required amendments to SFAS 133, in connectionwith other FASB projects dealing with financial instruments and in connectionwith implementation issues raised in relation to the application of thedefinition of a derivative.  The Companydoes not expect the adoption of SFAS 149 to have a material impact on itsfinancial condition and results of operations.

 

In May 2003, the FASB issued SFAS No. 150, “Certain FinancialInstruments with Characteristics of Both Liabilities and Equity.”  SFAS 150 establishes standards for how acompany clarifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  It requires a company to classify such instruments asliabilities, whereas they previously may have been classified as equity.  SFAS 150 is effective for all financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective July 1, 2003.  TheCompany does not expect the adoption of SFAS 150 to have a material impact onits financial condition and results of operations.

 

37

----

 

**CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES**

 

Management’s discussion and analysis of financial condition and resultsof operations, as well as disclosures included elsewhere in this report on Form10-K are based upon the Company’s consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States. The preparation of these consolidated financial statements requiresmanagement to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues, expenses and related disclosure ofcontingencies. The Company believes the critical accounting policies that mostimpact the consolidated financial statements are described below.  A summary of the significant accountingpolicies of the Company can be found in Note 3 to the Consolidated FinancialStatements which is included in Item 8 of this Form 10-K.

 

TRADE ACCOUNTS RECEIVABLES:             The Company reviews its tradeaccounts receivables and its estimates of the allowance for doubtful accountsand contractual adjustments each period. The amount of the allowance includes management’s estimate of theamounts expected to be written off on specific accounts and for write-offs onother unidentified accounts.  Inestimating the write-offs and adjustments on specific accounts, managementrelies on a combination of in-house analysis and a review of contractual paymentrates from private health insurance programs or under the federal Medicareprogram.  In estimating the allowancefor unidentified write-offs and adjustments, management relies on historicalexperience. Estimates of uncollectible amounts are revised each period, andchanges are recorded in the period they become known. The amounts the Companywill ultimately realize could differ materially from the amounts assumed inarriving at the allowance for doubtful accounts and contractual adjustments inthe condensed consolidated financial statements at June 30, 2003.

 

GOODWILL AND OTHER INTANGIBLE ASSETS:   The Company evaluates the carrying value ofgoodwill and identified intangibles not subject to amortization in the secondquarter of each fiscal year.  As part ofthe evaluation, the Company compares the carrying value of each intangibleasset with its fair value to determine whether there has been impairment.  The Company assesses the ongoingrecoverability of its intangible assets subject to amortization by determiningwhether the intangible asset balance can be recovered over the remainingamortization period through projected undiscounted future cash flows. Ifprojected future cash flows indicate that the unamortized intangible assetbalances will not be recovered, an adjustment is made to reduce the netintangible asset to an amount consistent with projected future cash flowsdiscounted at the Company’s incremental borrowing rate. Cash flow projections,although subject to a degree of uncertainty, are based on trends of historicalperformance and management’s estimate of future performance, givingconsideration to existing and anticipated competitive and economic conditions.

 

REVENUE RECOGNITION:  Revenues from contract services (primarily Mobile Facilities) andfrom patient services (primarily Fixed Facilities and Centers) are recognizedwhen services are provided.  Patientservices revenues are presented net of (i) related contractual adjustments,which represents the difference between the Company’s charge for a procedureand what it will ultimately receive from private health insurance programs,Medicare, Medicaid and other federal health care programs, and (ii) paymentsdue to radiologists.  Equipment rentalrevenues, management fees and other revenues are recognized over the applicablecontract period.  Revenues collected inadvance are recorded as unearned revenue.

 

38

----

 

**ITEM 7A.               QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The Company provides its services in the United States and receivespayment for its services exclusively in United States dollars.  Accordingly, the Company’s business isunlikely to be affected by factors such as changes in foreign market conditionsor foreign currency exchange rates.

 

The Company’s market risk exposure relates primarily to interest rates,where the Company will periodically use interest rate swaps to hedge variableinterest rates on long-term debt under its Credit Facilities.  The Company does not engage in activitiesusing complex or highly leveraged instruments.

 

At June 30, 2003, the Company had outstanding long-term debt ofapproximately $197.2 million, with floating rate terms.  The Company had outstanding an interest rateswap, converting $23.8 million of its floating rate debt to fixed rate debt.  The effect on pre-tax income of a 0.125%variance in interest rates would be approximately $0.2 million on an annualbasis.  Under the terms of the interestrate swap agreement, the Company is exposed to credit loss in the event ofnonperformance by the swap counterparty; however, the Company does notanticipate nonperformance by the counterparty.

 

39

----

 

**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

Index to Consolidated Financial Statementsfor the Years Ended June 30, 2003 and 2002, the Period from July 1,2001 to October 17, 2001and for the Year Ended June 30, 2001

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

 

In accordance with SEC Rule3-10 of Regulation S-X, the consolidated financial statements of InSight HealthServices Holdings Corp. (Company) are included herein and separatefinancial statements of InSight Health Services Corp. (InSight), the Company’swholly owned subsidiary, and InSight’s subsidiary guarantors are notincluded.  Condensed financial data forInSight and its subsidiary guarantors is included in Note 20 to theConsolidated Financial Statements.

 

40

----

 

**REPORTOF INDEPENDENT AUDITORS**

 

To the Stockholders of InSight Health Services Holdings Corp.:

 

In our opinion, theaccompanying consolidated balance sheets as of June 30, 2003 and 2002 andthe related consolidated statements of operations, of stockholders’ equity andof cash flows present fairly, in all material respects, the financial positionof InSight Health Services Holdings Corp. and its subsidiaries at June 30, 2003and 2002, and the results of their operations and their cash flows for theyears then ended in conformity with accounting principles generally accepted inthe United States of America.  Also, inour opinion, the accompanying consolidated statements of operations, ofstockholders’ equity and of cash flows present fairly, in all material respects,the results of operations and cash flows for InSight Health Services Corp.(Predecessor) for the period from July 1, 2001 through October 17,2001 in conformity with accounting principles generally accepted in the UnitedStates of America.  These financialstatements are the responsibility of the Company’s management; ourresponsibility is to express an opinion on these financial statements based onour audits.  We conducted our audits ofthese statements in accordance with auditing standards generally accepted inthe United States of America, which require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.  The financial statements of the Predecessorfor the year ended June 30, 2001 were audited by other independentaccountants who have ceased operations. Those independent accountants expressed an unqualified opinion on thosestatements in their report dated August 29, 2001.

 

As discussed above, the financial statements of the Predecessor as ofJune 30, 2001 and for the year ended June 30, 2001, were audited byother independent accountants who have ceased operations.  As described in Note 17, the Company changedthe composition of its reportable segments in 2002, and the amounts in the 2001financial statements relating to the reportable segments have been restated toconform to the 2002 composition of reportable segments.  We audited the adjustments that were appliedto restate the disclosure for reportable segments reflected in the 2001financial statements.  In our opinion,such adjustments are appropriate and have been properly applied.  However, we were not engaged to audit,review or apply any procedures to the 2001 financial statements of thePredecessor other than with respect to such adjustments and, accordingly, we donot express an opinion or any other form of assurance on the 2001 financialstatements taken as a whole.

 

As described in Note 3, the Company adopted the provisions of Statementof Financial Accounting Standards No. 142, “Goodwill and Other IntangibleAssets”.

 
| /s/  PRICEWATERHOUSECOOPERS LLP |   |
|---------------------------------|--------|
| Orange County, California       |
| September 18 , 2003   |

 

41

----

 

**REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS**

 

**The following report is a copy of a reportpreviously issued by Arthur Andersen LLP and has not been reissued by ArthurAndersen LLP.**

 

To the Stockholders of InSight Health Services Corp.:

 

We have audited the accompanying consolidated balance sheet of InSightHealth Services Corp. (a Delaware corporation) and subsidiaries as ofJune 30, 2001 and 2000, and the related consolidated statements of income,stockholders’ equity and cash flows for each of the three years in the periodended June 30, 2001.  Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of InSightHealth Services Corp. and subsidiaries as of June 30, 2001, and theresults of their operations and their cash flows for each of the three years inthe period ended June 30, 2001, in conformity with accounting principlesgenerally accepted in the United States.

 
| ARTHUR ANDERSEN LLP       |
|---------------------------|
| Orange County, California |
| August 29, 2001      |

 

42

----

 

**INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**AS OF JUNE 30, 2003 AND 2002**

(Amountsin thousands, except share data)

 
|                                                                                                                                                              |   | **2003** |    | **2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| ASSETS                                                                                                                                                            |   |     |    |     |   |
| CURRENT  ASSETS:                                                                                                                                                  |   |     |    |     |   |
| Cash  and cash equivalents                                                                                                                                        |   | $        | 19,554  |     | $      | 17,783 |   |
| Trade  accounts receivables, net                                                                                                                                  |   | 46,096   |    | 43,859   |   |
| Other  current assets                                                                                                                                             |   | 10,149   |    | 8,056    |   |
| Total  current assets                                                                                                                                             |   | 75,799   |    | 69,698   |   |
|                                                                                                                                                              |   |     |    |     |   |
| PROPERTY  AND EQUIPMENT, net                                                                                                                                      |   | 219,121  |    | 172,056  |   |
| INVESTMENTS  IN PARTNERSHIPS                                                                                                                                      |   | 2,734    |    | 1,886    |   |
| OTHER  ASSETS                                                                                                                                                     |   | 19,371   |    | 21,117   |   |
| OTHER  INTANGIBLE ASSETS, net                                                                                                                                     |   | 36,470   |    | 36,270   |   |
| GOODWILL                                                                                                                                                          |   | 223,822  |    | 198,374  |   |
|                                                                                                                                                              |   | $        | 577,317 |     | $      | 499,401 |   |
|                                                                                                                                                              |   |     |    |     |   |
| LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                                                        |   |     |    |     |   |
| CURRENT  LIABILITIES:                                                                                                                                             |   |     |    |     |   |
| Current  portion of notes payable                                                                                                                                 |   | $        | 2,009   |     | $      | 1,500 |   |
| Current  portion of capital lease obligations                                                                                                                     |   | 5,696    |    | 1,775    |   |
| Accounts  payable and other accrued expenses                                                                                                                      |   | 35,514   |    | 30,516   |   |
| Total  current liabilities                                                                                                                                        |   | 43,219   |    | 33,791   |   |
|                                                                                                                                                              |   |     |    |     |   |
| LONG-TERM  LIABILITIES:                                                                                                                                           |   |     |    |     |   |
| Notes  payable, less current portion                                                                                                                              |   | 420,239  |    | 372,375  |   |
| Capital  lease obligations, less current portion                                                                                                                  |   | 18,175   |    | 2,514    |   |
| Other  long-term liabilities                                                                                                                                      |   | 4,070    |    | 3,345    |   |
| Total  long-term liabilities                                                                                                                                      |   | 442,484  |    | 378,234  |   |
|                                                                                                                                                              |   |     |    |     |   |
| COMMITMENTS  AND CONTINGENCIES (Note 10)                                                                                                                          |   |     |    |     |   |
|                                                                                                                                                              |   |     |    |     |   |
| STOCKHOLDERS’  EQUITY:                                                                                                                                       |   |     |    |     |   |
| Common  stock, $.001 par value, 10,000,000 shares authorized, 5,468,814 and 5,468,764  shares issued and outstanding at June 30, 2003 and 2002, respectively |   | 5        |    | 5        |   |
| Additional  paid-in capital                                                                                                                                       |   | 87,081   |    | 87,586   |   |
| Accumulated  other comprehensive loss                                                                                                                             |   | (403     | )       | (224     | )      |
| Retained  earnings                                                                                                                                                |   | 4,931    |    | 9        |   |
| Total  stockholders’ equity                                                                                                                                  |   | 91,614   |    | 87,376   |   |
|                                                                                                                                                              |   | $        | 577,317 |     | $      | 499,401 |   |

 

The accompanying notes are an integral part of these consolidatedbalance sheets.

 

43

----

 

**INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDED JUNE 30, 2003 AND 2002, THE PERIODFROM JULY 1 TO OCTOBER 17, 2001 AND**

**FOR THE YEAR ENDED JUNE 30, 2001**

(Amountsin thousands)

 
|                                               |   |        |    | **Predecessor**                                   |   |
|----------------------------------------------------|--------|-------------|---------|---------------------------------------------------|--------|
|                                               |   | **Company** |    | **Period from  July 1 to  October 17,** |   | **Year Ended  June 30,** |   |
| **Years Ended June 30,**                      |
|                                               |   | **2003**    |    | **2002**                                          |   | **2001** |   | **2001** |   |
| REVENUES                                           |   | $           | 237,752 |                                              | $      | 155,407 |   | $ | 63,678 |   | $ | 211,503 |   |
|                                               |   |        |    |                                              |   |   |   |   |   |
| COSTS  OF OPERATIONS:                              |   |        |    |                                              |   |   |   |   |   |
| Costs  of services                                 |   | 125,685     |    | 80,868                                            |   | 32,197 |   | 109,216 |   |
| Provision  for doubtful accounts                   |   | 4,154       |    | 2,785                                             |   | 1,110 |   | 3,594 |   |
| Equipment  leases                                  |   | 860         |    | 5,469                                             |   | 2,557 |   | 7,928 |   |
| Depreciation  and amortization                     |   | 49,345      |    | 26,462                                            |   | 9,823 |   | 41,134 |   |
| Total  costs of operations                         |   | 180,044     |    | 115,584                                           |   | 45,687 |   | 161,872 |   |
|                                               |   |        |    |                                              |   |   |   |   |   |
| Gross  profit                                      |   | 57,708      |    | 39,823                                            |   | 17,991 |   | 49,631 |   |
|                                               |   |        |    |                                              |   |   |   |   |   |
| CORPORATE  OPERATING EXPENSES                      |   | 13,750      |    | 7,705                                             |   | 3,184 |   | 10,783 |   |
|                                               |   |        |    |                                              |   |   |   |   |   |
| Income  from company operations                    |   | 43,958      |    | 32,118                                            |   | 14,807 |   | 38,848 |   |
|                                               |   |        |    |                                              |   |   |   |   |   |
| EQUITY  IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS |   | 1,744       |    | 437                                               |   | 382 |   | 971 |   |
|                                               |   |        |    |                                              |   |   |   |   |   |
| ACQUISITION  RELATED COMPENSATION CHARGE           |   | —      |    | —                                            |   | (15,616 | ) | — |   |
|                                               |   |        |    |                                              |   |   |   |   |   |
| Operating  income (loss)                           |   | 45,702      |    | 32,555                                            |   | (427 | ) | 39,819 |   |
|                                               |   |        |    |                                              |   |   |   |   |   |
| INTEREST  EXPENSE, net                             |   | 37,514      |    | 32,546                                            |   | 6,321 |   | 23,394 |   |
|                                               |   |        |    |                                              |   |   |   |   |   |
| Income  (loss) before income taxes                 |   | 8,188       |    | 9                                                 |   | (6,748 | ) | 16,425 |   |
|                                               |   |        |    |                                              |   |   |   |   |   |
| PROVISION  (BENEFIT) FOR INCOME TAXES              |   | 3,266       |    | —                                            |   | (2,100 | ) | 2,624 |   |
|                                               |   |        |    |                                              |   |   |   |   |   |
| Net  income (loss)                                 |   | $           | 4,922   |                                              | $      | 9 |   | $ | (4,648 | ) | $ | 13,801 |   |

 

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

 

44

----

 

**INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**FOR THE YEARS ENDED JUNE 30, 2003 AND 2002**

(Amountsin thousands, except share data)

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

 

The accompanying notes are an intergral part of these consolidatedfinancial statements.

 

45

----

 

**INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**FOR THE PERIOD FROM JULY 1 TO OCTOBER 17, 2001 ANDFOR THE YEAR ENDED JUNE 30, 2001**

(Amountsin thousands, except share data)

 
|                                                             |   | **Preferred Stock** |   |         |   |         |   | **Additional**   |   | **Other**   |   | **Retained**      |   |         |   |
|------------------------------------------------------------------|--------|---------------------|--------|--------------|--------|--------------|--------|------------------|--------|-------------|--------|-------------------|--------|--------------|--------|
|                                                             |   | **Series B**        |   | **Series C** |   | **Series D** |   | **Common Stock** |   | **Paid-In** |   | **Comprehensive** |   | **Earnings** |   |   |   |
|                                                             |   | **Shares**          |   | **Amount**   |   | **Shares**   |   | **Amount**       |   | **Shares**  |   | **Amount**        |   | **Shares**   |   | **Amount** |   | **Capital** |   | **(Loss)** |   | **(Deficit)** |   | **Total** |   |
| **Predecessor**                                                  |   |                |   |         |   |         |   |             |   |        |   |              |   |         |   |   |   |   |   |   |   |   |   |   |   |
|                                                             |   |                |   |         |   |         |   |             |   |        |   |              |   |         |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE  AT JUNE 30, 2000                                   |   | 25,000              |   | $            | 23,923 |         | 27,953 |             | $      | 13,173      |   | —            |   | $            | — |   | 2,979,293 |   | $ | 3 |   | $ | 23,743 |   | $ | — |   | $ | (9,355 | ) | $ | 51,487 |   |
|                                                             |   |                |   |         |   |         |   |             |   |        |   |              |   |         |   |   |   |   |   |   |   |   |   |   |   |
| Stock  options and warrants exercised                            |   | —              |   | —       |   | —       |   | —           |   | —      |   | —            |   | 32,375       |   | — |   | 183 |   | — |   | — |   | 183 |   |
|                                                             |   |                |   |         |   |         |   |             |   |        |   |              |   |         |   |   |   |   |   |   |   |   |   |   |   |
| Adjustment  for fractional shares on merger exchange             |   | —              |   | —       |   | —       |   | —           |   | —      |   | —            |   | (12          | )      | — |   | — |   | — |   | — |   | — |   |
|                                                             |   |                |   |         |   |         |   |             |   |        |   |              |   |         |   |   |   |   |   |   |   |   |   |   |   |
| Net  income                                                      |   | —              |   | —       |   | —       |   | —           |   | —      |   | —            |   | —       |   | — |   | — |   | — |   | 13,801 |   | 13,801 |   |
| BALANCE  AT JUNE 30, 2001                                   |   | 25,000              |   | 23,923       |   | 27,953       |   | 13,173           |   | —      |   | —            |   | 3,011,656    |   | 3 |   | 23,926 |   | — |   | 4,446 |   | 65,471 |   |
|                                                             |   |                |   |         |   |         |   |             |   |        |   |              |   |         |   |   |   |   |   |   |   |   |   |   |   |
| Stock  options and warrants exercised                            |   | —              |   | —       |   | —       |   | —           |   | —      |   | —            |   | 13,911       |   | — |   | 145 |   | — |   | — |   | 145 |   |
|                                                             |   |                |   |         |   |         |   |             |   |        |   |              |   |         |   |   |   |   |   |   |   |   |   |   |   |
| Conversion  of Series B and Series C to Series D Preferred Stock |   | (25,000             | )      | (23,923      | )      | (27,953      | )      | (13,173          | )      | 632,266     |   | 37,096            |   | —       |   | — |   | — |   | — |   | — |   | — |   |
|                                                             |   |                |   |         |   |         |   |             |   |        |   |              |   |         |   |   |   |   |   |   |   |   |   |   |   |
| Conversion  of Series D Preferred Stock to Common Stock          |   | —              |   | —       |   | —       |   | —           |   | (632,266    | )      | (37,096           | )      | 6,323,660    |   | 6 |   | 37,090 |   | — |   | — |   | — |   |
|                                                             |   |                |   |         |   |         |   |             |   |        |   |              |   |         |   |   |   |   |   |   |   |   |   |   |   |
| Acquisition  related compensation charge                         |   | —              |   | —       |   | —       |   | —           |   | —      |   | —            |   | —       |   |   |   | 15,616 |   | — |   | — |   | 15,616 |   |
|                                                             |   |                |   |         |   |         |   |             |   |        |   |              |   |         |   |   |   |   |   |   |   |   |   |   |   |
| Net  loss                                                        |   | —              |   | —       |   | —       |   | —           |   | —      |   | —            |   | —       |   | — |   | — |   | — |   | (4,648 | ) | (4,648 | ) |
|                                                             |   |                |   |         |   |         |   |             |   |        |   |              |   |         |   |   |   |   |   |   |   |   |   |   |   |
| Other  comprehensive (loss)                                      |   | —              |   | —       |   | —       |   | —           |   | —      |   | —            |   | —       |   | — |   | — |   | (682 | ) | — |   | (682 | ) |
| Comprehensive  (loss)                                            |   |                |   |         |   |         |   |             |   |        |   |              |   |         |   |   |   |   |   |   |   |   |   | (5,330 | ) |
| BALANCE  AT OCTOBER 17, 2001                                     |   | —              |   | $            | — |         | — |             | $      | —      |   | —            |   | $            | — |   | 9,349,227 |   | $ | 9 |   | $ | 76,777 |   | $ | (682 | ) | $ | (202 | ) | $ | 75,902 |   |
|                                                                  |        |                     |        |              |        |              |        |                  |        |             |        |                   |        |              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

46

----

 

**INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED JUNE 30, 2003 AND 2002, THE PERIODFROM JULY 1 TO OCTOBER 17, 2001 AND**

**FOR THE YEAR ENDED JUNE 30, 2001**

(Amountsin thousands)

 
|                                                                                      |   |        |   | **Predecessor**                                   |   |
|-------------------------------------------------------------------------------------------|--------|-------------|--------|---------------------------------------------------|--------|
|                                                                                      |   | **Company** |   | **Period from  July 1 to  October 17,** |   | **Year Ended  June 30,** |   |
| **Years Ended June 30,**                                                             |
|                                                                                      |   | **2003**    |   | **2002**                                          |   | **2001** |   | **2001** |   |
| OPERATING  ACTIVITIES:                                                                    |   |        |   |                                              |   |   |   |   |   |
| Net  income (loss)                                                                        |   | $           | 4,922  |                                              | $      | 9 |   | $ | (4,648 | ) | $ | 13,801 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |   |        |   |                                              |   |   |   |   |   |
| Write-off  of debt issuance costs                                                         |   | —      |   | 7,378                                             |   | — |   | — |   |
| Depreciation  and amortization                                                            |   | 49,345      |   | 26,462                                            |   | 9,823 |   | 41,134 |   |
| Acquisition  related compensation charge                                                  |   | —      |   | —                                            |   | 15,616 |   | — |   |
| Cash  provided by (used in) changes in operating assets and liabilites:                   |   |        |   |                                              |   |   |   |   |   |
| Trade  accounts receivables, net                                                          |   | (2,237      | )      | 1,874                                             |   | (2,378 | ) | (2,757 | ) |
| Other  current assets                                                                     |   | 4,907       |   | 590                                               |   | (3,616 | ) | 782 |   |
| Accounts  payable and other accrued expenses                                              |   | 4,819       |   | 3,288                                             |   | 23 |   | (2,278 | ) |
| Net  cash provided by operating activities                                                |   | 61,756      |   | 39,601                                            |   | 14,820 |   | 50,682 |   |
|                                                                                      |   |        |   |                                              |   |   |   |   |   |
| INVESTING  ACTIVITIES:                                                                    |   |        |   |                                              |   |   |   |   |   |
| Purchase  of InSight common stock                                                         |   | —      |   | (187,722                                          | )      | — |   | — |   |
| Cash  acquired in the Acquisition                                                         |   | —      |   | 8,429                                             |   | — |   | — |   |
| Acquisition  of Centers and Fixed Facilities                                              |   | (46,292     | )      | —                                            |   | — |   | — |   |
| Additions  to property and equipment                                                      |   | (56,967     | )      | (43,655                                           | )      | (20,852 | ) | (22,911 | ) |
| Other                                                                                     |   | 554         |   | 1,385                                             |   | (740 | ) | (531 | ) |
| Net  cash used in investing activities                                                    |   | (102,705    | )      | (221,563                                          | )      | (21,592 | ) | (23,442 | ) |
|                                                                                      |   |        |   |                                              |   |   |   |   |   |
| FINANCING  ACTIVITIES:                                                                    |   |        |   |                                              |   |   |   |   |   |
| Proceeds  from stock options and warrants exercised                                       |   | 1           |   | —                                            |   | 145 |   | 183 |   |
| Purchase  of stock options                                                                |   | (506        | )      | —                                            |   | — |   | — |   |
| Proceeds  from sale of common stock, net of equity issuance costs                         |   | —      |   | 85,763                                            |   | — |   | — |   |
| Issuance  of common stock                                                                 |   | —      |   | 133                                               |   | — |   | — |   |
| Payment  of deferred loan fees                                                            |   | —      |   | (29,499                                           | )      | — |   | — |   |
| Principal  payments of notes payable and capital lease obligations                        |   | (7,500      | )      | (416,510                                          | )      | (8,579 | ) | (31,759 | ) |
| Proceeds  from issuance of notes payable                                                  |   | 50,000      |   | 575,000                                           |   | — |   | — |   |
| Payments  made in connection with refinancing notes payable                               |   | —      |   | (15,109                                           | )      | — |   | — |   |
| Other                                                                                     |   | 725         |   | (33                                               | )      | 381 |   | 457 |   |
| Net  cash provided by (used in) financing activities                                      |   | 42,720      |   | 199,745                                           |   | (8,053 | ) | (31,119 | ) |
|                                                                                      |   |        |   |                                              |   |   |   |   |   |
| INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS:                                        |   | 1,771       |   | 17,783                                            |   | (14,825 | ) | (3,879 | ) |
| Cash,  beginning of period                                                                |   | 17,783      |   | —                                            |   | 23,254 |   | 27,133 |   |
| Cash,  end of period                                                                      |   | $           | 19,554 |                                              | $      | 17,783 |   | $ | 8,429 |   | $ | 23,254 |   |
|                                                                                      |   |        |   |                                              |   |   |   |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                        |   |        |   |                                              |   |   |   |   |   |
| Interest  paid                                                                            |   | $           | 36,286 |                                              | $      | 20,173 |   | $ | 6,799 |   | $ | 22,947 |   |
| Income  taxes paid (received)                                                             |   | (224        | )      | 4                                                 |   | 943 |   | 2,582 |   |
| Equipment  additions under capital leases                                                 |   | 25,455      |   | —                                            |   | — |   | 11,780 |   |

 

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

 

47

----

 

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30,2003**

 

**1.     ORGANIZATION AND ACQUISITION**

 

InSight Health Services Holdings Corp.(Company), a Delaware corporation, was incorporated on June 13, 2001 underthe name JWC/Halifax Holdings Corp.  The Company was funded through an equity contribution from J.W. ChildsEquity Partners II, L.P., Halifax Capital Partners, L.P. and certain of theiraffiliates.  On June 29, 2001, theCompany’s name waschanged to InSight Health Services Holdings Corp.  The Company and its former wholly owned subsidiary, InSightHealth Services Acquisition Corp. (Acquisition Corp.) were created to acquireall the outstanding shares of InSight Health Services Corp. (InSight).

 

On October 17, 2001, the Companyacquired InSight pursuant to an agreement and plan of merger datedJune 29, 2001, as amended, among the Company, Acquisition Corp. andInSight (the Acquisition).  AcquisitionCorp. was merged with and into InSight, with InSight being the survivingcorporation and becoming a wholly owned subsidiary of the Company.  The consolidated operations of the Companyafter the Acquisition are substantially consistent with the operations ofInSight prior to the Acquisition.  Inaddition, the Company has no operations other than its investment in InSight.  As such, prior to October 17, 2001,InSight is considered the predecessor to the Company in accordance withRegulation S-X.

 

Pursuant to the terms of the mergeragreement, each of InSight’s stockholders received $18.00 in cash for each share of common stockthey owned prior to the Acquisition. Holders of options and warrants, which prior to the Acquisition wereexercisable for InSight common stock, received the difference between $18.00and the exercise price of each share of common stock the holder could haveacquired pursuant to the terms of the options and warrants, and the options andwarrants were terminated.  This resultedin a charge of approximately $15.6 million, which is reflected in theaccompanying statement of operations of InSight.  In addition, certain members of senior management rolled aportion of their InSight common stock options into stock options of theCompany.  InSight’s stockholders, option holders and warrantholders received aggregate cash consideration of approximately $187.7 millionas a result of the Acquisition.

 

Concurrently with the Acquisition,InSight:  (i) repurchased by tenderoffer all of its 9 5/8% senior subordinated notes due 2008 in an aggregateprincipal amount of $100 million; (ii) repaid its then outstanding seniorcredit facilities and certain other indebtedness; and (iii) paid fees andexpenses relating to the Acquisition and related financing transactions.

 

These transactions were financed through:

 

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

 

•                  A $200 million senior subordinated bridgefinancing; and

 

•                  The investment by the Company, before equityissuance costs, of approximately $98.1 million; management options and commonstock rollover with a total net value of approximately $1.9 million.

 

**2.**     **BASISOF PREPARATION**

 

The accompanying consolidatedbalance sheets as of June 30, 2003 and 2002, the consolidated statementsof operations for the years ended June 30, 2003 and 2002, and theconsolidated statements of cash flows for the years ended June 30, 2003and 2002, reflect the consolidated financial position, results of operationsand cash flows of the Company and also include the consolidated financialposition, statements of operations and cash flows of InSight from the date ofthe Acquisition and include all material adjustments required under purchaseaccounting.  InSight is considered thepredecessor to the Company in accordance with Regulation S-X.  As such, the historical financial statementsof InSight prior to the Acquisition are included in the accompanyingconsolidated financial statements, including the consolidated statements ofoperations for the period from July 1, 2001 to October 17, 2001 andfor the

 

48

----

 

year ended June 30, 2001and the consolidated statements of cash flows for the period from July 1,2001 to October 17, 2001 and for the year ended June 30, 2001(collectively Predecessor financial statements).  The Predecessor financial statements have not been adjusted toreflect the Acquisition of InSight by the Company.  As such, the consolidated financial statements of the Companyafter the Acquisition are not directly comparable to the Predecessor financialstatements prior to the Acquisition.

 

**3.     SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

a.   NATURE OF BUSINESS

 

TheCompany, through InSight and its subsidiaries, provides diagnostic imaging,treatment and related management services in 29 states throughout the UnitedStates.  The Company has two reportablesegments:  Mobile Division andFixed-Site Division.  The Company’sservices are provided through a network of 86 mobile magnetic resonance imaging(MRI) facilities, 11 mobile positron emission tomography (PET) facilities,three mobile lithotripsy facilities (collectively, Mobile Facilities), 52fixed-site MRI facilities (Fixed Facilities), 32 multi-modality fixed-siteimaging centers (Centers), two PET fixed-site centers, one Leksell StereotacticGamma Knife fixed-site treatment center and one radiation oncology fixed-sitecenter.  An additional radiationoncology fixed-site center is operated by the Company as part of one of itsCenters.  The Company has a substantialpresence in California, Arizona, New England, the Carolinas, Florida and theMid-Atlantic states.

 

Subsequent to June 30, 2003, the Company completed an acquisitionof 14 mobile MRI facilities, four mobile PET facilities, three mobile computedtomography (CT) facilities and one mobile lithotripsy facility primarilylocated in the Mid-Atlantic states (Note 19).

 

At its Centers, the Company typically offers other services in additionto MRI, including CT, diagnostic and fluoroscopic x-ray, mammography,diagnostic ultrasound, nuclear medicine, bone densitometry, nuclear cardiology,and cardiovascular services.

 

b.   CONSOLIDATED FINANCIALSTATEMENTS

 

The consolidated financial statements include the accounts of theCompany and its wholly owned subsidiaries. The Company’s investment interests in partnerships or limited liabilitycompanies (Partnerships) are accounted for under the equity method ofaccounting when the Company’s ownership is 50 percent or less.  The Company’s investment interests inPartnerships are consolidated for ownership of 50 percent or greater ownedentities when the Company exercises significant control over the operations andis primarily responsible for the associated long-term debt (Note 14).

 

Significant intercompany balances have been eliminated inconsolidation.

 

c.   USE OF ESTIMATES

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makecertain estimates and assumptions that affect the reported amounts of assetsand liabilities at the date of the financial statements, disclosures ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

d.   REVENUE RECOGNITION

 

Revenuesfrom contract services (primarily Mobile Facilities) and from patient services(primarily Fixed Facilities and Centers) are recognized when services areprovided.  Patient services revenues arepresented net of (i) related contractual adjustments, which represents thedifference between the Company’s charge for a procedure and what it willultimately receive from private health insurance programs, Medicare, Medicaidand other federal health care programs, and (ii) payments due toradiologists.  Equipment rentalrevenues, management fees and other revenues are recognized over the applicablecontract period.  Revenues collected inadvance are recorded as unearned revenue.

 

49

----

 

e.   CASH EQUIVALENTS

 

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

 

f.    PROPERTY AND 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 |

 

The Company capitalizes expenditures for improvements and majorequipment upgrades.  Maintenance,repairs and minor replacements are charged to operations as incurred. Whenassets are sold or otherwise disposed of, the cost and related accumulateddepreciation are removed from the accounts and any resulting gain or loss isincluded in the results of operations.

 

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.  Total costs deferred and included in other assets in the accompanyingconsolidated balance sheets at June 30, 2003 and 2002 were approximately$19.0 million and $20.5 million, respectively.

 

h.   GOODWILL AND OTHER INTANGIBLEASSETS

 

Goodwill represents the excess purchase pricepaid by the Company over the fair value of the tangible and intangible assetsand liabilities of InSight at October 17, 2001, the date of theAcquisition and the acquisition completed in 2003 (Note 4).  In accordance with SFAS 142, the goodwill andindefinite-lived intangibles balances are not being amortized, but instead willbe subject to an annual assessment of impairment by applying a fair-value basedtest.  Net other intangible assets areamortized on a straight-line basis over the estimated lives of the assetsranging from three to thirty years.

 

A reconciliation of goodwill for the yearended June 30, 2003 is as follows (amounts in thousands):

 
|                          |   | **Mobile** |   | **Fixed-Site** |   | **Consolidated** |   |
|-------------------------------|--------|------------|--------|----------------|--------|------------------|--------|
| Goodwill,  June 30, 2002 |   | $          | 79,079 |           | $      | 119,295          |   | $ | 198,374 |   |
| Acquired  in acquisitions     |   | —     |   | 25,393         |   | 25,393           |   |
| Adjustments  to goodwill      |   | —     |   | 55             |   | 55               |   |
| Goodwill,  June 30, 2003 |   | $          | 79,079 |           | $      | 144,743          |   | $ | 223,822 |   |

 

The Company evaluates the carrying value ofgoodwill and identified intangibles not subject to amortization in the secondquarter of each fiscal year.  As part ofthe evaluation, the Company compares the carrying value of each intangibleasset with its fair value to determine whether there has been impairment.  The Company assesses the ongoingrecoverability of its intangible assets subject to amortization by determiningwhether the intangible asset balance can be recovered over the remainingamortization period through projected undiscounted future cash flows. Ifprojected future cash flows indicate that the unamortized intangible assetbalances will not be recovered, an adjustment is made to reduce the netintangible asset to an amount consistent with projected future cash flowsdiscounted at the Company’s incremental borrowing rate. Cash flow projections,although subject to a degree of uncertainty, are based on trends of historicalperformance and management’s estimate of future performance, givingconsideration to existing and anticipated competitive and

 

50

----

 

economic conditions.  As of June 30, 2003, the Company doesnot believe any impairment of goodwill or other intangible assets has occurred.

 

i.     INCOMETAXES

 

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

 

j.    COMPREHENSIVE INCOME (LOSS)

 

Components of comprehensive income are changes in equityother than those resulting from investments by owners and distributions toowners. Net income (loss) is the primary component of comprehensive income. Forthe Company, the only component of comprehensive income other than net income(loss) is the change in unrealized gain or loss on derivatives qualifying forhedge accounting, net of tax. The aggregate amount of such changes to equitythat have not yet been recognized in net income are reported in the equityportion of the consolidated balance sheets as accumulated other comprehensiveincome (loss).

 

k.   FAIR VALUE OF FINANCIALINSTRUMENTS

 

The fair value of financial instruments is estimated using availablemarket information and other valuation methodologies. The fair value of theCompany’s financial instruments is estimated to approximate the related bookvalue, unless otherwise indicated.

 

l.     NEWPRONOUNCEMENTS

 

In June 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations.”  SFAS 143addresses financial accounting and reporting for obligations associated withthe retirement of tangible long-lived assets and the associated assetretirement costs. It applies to legal obligations associated with theretirement of long-lived assets that result from the acquisition, construction,development and/or the normal operation of a long-lived asset, except forcertain obligations of lessees.  SFAS143 requires that the fair value of a liability for an asset retirementobligation be recognized in the period in which it is incurred if a reasonableestimate of fair value can be made.  Theassociated asset retirement costs are capitalized as part of the carryingamount of the long-lived asset. The Company adopted SFAS 143 on July 1,2002, which did not have an impact on the Company’s financial condition andresults of operations.

 

In July 2001, the Company and InSight adopted SFAS No. 141,“Business Combinations”.   SFAS 141eliminates the pooling-of-interests method of accounting and further clarifiesthe criteria for recognition of intangible assets separately fromgoodwill.  In accordance with SFAS 141,the Company engaged a valuation specialist to assist the Company in identifyingacquired intangible assets, their respective fair values and amortizationperiods related to the Acquisition.  TheCompany has made an allocation of values to these identifiable intangibleassets based on a third-party valuation.

 

In July 2001, the Company and InSight adopted SFAS No. 142,“Goodwill and Other Intangible Assets”. SFAS 142 eliminates the amortization of goodwill, permitsindefinite-lived intangible assets and initiates an annual review forimpairment.  Identifiable intangibleassets with a determinable useful life will continue to be amortized.  Impairment results when the fair value ofthe Company’s reporting units, including goodwill, is less than its carryingvalue.  The Company completed a reviewof impairment for goodwill and other intangible assets, indicating noimpairment as of January 1, 2003.

 

In August 2001, the FASB issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” SFAS 144 addresses financial accounting and reporting for the impairmentor disposal of long-lived

 

51

----

 

assets.  SFAS 144 supersedesSFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed Of,” and the accounting and reportingprovisions of APB Opinion No. 30, “Reporting the Results of Operations –Reporting the Effects and Transactions,” for the disposal of a segment of abusiness (as previously defined in that Opinion).  The Company adopted SFAS 144 on July 1, 2002, which did nothave an impact on the Company’s financial condition and results of operations.

 

In April 2002, the FASB issued SFAS No. 145, “Revision of SFASNos. 4, 44, and 64, Amendment of FASB No. 13 and Technical Corrections.” SFAS145 rescinds, amends or makes various technical corrections to certain existingauthoritative pronouncements.  TheCompany adopted SFAS 145 on July 1, 2002. As a result, the extraordinary loss from the extinguishment of debt ofapproximately $7.4 million will no longer be considered extraordinary, and hasbeen classified as interest expense for the year ended June 30, 2002.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” SFAS 146 addresses financial accounting and reporting for costsassociated with exit or disposal activities. SFAS 146 is effective for exit or disposal activities initiated afterDecember 31, 2002.  The Companydoes not expect the adoption of SFAS 146 to have an impact on its financialcondition and results of operations.

 

In December 2002, the FASB issued SFASNo. 148, “Accounting for Stock-Based Compensation – Transitionand Disclosure – an Amendment of FASB Statement No. 123.”  SFAS 148 amends SFAS No. 123, “Accountingfor Stock-Based Compensation,” to provide alternative methods of transition fora voluntary change to the fair value based method of accounting for stock-basedemployee compensation.  In addition,SFAS 148 amends the disclosure requirements of SFAS 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results.  The Companyadopted the disclosure requirements of SFAS 148 on January 1, 2003.  The adoption of SFAS 148 did not have amaterial effect of the Company’s financial condition and results ofoperations.  As permitted under bothSFAS 123 and SFAS 148, the Company continues to follow the intrinsic valuemethod of accounting under Accounting Principles Board No. 25 “Accounting forStock Issued to Employees. “

 

In January 2003, the FASB issued FIN 46, “Consolidation ofVariable Interest Entities-an interpretation of ARB No. 51.”  FIN 46 addresses consolidation by businessenterprises of variable interest entities, which have one or both of thefollowing characteristics:  (i) theequity investment at risk is not sufficient to permit the entity to finance itsactivities without additional subordinated financial support from otherparties, which is provided through other interests that will absorb some or allof the expected losses of the entity, and (ii) the equity investors lack anessential characteristic of a controlling financial interest.  FIN 46 applies to variable interest entitiesestablished after December 31, 2002. The Company does not expect the adoption of FIN 46 to have a materialimpact on its financial condition and results of operations.

 

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

 

In May 2003, the FASB issued SFAS No. 150, “Certain FinancialInstruments with Characteristics of Both Liabilities and Equity.”  SFAS 150 establishes standards for how acompany clarifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  It requires a company to classify such instruments asliabilities, whereas they previously may have been classified as equity.  SFAS 150 is effective for all financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective July 1,

 

52

----

 

2003.  The Company does notexpect the adoption of SFAS 150 to have a material impact on its financialcondition and results of operations.

 

**4.     ACQUISITIONS**

 

The Acquisition was accounted for as a purchase by the Company.  The purchase accounting adjustments of theCompany have been recorded in the accompanying consolidated financialstatements as of and for any periods subsequent to October 17, 2001.  The excess purchase price paid by theCompany over its estimates of the fair market value of the tangible assets andliabilities of InSight as of the date of the Acquisition was approximately$234.2 million and is reflected as goodwill and other intangible assets, net inthe accompanying consolidated balance sheets as of June 30, 2003 and2002.  In accordance with SFAS 141, thenew intangible asset balance has been allocated between identifiable intangibleassets and remaining goodwill.  Goodwillwill not be amortized but is subject to an ongoing assessment for impairment.  A summary of the assets acquired andliabilities assumed in the Acquisition follows (amounts in thousands):

 
| Cash  purchase price     |   | $        | 403,453 |   |
|--------------------------|--------|----------|---------|--------|
| Estimated  fair values   |   |     |    |
| Assets  acquired:        |   |     |    |
| Tangible                 |   | 357,877  |    |
| Other  Intangible Assets |   | 37,870   |    |
| Liabilities  assumed     |   | (189,993 | )       |
| Goodwill                 |   | $        | 197,699 |   |

 

InApril 2003, the Company acquired 13 diagnostic imaging centers located inSouthern California, which are included in the Fixed-Site Division.  The acquisition consists of certain tangibleand intangible assets, including diagnostic imaging equipment, customercontracts and other agreements.  Theaggregate purchase price was approximately $47 million, which includedapproximately $39 million paid to the seller and the payment of debt andtransaction costs of approximately $8 million, and is subject to certainpost-closing adjustments.  The excesspurchase price paid by the Company over its estimates of the fair market valueof the tangible and other intangible assets as of the date of the acquisition wasapproximately $28.6 million and is reflected as goodwill, net in theaccompanying consolidated balance sheet as of June 30, 2003.  In accordance with SFAS 141, the newintangible asset balance has been allocated between identifiable intangibleassets and remaining goodwill.  Thepurchase price allocation is based upon preliminary evaluations and otherstudies of the fair value of the net assets acquired.  Goodwill will not be amortized but is subject to an ongoingassessment for impairment.  A preliminarysummary of the assets acquired and liabilities assumed follows (amounts inthousands):

 
| Cash  purchase price     |   | $      | 46,488 |   |
|--------------------------|--------|--------|--------|--------|
| Estimated  fair values   |   |   |   |
| Assets  acquired:        |   |   |   |
| Tangible                 |   | 17,977 |   |
| Other  Intangible Assets |   | 3,200  |   |
| Liabilities  assumed     |   | (82    | )      |
| Goodwill                 |   | $      | 25,393 |   |

 

Unauditedpro-forma combined results of operations of the Company, assuming theacquisitions had occurred as of July 1, 2001, are presented below.  The pro-forma combined results of operationsinclude the combined results of operations of the Company and InSight for theyear ended June 30, 2002.  Thepro-forma combined results of operations for the years ended June 30, 2003and 2002, include adjustments to interest expense, the consolidation of certainjoint ventures in which the Company purchased a 100% interest, and amortizationof identified intangible assets.  Thesecombined results have been prepared for comparison purposes only and do notpurport to be indicative of what operating results would have been, and may notbe indicative of future operating results (amounts in thousands):

 

53

----

 
|                                               |   | **Years Ended June 30,** |    |
|----------------------------------------------------|--------|-------------------------------|---------|
|                                               |   | **2003**                      |    | **2002** |   |
|                                               |   | **(unaudited)**               |    |
| Revenues                                           |   | $                             | 258,287 |   | $ | 246,605 |   |
| Costs  of operations                               |   | 196,038                       |    | 183,774 |   |
| Gross  profit                                      |   | 62,249                        |    | 62,831 |   |
| Corporate  operating expenses                      |   | 15,964                        |    | 14,476 |   |
| Income  from company operations                    |   | 46,285                        |    | 48,355 |   |
| Equity  in earnings of unconsolidated partnerships |   | 1,744                         |    | 819 |   |
| Operating  income                                  |   | 48,029                        |    | 49,174 |   |
| Interest  expense                                  |   | 39,577                        |    | 46,112 |   |
| Income  before income taxes                        |   | 8,452                         |    | 3,062 |   |
| Provision  (benefit) for income taxes              |   | 3,371                         |    | (1,522 | ) |
| Net  income                                        |   | $                             | 5,081   |   | $ | 4,584 |   |

 

**5.     TRADE ACCOUNTS RECEIVABLES**

 

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

 
|                                                                                  |   | **June 30,** |   |
|---------------------------------------------------------------------------------------|--------|-------------------|--------|
|                                                                                  |   | **2003**          |   | **2002** |   |
| Trade  accounts receivables                                                           |   | $                 | 93,914 |   | $ | 80,581 |   |
| Less:    Allowances for doubtful accounts and  contractual adjustments |   | 36,273            |   | 26,490 |   |
| Allowances  for professional fees                                                     |   | 11,545            |   | 10,232 |   |
| Trade  accounts receivables, net                                                      |   | $                 | 46,096 |   | $ | 43,859 |   |

 

The allowances for doubtful accounts and contractual adjustmentsincludes management’s estimate of the amounts expected to be written off onspecific accounts and for write-offs on other unidentified accounts included inaccounts receivables. In estimating the write-offs and adjustments on specificaccounts, management relies on a combination of in-house analysis and a reviewof contractual payment rates from private health insurance programs or underthe federal Medicare program.  In estimatingthe allowance for unidentified write-offs and adjustments, management relies onhistorical experience.  The amounts theCompany will ultimately realize could differ materially in the near term fromthe amounts assumed in arriving at the allowances for doubtful accounts andcontractual adjustments in the financial statements at June 30, 2003.

 

The Company reserves a contractually agreed upon percentage at severalof its Centers and Fixed Facilities, averaging 20 percent of the accountsreceivables balance from patients, for payments to radiologists forinterpreting 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.     PROPERTY AND EQUIPMENT**

 

Property andequipment, net are stated at cost and are comprised of the following (amountsin thousands):

 
|                                             |   | **June 30,** |    |
|--------------------------------------------------|--------|-------------------|---------|
|                                             |   | **2003**          |    | **2002** |   |
| Vehicles                                         |   | $                 | 3,605   |   | $ | 3,135 |   |
| Land,  building and leasehold improvements       |   | 23,133            |    | 19,635 |   |
| Computer  and office equipment                   |   | 21,967            |    | 14,676 |   |
| Diagnostic  and related equipment                |   | 158,972           |    | 108,794 |   |
| Equipment  and vehicles under capital leases     |   | 79,426            |    | 47,997 |   |
|                                             |   | 287,103           |    | 194,237 |   |
| Less:  Accumulated depreciation and amortization |   | 67,982            |    | 22,181 |   |
| Property  and equipment, net                     |   | $                 | 219,121 |   | $ | 172,056 |   |

 

54

----

 

**7.     OTHER INTANGIBLE ASSETS**

 

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

 
|                           |   | **June  30,2003**         |   | **June 30,  2002**            |   |
|--------------------------------|--------|---------------------------|--------|-------------------------------|--------|
|                           |   | **Gross  Carrying Value** |   | **Accumulated  Amortization** |   | **Gross  Carrying Value** |   | **Accumulated  Amortization** |   |
| Amortized intangible assets:   |   |                      |   |                          |   |   |   |   |   |
| Managed care agreements        |   | $                         | 21,210 |                          | $      | 874 |   | $ | 18,010 |   | $ | 150 |   |
| Contracts                      |   | 11,180                    |   | 3,726                         |   | 11,180 |   | 1,450 |   |
|                           |   | 32,390                    |   | 4,600                         |   | 29,190 |   | 1,600 |   |
|                           |   |                      |   |                          |   |   |   |   |   |
| Unamortized intangible assets: |   |                      |   |                          |   |   |   |   |   |
| Trademark                      |   | 8,680                     |   | —                        |   | 8,680 |   | — |   |
| Other intangible assets        |   | $                         | 41,070 |                          | $      | 4,600 |   | $ | 37,870 |   | $ | 1,600 |   |

 

Amortization of intangible assets was approximately $3.0 million, $1.6million, $0.1 million and $6.2 million, for the years ended June 30, 2003and 2002, the period from July 1, 2001 to October 17, 2001, and forthe year ended June 30, 2001, respectively.

 
| Estimated  amortization expense for the years ending June 30 is as follows (amounts  in thousands): |   |   |   |
|----------------------------------------------------------------------------------------------------------|--------|--------|--------|
| 2004                                                                                                     |   | $      | 2,836  |   |
| 2005                                                                                                     |   | 2,836  |   |
| 2006                                                                                                     |   | 2,836  |   |
| 2007                                                                                                     |   | 1,345  |   |
| 2008                                                                                                     |   | 600    |   |
|                                                                                                          |        |        |        |  |

 

**8.     ACCOUNTS PAYABLE AND OTHER ACCRUEDEXPENSES**

 

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

 
|                               |   | **June 30,** |   |
|------------------------------------|--------|-------------------|--------|
|                               |   | **2003**          |   | **2002** |   |
| Accounts  payable                  |   | $                 | 3,090  |   | $ | 1,660 |   |
| Accrued  equipment related costs   |   | 6,807             |   | 7,663 |   |
| Accrued  payroll and related costs |   | 8,047             |   | 6,985 |   |
| Accrued  interest expense          |   | 4,719             |   | 5,114 |   |
| Accrued  professional fees         |   | 1,753             |   | 2,047 |   |
| Accrued  income taxes              |   | 4,311             |   | 983 |   |
| Other  accrued expenses            |   | 6,787             |   | 6,064 |   |
|                               |   | $                 | 35,514 |   | $ | 30,516 |   |

 

**9.**     **NOTESPAYABLE**

 

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

 
|                                                                                                                                                                                                                                                                                            |   | **June 30,** |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|
|                                                                                                                                                                                                                                                                                            |   | **2003**          |    | **2002** |   |
|                                                                                                                                                                                                                                                                                            |   |              |    |   |   |
| Notes  payable to bank (Credit Facilities), bearing interest at LIBOR plus 3.5  percent (4.60 percent at June 30, 2003), principal and interest payable  quarterly, maturing in October 2008.   The notes are collateralized by substantially all of the Company’s  assets. |   | $                 | 197,248 |   | $ | 148,875 |   |
|                                                                                                                                                                                                                                                                                            |   |              |    |   |   |
| Unsecured  senior subordinated notes payable (Notes), bearing interest at 9.875 percent,  interest payable semi-annually, principal due in October 2011. At  June 30, 2003, the fair value of the notes was approximately $234  million.                                              |   | 225,000           |    | 225,000 |   |
| Total  notes payable                                                                                                                                                                                                                                                                            |   | 422,248           |    | 373,875 |   |
| Less:  Current portion                                                                                                                                                                                                                                                                          |   | 2,009             |    | 1,500 |   |
| Long-term  notes payable                                                                                                                                                                                                                                                                        |   | $                 | 420,239 |   | $ | 372,375 |   |

 

55

----

 

Scheduled maturities ofequipment and other notes payable at June 30, 2003, are as follows(amounts in thousands):

 
| 2004       |   | $       | 2,009   |   |
|------------|--------|---------|---------|--------|
| 2005       |   | 2,009   |    |
| 2006       |   | 2,009   |    |
| 2007       |   | 2,009   |    |
| 2008       |   | 142,034 |    |
| Thereafter |   | 272,178 |    |
|       |   | $       | 422,248 |   |

 

The Company, through InSight, has credit facilities (Credit Facilities)with a bank and a syndication of other lenders consisting of (i) a $150 millionterm loan B, (ii) a $75 million delayed-draw term loan facility, (iii) a $50million revolving credit facility and (iv) a $50 million second delayed-drawterm loan facility.  The entire $150million term loan B was used to consummate the Acquisition.  Borrowings under the Credit Facilities bearinterest at rates ranging from LIBOR plus 3.5% to 3.75%.  The Company is required to pay an annualunused facility fee of between 0.5% and 2.5%, payable quarterly, on unborrowedamounts under the facilities.  TheCompany expects to use the revolving credit facility primarily to fund itsfuture working capital needs.  As ofJune 30, 2003, there were $50 million in borrowings under the $75 milliondelayed-draw term loan facility and no borrowings under $50 million seconddelayed-draw term loan facility and the revolving credit facility.

 

Subsequent to June 30, 2003 the Company borrowed the remaining $25million under the $75 million delayed-draw term loan facility and $25 millionunder the $50 million second delayed-draw term loan facility to complete anacquisition of 22 Mobile Facilities located in the Mid-Atlantic states (Note19).  The Company expects to use theremaining $25 million under the second delayed-draw facility, which isavailable through January 31, 2005, to fund future acquisitions andcapital expenditures.

 

The credit agreement related to the Credit Facilities and the indenturerelated to the Notes contain limitations on additional borrowings, capitalexpenditures, dividend payments and certain financial covenants.  As of June 30, 2003, the Company was incompliance with these covenants.

 

During 1998,InSight entered into an interest rate swap agreement with a bank to hedgeagainst the effects of increases in the interest rates associated with floatingrate debt on its bank financing.  Theinitial and June 30, 2003 notional amount of the swap agreement was $40.0million and $23.8 million, respectively. The swap agreement expires in 2004 (Note 15).

 

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

 

The Company leasesdiagnostic equipment, certain other equipment and its office, imaging andtreatment facilities under various capital and operating leases.  Future minimum scheduled rental paymentsrequired under these noncancelable leases at June 30, 2003 are as follows(amounts in thousands):

 
|                                        |   | **Capital** |   | **Operating** |   |
|---------------------------------------------|--------|-------------|--------|---------------|--------|
| 2004                                        |   | $           | 7,401  |          | $      | 6,531 |   |
| 2005                                        |   | 6,020       |   | 6,129         |   |
| 2006                                        |   | 6,020       |   | 5,840         |   |
| 2007                                        |   | 5,637       |   | 5,262         |   |
| 2008                                        |   | 2,929       |   | 4,191         |   |
| Thereafter                                  |   | 326         |   | 10,323        |   |
| Total  minimum lease payments               |   | 28,333      |   | $             | 38,276 |   |
| Less:  Amounts representing interest        |   | 4,462       |   |          |   |
| Present  value of capital lease obligations |   | 23,871      |   |          |   |
| Less:  Current portion                      |   | 5,696       |   |          |   |
| Long-term  capital lease obligations        |   | $           | 18,175 |          |   |   |

 

Rental expense fordiagnostic equipment and other equipment for the years ended June 30, 2003and 2002, the period from July 1, 2001 to October 17, 2001 and theyear ended June 30, 2001 was $0.9 million, $5.5 million, $2.6 million and$7.9 million, respectively.

 

56

----

 

The Company occupies facilities under lease agreements expiring through2016.  Rental expense for thesefacilities for the year ended June 30, 2003 and 2002, the period fromJuly 1, 2001 to October 17, 2001 and the year ended June 30,2001, was $6.5 million, $3.9 million, $1.5 million and $5.4 million,respectively.

 

The Company is engaged from time to time in the defense of lawsuitsarising out of the ordinary course and conduct of its business, includingclaims for malpractice, and has insurance policies covering such potentialinsurable losses where such coverage is cost-effective.  Management believes that the outcome of anysuch lawsuits will not have a material adverse impact on the Company’sbusiness, financial condition and results of operations.

 

**11.**  **CAPITAL STOCK**

 

WARRANTS:  The Company does not have a formal warrant plan.  All warrants, which had been granted byInSight in connection with previous financing transactions, had been issuedwith an exercise price of at least the fair market value of its common stock onthe issuance date.   All holders ofwarrants, which at the time of the Acquisition were exercisable for InSightcommon stock, received the difference between $18.00 and the exercise price ofeach share of common stock the holder could have acquired pursuant to the termsof the warrants, and the warrants were terminated.  A summary of the status of the InSight warrants atOctober 17, 2001 and June 30, 2001 and changes during the periods ispresented below:

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

 

STOCK OPTIONS:  The Company reserved 626,000 shares for the granting ofnonstatutory stock options to key employees. Options are issued with an exercise price of at least the fair marketvalue, as determined by the board of directors, of its common stock on thegrant date.  A portion of the optionsvest cumulatively over various periods up to eight years from the grant date,and a portion are performance based and vest cumulatively upon the achievementof certain performance targets.  Theoptions are exercisable in whole or in installments, and expire ten years fromthe grant date.

 

The Company has one stock option plan, which provided for the grantingof nonstatutory stock options to four key employees, all of which are fullyvested.  Holders of options for 175,990shares of InSight common stock rolled over their options and received optionsfor the Company’s common stock with the same terms under the Company’s stockoption plan.  In 2003, the Companypurchased the vested stock options covering 56,000 shares of the Company’scommon stock at a price equal to the difference between $19.07 and the exerciseprice per share.

 

 

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

57

----

 

As of June 30, 2003, the Company had 113,125 shares available forissuance.  A summary of the status ofthe Company’s and InSight’s stock option plans at June 30, 2003, 2002 and2001 and changes during the periods is presented below:

 
|                                |   | **Shares** |   | **Weighted  Average  Exercise Price** |   |
|-------------------------------------|--------|------------|--------|---------------------------------------|--------|
| Company                             |   |       |   |                                  |   |
| Outstanding,  June 30, 2001    |   | —     |   | $                                     | — |   |
| Granted                             |   | 777,990    |   | 15.82                                 |   |
| Forfeited                           |   | (5,000     | )      | 18.00                                 |   |
| Outstanding,  June 30, 2002    |   | 772,990    |   | 15.81                                 |   |
| Granted                             |   | 25,500     |   | 19.01                                 |   |
| Exercised                           |   | (50        | )      | 18.00                                 |   |
| Repurchased                         |   | (56,000    | )      | 8.97                                  |   |
| Forfeited                           |   | (109,625   | )      | 18.00                                 |   |
| Outstanding,  June 30, 2003    |   | 632,815    |   | $                                     | 16.16  |   |
|                                |   |       |   |                                  |   |
| Predecessor                         |   |       |   |                                  |   |
| Outstanding,  June 30, 2000    |   | 1,308,740  |   | $                                     | 7.90   |   |
| Granted                             |   | 370,000    |   | 8.71                                  |   |
| Exercised                           |   | (17,375    | )      | 5.79                                  |   |
| Forfeited                           |   | (105,667   | )      | 11.33                                 |   |
| Outstanding,  June 30, 2001    |   | 1,555,698  |   | 7.88                                  |   |
| Granted                             |   | 5,000      |   | 16.51                                 |   |
| Exercised                           |   | (6,728     | )      | 15.64                                 |   |
| Cancelled  at the Acquisition       |   | (1,377,980 | )      | 7.81                                  |   |
| Rolled  over to Company options     |   | (175,990   | )      | 8.37                                  |   |
| Outstanding,  October 17, 2001 |   | —     |   | $                                     | — |   |
|                                |   |       |   |                                  |   |
| Exercisable  at:                    |   |       |   |                                  |   |
| June 30,  2001                 |   | 867,239    |   | $                                     | 7.41   |   |
| June 30,  2002                 |   | 175,990    |   | $                                     | 8.37   |   |
| June 30,  2003                 |   | 148,465    |   | $                                     | 9.99   |   |

 

Of the 632,815 options outstanding at June 30, 2003, thecharacteristics are as follows:

 
| **Exercise Price  Range** |   | **Weighted Average  Exercise Price** |   | **Options  Exercisable** |   | **Total Options  Outstanding** |   | **Remaining Contractual  Life** |   |
|---------------------------|--------|--------------------------------------|--------|--------------------------|--------|--------------------------------|--------|---------------------------------|--------|
| $                         | 8.37   |                                 | $      | 8.37                     |   | 123,490                        |   | 123,490                         |   | 8.33  years |   |
| 18.00 - 19.01             |   | 18.05                                |   | 24,975                   |   | 509,325                        |   | 8.02  years                     |   |
|                      |   |                                 |   | 148,465                  |   | 632,815                        |   |                            |   |
|                           |        |                                      |        |                          |        |                                |        |                                 |        |  |  |

 

58

----

 

As permitted under SFAS No. 123, “Accounting for Stock BasedCompensation”, the Company accounts for the options and warrants issued toemployees in accordance with APB Opinion No. 25.  SFAS 123 requires that the Company present pro forma disclosures ofnet income as if the Company had recognized compensation expense equal to thefair value of options granted, as determined at the date of grant.  The Company’s or the Predecessor’s netincome would have reflected the following pro forma amounts (amounts inthousands):

 
|         |   |        |   |                          |   |     |   | **Predecessor**                                         |   |
|--------------|--------|-------------|--------|-------------------------------|--------|----------|--------|---------------------------------------------------------|--------|
|         |   |        |   |                          |   |     |   | **Period from  July 1 to  October 17,  2001** |   | **Year Ended  June 30,  2001** |   |
|         |   |        |   | **Company**                   |   |     |   |
|         |   |        |   | **Years Ended June 30,** |   |     |   |
|         |   |        |   | **2003**                      |   | **2002** |   |                                                    |   |
| Net  income: |   | As Reported |   | $                             | 4,922  |     | $      | 9                                                       |   | $ | (4,648 | ) | $ | 13,801 |   |
|         |   | Pro Forma   |   | 4,270                         |   | (1,079   | )      | (4,648                                                  | )      | 12,458 |   |
|              |        |             |        |                               |        |          |        |                                                         |        |  |  |  |  |  |  |

 

The fair value of each option grant and warrant issued is estimated onthe date of grant or issuance using the Black-Scholes pricing model with thefollowing assumptions used for the grants and issuances in the years endedJune 30, 2003, 2002 and 2001, respectively:

 
|                          |   |         |   | **Predecessor**               |   |
|-------------------------------|--------|--------------|--------|-------------------------------|--------|
|                          |   | **Company**  |   | **Year Ended  June 30,** |   |
| **Years Ended June 30,** |
|                          |   | **2002**     |   | **2002**                      |   | **2001** |   |
| Assumptions                   |   |         |   |                          |   |   |   |
| Risk-free  interest rate      |   | 4.07  - 4.58 | %      | 4.60                          | %      | 5.87 | % |
| Volatility                    |   | 0.00         | %      | 0.00                          | %      | 71.27 | % |
| Expected  dividend yield      |   | 0.00         | %      | 0.00                          | %      | 0.00 | % |
| Estimated  contractual life   |   | 10.00  years |   | 9.30  years                   |   | 9.19  years |   |

 

**12.  INCOME TAXES**

 

The provision (benefit) for income taxes for the years endedJune 30, 2003 and 2002, the period from July 1, 2001 toOctober 17, 2001, and the year ended June 30, 2001 was computed usingeffective tax rates calculated as follows:

 
|                                                                 |   |        |   | **Predecessor**                                         |   |
|----------------------------------------------------------------------|--------|-------------|--------|---------------------------------------------------------|--------|
|                                                                 |   |        |   | **Period from  July 1 to  October 17,  2001** |   | **Year Ended  June 30,  2001** |   |
|                                                                 |   | **Company** |   |
| **Years Ended June 30,**                                        |
| **2002**                                                             |   | **2002**    |
| Federal statutory tax rate                                           |   | 34.0        | %      | 34.0                                                    | %      | 34.0 | % | 34.0 | % |
| State  income taxes, net of federal benefit                          |   | 4.0         |   | 6.0                                                     |   | 6.0 |   | 6.0 |   |
| Permanent  items, including goodwill and non-deductible merger costs |   | 1.0         |   | 1.0                                                     |   | 115.0 |   | 5.0 |   |
| Changes  in valuation allowance                                      |   | 1.0         |   | (1.0                                                    | )      | (186.0 | ) | (29.1 | ) |
| Net  effective tax rate                                              |   | 40.0        | %      | 40.0                                                    | %      | (31.0 | )% | 15.9 | % |

 

59

----

 

The provision (benefit) for income taxes includes income taxescurrently payable and those deferred because of temporary differences betweenthe financial statements and tax bases of assets and liabilities.  The provision (benefit) for income taxes forthe years June 30, 2003 and 2002, the period from July 1, 2001 toOctober 17, 2001, and the year ended June 30, 2001 consisted of thefollowing (amounts in thousands):

 
|                                                |   |                          |   |                 |   | **Predecessor**   |   |
|-----------------------------------------------------|--------|-------------------------------|--------|----------------------|--------|-------------------|--------|
|                                                |   |                          |   |                 |   | **Period from**   |   |   |   |
|                                                |   | **Company**                   |   | **July 1 to**   |   | **Year Ended**    |   |
|                                                |   | **Years Ended June 30,** |   | **October 17,** |   | **June 30,** |   |
|                                                |   | **2003**                      |   | **2002**             |   | **2001**          |   | **2001** |   |
| Current  provision:                                 |   |                          |   |                 |   |              |   |   |   |
| Federal                                             |   | $                             | 2,491  |                 | $      | —            |   | $ | (2,100 | ) | $ | 2,931 |   |
| State                                               |   | —                        |   | —               |   | —            |   | 1,173 |   |
|                                                |   | 3,266                         |   | —               |   | (2,100            | )      | 4,104 |   |
| Deferred  taxes arising from temporary differences: |   |                          |   | —               |   |              |   |   |   |
| State  income taxes                                 |   | (176                          | )      | —               |   | —            |   | (480 | ) |
| Accrued  expenses (not currently deductible)        |   | 163                           |   | (138                 | )      | (116              | )      | (198 | ) |
| Reserves                                            |   | 1,127                         |   | (313                 | )      | (535              | )      | (1,790 | ) |
| Depreciation  and amortization                      |   | 7,718                         |   | 3,168                |   | 2,474             |   | 7,920 |   |
| Creation/utilization  of net operating losses       |   | (9,491                        | )      | (2,761               | )      | (14,145           | )      | 836 |   |
| Section 481  adjustment                        |   | (2,343                        | )      | —               |   | —            |   | — |   |
| Changes  in valuation allowance reducing goodwill   |   | —                        |   | —               |   | (10               | )      | — |   |
| Changes  in valuation allowance                     |   | 1,728                         |   | 50                   |   | 12,336            |   | (4,044 | ) |
| Non-goodwill  intangible amortization               |   | 1,200                         |   | —               |   | —            |   | — |   |
| Alternative  minimum tax credit carryforwards       |   | —                        |   | —               |   | —            |   | (3,038 | ) |
| Other                                               |   | 74                            |   | (6                   | )      | (4                | )      | (686 | ) |
|                                                |   | —                        |   | —               |   | —            |   | (1,480 | ) |
| Total  provision (benefit) for income taxes         |   | $                             | 3,266  |                 | $      | —            |   | $ | (2,100 | ) | $ | 2,624 |   |

 

The components of the Company’s net deferred tax asset (includingcurrent and non-current portions) as of June 30, 2003 and 2002,respectively, which arise due to timing differences between financial and taxreporting and net operating loss (NOL) carryforwards are as follows (amounts inthousands):

 
|                                         |   | **June 30,** |   |
|----------------------------------------------|--------|-------------------|--------|
|                                         |   | **2003**          |   | **2002** |   |
| Reserves                                     |   | $                 | 5,477  |   | $ | 6,603 |   |
| Accrued  expenses (not currently deductible) |   | 1,307             |   | 1,469 |   |
| Depreciation  and amortization               |   | (24,608           | )      | (16,890 | ) |
| NOL  carryforwards                           |   | 36,152            |   | 26,661 |   |
| Valuation  allowance                         |   | (11,067           | )      | (11,622 | ) |
| Non-goodwill  intangible amortization        |   | (9,836            | )      | (11,036 | ) |
| State  taxes                                 |   | 176               |   | — |   |
| Section 481  adjustment                 |   | 2,322             |   | 4,665 |   |
| Other                                        |   | 77                |   | 150 |   |
|                                         |   | $                 | — |   | $ | — |   |

 

As of June 30, 2003, the Company had NOL carryforwards ofapproximately $66.0 million, expiring on various dates through 2019.  The NOLs and related deferred tax componentshave been reduced to reflect limitations from prior changes in ownership.  A valuation allowance is provided againstthe net deferred tax asset when it is more likely than not that the netdeferred tax asset will not be realized. The Company established approximately $8.2 million of valuationallowance in the purchase accounting in connection with the Acquisition.  As a result, as the underlying taxattributes are utilized, the reduction in valuation allowance will be recordedas a reduction of goodwill.  None ofthese tax attributes had been utilized at June 30, 2003.

 

60

----

 

**13.  RETIREMENT SAVINGS PLANS**

 

InSight has a 401(k) profit sharing plan (Plan), which is available toall eligible employees, pursuant to which InSight may match a percentage ofemployee contributions to the Plan. InSight contributions of approximately $0.8 million, $0.4 million, $0.2million, and $0.7 million were made for the years ended June 30, 2003 and2002, the period from July 1, 2001 to October 17, 2001, and for theyear ended June 30, 2001, respectively.

 

**14.  INVESTMENTS IN AND TRANSACTIONS WITHPARTNERSHIPS**

 

The Company has direct ownership in five Partnerships at June 30,2003, one of which operates a Fixed Facility, three of which operate Centersand one of which operates a Mobile PET Facility.  The Company owns between 25 percent and 50 percent of thesePartnerships, serves as the managing general partner and provides certainmanagement services under agreements expiring in 2010.  These Partnerships are accounted for underthe equity method since the Company does not exercise control over theoperations of these Partnerships and does not have primary responsibility forthe Partnerships’ long-term debt.

 

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

 
|                             |   | **June 30,** |   |
|----------------------------------|--------|-------------------|--------|
|                             |   | **2003**          |   | **2002** |   |
| Combined  Financial Position:    |   |              |   |   |   |
| Current  assets:                 |   |              |   |   |   |
| Cash                             |   | $                 | 4,028  |   | $ | 2,383 |   |
| Trade  accounts receivables, net |   | 2,294             |   | 3,224 |   |
| Other                            |   | 457               |   | 429 |   |
| Property  and equipment, net     |   | 6,807             |   | 9,127 |   |
| Intangible  assets, net          |   | 783               |   | 990 |   |
| Total  assets                    |   | 14,369            |   | 16,153 |   |
| Current  liabilities             |   | (3,497            | )      | (4,576 | ) |
| Due  to the Company              |   | (2,397            | )      | (3,108 | ) |
| Long-term  liabilities           |   | (2,324            | )      | (4,324 | ) |
| Net  assets                      |   | $                 | 6,151  |   | $ | 4,145 |   |

 

Set forth below are the combined operating results of the Partnershipsand the Company’s equity in earnings of the Partnerships (amounts inthousands):

 
|                                |   |     |   | **Predecessor**                                         |   |
|-------------------------------------|--------|----------|--------|---------------------------------------------------------|--------|
|                                |   |     |   | **Period from  July 1 to  October 17,  2001** |   | **Year Ended  June 30,  2001** |   |
| **Company**                         |
| **Years Ended June 30,**       |
| **2003**                            |   | **2002** |
| Operating  Results:                 |   |     |   |                                                    |   |   |   |   |   |
| Net  revenues                       |   | $        | 19,291 |                                                    | $      | 10,604 |   | $ | 6,073 |   | $ | 11,344 |   |
| Expenses                            |   | 15,646   |   | 10,382                                                  |   | 4,987 |   | 9,211 |   |
| Net  income                         |   | $        | 3,645  |                                                    | $      | 222 |   | $ | 1,086 |   | $ | 2,133 |   |
|                                |   |     |   |                                                    |   |   |   |   |   |
| Equity  in earnings of partnerships |   | $        | 1,744  |                                                    | $      | 437 |   | $ | 382 |   | $ | 971 |   |

 

The Company has direct ownership in 50 percent of an additionalPartnership, which operates a Center. Since the Company controls the operations and is primarily responsiblefor the associated long-term debt, the Partnership has been included in theCompany’s consolidated financial statements. Total assets and revenues as of and for the year ended June 30,2003 for the Company’s 50 percent controlled entity which is consolidated wereapproximately $2.7 million and $6.6 million, respectively.

 

61

----

 

**15.  HEDGING ACTIVITIES**

 

The Company accounts for hedging activities under Statement ofFinancial Accounting Standards (SFAS) No. 133, “Accounting for DerivativeInstruments and Hedging Activities” as amended by SFAS No. 137 and SFAS No. 138(collectively SFAS 133).  SFAS 133requires that entities recognize all derivatives as either assets orliabilities in the statement of financial condition and measure thoseinstruments at fair value.  Under SFAS133 an entity may designate a derivative as a hedge of exposure to eitherchanges in:  (i) the fair value of arecognized asset or liability or firm commitment; (ii) cash flows of arecognized or forecasted transaction; or (iii) foreign currencies of a netinvestment in foreign operations, firm commitments, available-for-salesecurities or a forecasted transaction. Additionally, any ineffective portion of the hedging transaction isrecorded currently in net income with the remainder deferred in accumulatedother comprehensive income (loss).

 

The Company has established policies and procedures to permit limitedtypes and amounts of off-balance sheet hedges to help manage interest raterisk.  InSight had entered into aninterest rate swap to pay a fixed rate of interest to a counterparty andreceived a floating rate of interest and had designated the interest rate swapas a cash flow hedge of its floating rate debt.  Such swaps have the effect of converting variable rate borrowingsinto fixed rate borrowings.

 

Subsequent to the Acquisition, the Company re-designated the acquiredswap as a cash flow hedge and established a new hedging relationship with theCredit Facilities.  At June 30,2003, the notional amount of this swap was $23.8 million with a fair value lossof approximately $0.9 million.  The fairvalue of the swap at the time of the Acquisition was approximately $1.8 millionand represents hedge ineffectiveness that will be recognized in net income overthe remaining life of the swap. Approximately $0.8 million of hedge ineffectiveness was recognized as areduction to interest expense for the year ended June 30, 2003.

 

**16.  RELATED PARTY TRANSACTIONS**

 

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

 

62

----

 

17.   SEGMENT INFORMATION

 

The Company has two reportable segments:  the Mobile Division and Fixed-Site Division, which are businessunits defined primarily by the type of service provided.  The Mobile Division operates primarilyMobile Facilities while the Fixed-Site Division operates primarily Centers andFixed Facilities, although each Division generates both contract services andpatient services revenues.  The Companydoes not allocate corporate and billing related costs, depreciation related tothe Company’s billing system and amortization related to other intangibleassets to the two segments.  The Companyalso does not allocate income taxes to the two segments.  The Company manages cash flows and assets ona consolidated basis, and not by segment, and does not allocate or reportassets and capital expenditures by segment.

 

The following tables summarize the operating results by segment(amounts in thousands):

 

Company

Yearended June 30, 2003:

 
|                                               |   | **Mobile** |   | **Fixed-Site** |   | **Other** |   | **Consolidated** |   |
|----------------------------------------------------|--------|------------|--------|----------------|--------|-----------|--------|------------------|--------|
| Revenues                                           |   | $          | 97,936 |           | $      | 139,816   |   | $                | — |   | $ | 237,752 |   |
| Depreciation  and amortization                     |   | 24,322     |   | 17,408         |   | 7,615     |   | 49,345           |   |
| Total  costs of operations                         |   | 66,823     |   | 99,795         |   | 13,426    |   | 180,044          |   |
| Equity  in earnings of unconsolidated partnerships |   | 84         |   | 1,660          |   | —    |   | 1,744            |   |
| Operating  income (loss)                           |   | 31,197     |   | 41,681         |   | (27,176   | )      | 45,702           |   |
| Interest  expense, net                             |   | 11,190     |   | 8,259          |   | 18,065    |   | 37,514           |   |
| Income  (loss) before income taxes                 |   | 20,007     |   | 33,422         |   | (45,241   | )      | 8,188            |   |
|                                                    |        |            |        |                |        |           |        |                  |        |  |  |  |  |

 

Yearended June 30, 2002:

 
|                                                      |   | **Mobile** |   | **Fixed-Site** |   | **Other** |   | **Consolidated** |   |
|-----------------------------------------------------------|--------|------------|--------|----------------|--------|-----------|--------|------------------|--------|
| Revenues                                                  |   | $          | 65,630 |           | $      | 89,995    |   | $                | (218   | ) | $ | 155,407 |   |
| Depreciation  and amortization                            |   | 11,388     |   | 11,096         |   | 3,978     |   | 26,462           |   |
| Total  costs of operations                                |   | 45,683     |   | 64,316         |   | 5,585     |   | 115,584          |   |
| Equity  in earnings (loss) of unconsolidated partnerships |   | (109       | )      | 546            |   | —    |   | 437              |   |
| Operating  income (loss)                                  |   | 19,838     |   | 26,225         |   | (13,508   | )      | 32,555           |   |
| Interest  expense, net                                    |   | 5,964      |   | 6,361          |   | 20,221    |   | 32,546           |   |
| Income  (loss) before income taxes                        |   | 13,874     |   | 19,864         |   | (33,729   | )      | 9                |   |
|                                                           |        |            |        |                |        |           |        |                  |        |  |  |  |  |

 

Predecessor

Periodfrom July 1, 2001 through October 17, 2001:

 
|                                               |   | **Mobile** |   | **Fixed-Site** |   | **Other** |   | **Consolidated** |   |
|----------------------------------------------------|--------|------------|--------|----------------|--------|-----------|--------|------------------|--------|
| Revenues                                           |   | $          | 26,333 |           | $      | 37,313    |   | $                | 32     |   | $ | 63,678 |   |
| Depreciation  and amortization                     |   | 4,621      |   | 4,187          |   | 1,015     |   | 9,823            |   |
| Total  costs of operations                         |   | 17,828     |   | 25,600         |   | 2,259     |   | 45,687           |   |
| Equity  in earnings of unconsolidated partnerships |   | 41         |   | 341            |   | —    |   | 382              |   |
| Acquisition  related compensation charge           |   | —     |   | —         |   | (15,616   | )      | (15,616          | )      |
| Operating  income (loss)                           |   | 8,546      |   | 12,054         |   | (21,027   | )      | (427             | )      |
| Interest  expense, net                             |   | 2,543      |   | 2,538          |   | 1,240     |   | 6,321            |   |
| Income  (loss) before income taxes                 |   | 6,003      |   | 9,516          |   | (22,267   | )      | (6,748           | )      |
|                                                    |        |            |        |                |        |           |        |                  |        |  |  |  |  |

 

Yearended June 30, 2001:

 
|                                               |   | **Mobile** |   | **Fixed-Site** |   | **Other** |   | **Consolidated** |   |
|----------------------------------------------------|--------|------------|--------|----------------|--------|-----------|--------|------------------|--------|
| Revenues                                           |   | $          | 92,408 |           | $      | 119,219   |   | $                | (124   | ) | $ | 211,503 |   |
| Depreciation  and amortization                     |   | 19,366     |   | 17,113         |   | 4,655     |   | 41,134           |   |
| Total  costs of operations                         |   | 64,486     |   | 86,684         |   | 10,702    |   | 161,872          |   |
| Equity  in earnings of unconsolidated partnerships |   | 8          |   | 963            |   | —    |   | 971              |   |
| Operating  income (loss)                           |   | 27,930     |   | 33,498         |   | (21,609   | )      | 39,819           |   |
| Interest  expense, net                             |   | 9,757      |   | 9,288          |   | 4,349     |   | 23,394           |   |
| Income  (loss) before income taxes                 |   | 18,173     |   | 24,210         |   | (25,958   | )      | 16,425           |   |
|                                                    |        |            |        |                |        |           |        |                  |        |  |  |  |  |

 

63

----

 

**18.  RESULTS OF QUARTERLY OPERATIONS (unaudited)**

 
|               |   | **First  Quarter**         |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   | **Total** |   |
|--------------------|--------|----------------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|-----------|--------|
|               |   | **(amounts in thousands)** |   |
| 2003:              |   |                       |   |                |   |               |   |                |   |      |   |
| Revenues           |   | $                          | 58,656 |                | $      | 58,265             |   | $                   | 56,134 |      | $      | 64,697 |   | $ | 237,752 |   |
| Gross  profit      |   | 15,499                     |   | 14,510              |   | 12,508             |   | 15,191              |   | 57,708    |   |
| Net  income        |   | 1,956                      |   | 1,444               |   | 256                |   | 1,266               |   | 4,922     |   |
|               |   |                       |   |                |   |               |   |                |   |      |   |
| 2002:              |   |                       |   |                |   |               |   |                |   |      |   |
| Revenues           |   | $                          | 53,117 |                | $      | 53,672             |   | $                   | 55,526 |      | $      | 56,770 |   | $ | 219,085 |   |
| Gross  profit      |   | 15,046                     |   | 12,853              |   | 14,351             |   | 15,564              |   | 57,814    |   |
| Net  income (loss) |   | 4,967                      |   | (16,794             | )      | 3,127              |   | 4,061               |   | (4,639    | )      |

 

**19.  SUBSEQUENT EVENT**

 

OnAugust 1, 2003, the Company acquired 22 Mobile Facilities primarilylocated in the Mid-Atlantic states.  Theacquisition consists of certain tangible assets, including diagnostic imagingequipment, customer contracts and other agreements.  The aggregate purchase price was approximately $48.5 million,which includes approximately $28.1 million paid to the seller and the paymentof debt and transaction costs of approximately $20.4 million, and is subject tocertain post-closing adjustments.  TheCompany borrowed the remaining $25 million under its $75 million delayed-drawterm loan facility and $25 million under the $50 million second delayed-drawterm loan facility to fund the purchase price and future capital expendituresrelated to the acquisition.

 

**20.  SUPPLEMENTAL CONDENSED CONSOLIDATEDFINANCIAL INFORMATION**

 

InSight’s paymentobligations under the Notes (Note 9) are guaranteed by the Company (ParentCompany) and all of InSight’s wholly owned subsidiaries (the GuarantorSubsidiaries).  These guarantees arefull, unconditional and joint and several. The following condensed consolidating financial information has beenprepared and presented pursuant to SEC Regulation S-X Rule 3-10 “Financialstatements of guarantors and issuers of guaranteed securities registered orbeing registered.”  The Company accountsfor its investment in InSight and its subsidiaries under the equity method ofaccounting.  Dividends from InSight tothe Company are restricted under the Credit Facilities.  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.

 

64

----

 

**INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET**

**JUNE 30, 2003**

**(Amounts in thousands)**

**(Company)**

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

 

65

----

 

**INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET**

**JUNE 30, 2002**

**(Amounts in thousands)**

**(Company)**

 
|                                                               |   | **PARENT  COMPANY  ONLY** |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |    | **ELIMINATIONS** |   | **CONSOLIDATED** |   |
|--------------------------------------------------------------------|--------|---------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|---------|------------------|--------|------------------|--------|
| ASSETS                                                             |   |                      |   |        |   |                        |   |                            |    |             |   |             |   |
| Current  assets:                                                   |   |                      |   |        |   |                        |   |                            |    |             |   |             |   |
| Cash  and cash equivalents                                         |   | $                         | — |        | $      | —                      |   | $                               | 14,451  |             | $      | 3,332            |   | $ | — |   | $ | 17,783 |   |
| Trade  accounts receivables, net                                   |   | —                    |   | —      |   | 35,190                      |   | 8,669                           |    | —           |   | 43,859           |   |
| Other  current assets                                              |   | —                    |   | —      |   | 7,828                       |   | 228                             |    | —           |   | 8,056            |   |
| Intercompany  accounts receivable                                  |   | 87,367                    |   | 373,875     |   | 23,540                      |   | —                          |    | (484,782         | )      | —           |   |
| Total  current assets                                              |   | 87,367                    |   | 373,875     |   | 81,009                      |   | 12,229                          |    | (484,782         | )      | 69,698           |   |
| Property  and equipment, net                                       |   | —                    |   | —      |   | 150,857                     |   | 21,199                          |    | —           |   | 172,056          |   |
| Investments  in partnerships                                       |   | —                    |   | —      |   | 1,886                       |   | —                          |    | —           |   | 1,886            |   |
| Investments  in consolidated subsidiaries                          |   | 9                         |   | 9           |   | 9,156                       |   | —                          |    | (9,174           | )      | —           |   |
| Other  assets                                                      |   | —                    |   | —      |   | 21,117                      |   | —                          |    | —           |   | 21,117           |   |
| Goodwill  and other intangible assets, net                         |   | —                    |   | —      |   | 229,886                     |   | 4,758                           |    | —           |   | 234,644          |   |
|                                                               |   | $                         | 87,376 |        | $      | 373,884                     |   | $                               | 493,911 |             | $      | 38,186           |   | $ | (493,956 | ) | $ | 499,401 |   |
|                                                               |   |                      |   |        |   |                        |   |                            |    |             |   |             |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                         |   |                      |   |        |   |                        |   |                            |    |             |   |             |   |
| Current  liabilities:                                              |   |                      |   |        |   |                        |   |                            |    |             |   |             |   |
| Current  portion of notes payable and capital lease obligations    |   | $                         | — |        | $      | 1,500                       |   | $                               | 1,509   |             | $      | 266              |   | $ | — |   | $ | 3,275 |   |
| Accounts  payable and other accrued expenses                       |   | —                    |   | —      |   | 29,408                      |   | 1,108                           |    | —           |   | 30,516           |   |
| Intercompany  accounts payable                                     |   | —                    |   | —      |   | 461,243                     |   | 23,539                          |    | (484,782         | )      | —           |   |
| Total  current liabilities                                         |   | —                    |   | 1,500       |   | 492,160                     |   | 24,913                          |    | (484,782         | )      | 33,791           |   |
| Notes  payable and capital lease obligations, less current portion |   | —                    |   | 372,375     |   | 1,506                       |   | 1,008                           |    | —           |   | 374,889          |   |
| Other  long-term liabilities                                       |   | —                    |   | —      |   | 236                         |   | 3,109                           |    | —           |   | 3,345            |   |
| Stockholders’  equity                                         |   | 87,376                    |   | 9           |   | 9                           |   | 9,156                           |    | (9,174           | )      | 87,376           |   |
|                                                               |   | $                         | 87,376 |        | $      | 373,884                     |   | $                               | 493,911 |             | $      | 38,186           |   | $ | (493,956 | ) | $ | 499,401 |   |

 

66

----

 

**INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF INCOME**

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

**(Amounts in thousands)**

**(Company)**

 
|                                                         |   | **PARENT  COMPANY  ONLY** |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |    | **ELIMINATION** |   | **CONSOLIDATED** |   |
|--------------------------------------------------------------|--------|---------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|---------|-----------------|--------|------------------|--------|
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Revenues                                                     |   | $                         | — |        | $      | —                      |   | $                               | 193,956 |            | $      | 43,796           |   | $ | — |   | $ | 237,752 |   |
| Costs  of operations                                         |   | —                    |   | —      |   | 142,668                     |   | 37,376                          |    | —          |   | 180,044          |   |
| Gross  profit                                                |   | —                    |   | —      |   | 51,288                      |   | 6,420                           |    | —          |   | 57,708           |   |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Corporate  operating expenses                                |   | —                    |   | —      |   | 13,750                      |   | —                          |    | —          |   | 13,750           |   |
| Income  from company operations                              |   | —                    |   | —      |   | 37,538                      |   | 6,420                           |    | —          |   | 43,958           |   |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Equity  in earnings of unconsolidated partnerships           |   | —                    |   | —      |   | 1,744                       |   | —                          |    | —          |   | 1,744            |   |
| Operating  income                                            |   | —                    |   | —      |   | 39,282                      |   | 6,420                           |    | —          |   | 45,702           |   |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Interest  expense, net                                       |   | —                    |   | —      |   | 35,601                      |   | 1,913                           |    | —          |   | 37,514           |   |
| Income  before income taxes                                  |   | —                    |   | —      |   | 3,681                       |   | 4,507                           |    | —          |   | 8,188            |   |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Provision  for income taxes                                  |   | —                    |   | —      |   | 3,266                       |   | —                          |    | —          |   | 3,266            |   |
| Income  before equity in income of consolidated subsidiaries |   | —                    |   | —      |   | 415                         |   | 4,507                           |    | —          |   | 4,922            |   |
|                                                         |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Equity  in income of consolidated subsidiaries               |   | 4,922                     |   | 4,922       |   | 4,507                       |   | —                          |    | (14,351         | )      | —           |   |
| Net  income                                                  |   | $                         | 4,922  |        | $      | 4,922                       |   | $                               | 4,922   |            | $      | 4,507            |   | $ | (14,351 | ) | $ | 4,922 |   |

 

67

----

 

**INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF INCOME**

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

**(Amounts in thousands)**

**(Company)**

 
|                                                                |   | **PARENT  COMPANY  ONLY** |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |    | **ELIMINATION** |   | **CONSOLIDATED** |   |
|---------------------------------------------------------------------|--------|---------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|---------|-----------------|--------|------------------|--------|
|                                                                |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Revenues                                                            |   | $                         | — |        | $      | —                      |   | $                               | 128,442 |            | $      | 26,965           |   | $ | — |   | $ | 155,407 |   |
| Costs  of operations                                                |   | —                    |   | —      |   | 93,515                      |   | 22,069                          |    | —          |   | 115,584          |   |
| Gross  profit                                                       |   | —                    |   | —      |   | 34,927                      |   | 4,896                           |    | —          |   | 39,823           |   |
|                                                                |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Corporate  operating expenses                                       |   | —                    |   | —      |   | 7,705                       |   | —                          |    | —          |   | 7,705            |   |
| Income  from company operations                                     |   | —                    |   | —      |   | 27,222                      |   | 4,896                           |    | —          |   | 32,118           |   |
|                                                                |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Equity  in earnings of unconsolidated partnerships                  |   | —                    |   | —      |   | 437                         |   | —                          |    | —          |   | 437              |   |
| Operating  income                                                   |   | —                    |   | —      |   | 27,659                      |   | 4,896                           |    | —          |   | 32,555           |   |
|                                                                |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Interest  expense, net                                              |   | —                    |   | —      |   | 31,152                      |   | 1,394                           |    | —          |   | 32,546           |   |
| Income  (loss) before income taxes                                  |   | —                    |   | —      |   | (3,493                      | )      | 3,502                           |    | —          |   | 9                |   |
|                                                                |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Provision  for income taxes                                         |   | —                    |   | —      |   | —                      |   | —                          |    | —          |   | —           |   |
| Income  (loss) before equity in income of consolidated subsidiaries |   | —                    |   | —      |   | (3,493                      | )      | 3,502                           |    | —          |   | 9                |   |
|                                                                |   |                      |   |        |   |                        |   |                            |    |            |   |             |   |
| Equity  in income of consolidated subsidiaries                      |   | 9                         |   | 9           |   | 3,502                       |   | —                          |    | (3,520          | )      | —           |   |
| Net  income                                                         |   | $                         | 9      |        | $      | 9                           |   | $                               | 9       |            | $      | 3,502            |   | $ | (3,520 | ) | $ | 9 |   |

 

68

----

 

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**FOR THE PERIOD FROM JULY 1, 2001 THROUGHOCTOBER 17, 2001**

**(Amounts in thousands)**

**(Predecessor)**

 
|                                                                |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |   | **ELIMINATION** |   | **CONSOLIDATED** |   |
|---------------------------------------------------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|--------|-----------------|--------|------------------|--------|
|                                                                |   |        |   |                        |   |                            |   |            |   |             |   |
| Revenues                                                            |   | $           | — |                        | $      | 50,352                          |   | $               | 13,326 |             | $      | — |   | $ | 63,678 |   |
| Costs  of operations                                                |   | —      |   | 35,316                      |   | 10,371                          |   | —          |   | 45,687           |   |
| Gross  profit                                                       |   | —      |   | 15,036                      |   | 2,955                           |   | —          |   | 17,991           |   |
|                                                                |   |        |   |                        |   |                            |   |            |   |             |   |
| Corporate  operating expenses                                       |   | —      |   | 3,184                       |   | —                          |   | —          |   | 3,184            |   |
| Income  from company operations                                     |   | —      |   | 11,852                      |   | 2,955                           |   | —          |   | 14,807           |   |
|                                                                |   |        |   |                        |   |                            |   |            |   |             |   |
| Equity  in earnings of unconsolidated partnerships                  |   | —      |   | 382                         |   | —                          |   | —          |   | 382              |   |
|                                                                |   |        |   |                        |   |                            |   |            |   |             |   |
| Acquisition  related compensation charges                           |   | —      |   | (15,616                     | )      | —                          |   | —          |   | (15,616          | )      |
| Operating  income (loss)                                            |   | —      |   | (3,382                      | )      | 2,955                           |   | —          |   | (427             | )      |
|                                                                |   |        |   |                        |   |                            |   |            |   |             |   |
| Interest  expense, net                                              |   | —      |   | 5,647                       |   | 674                             |   | —          |   | 6,321            |   |
| Income  (loss) before income taxes                                  |   | —      |   | (9,029                      | )      | 2,281                           |   | —          |   | (6,748           | )      |
|                                                                |   |        |   |                        |   |                            |   |            |   |             |   |
| Provision  (benefit) for income taxes                               |   | —      |   | (2,100                      | )      | —                          |   | —          |   | (2,100           | )      |
| Income  (loss) before equity in income of consolidated subsidiaries |   | —      |   | (6,929                      | )      | 2,281                           |   | —          |   | (4,648           | )      |
|                                                                |   |        |   |                        |   |                            |   |            |   |             |   |
| Equity  in income (loss) of consolidated subsidiaries               |   | (4,648      | )      | 2,281                       |   | —                          |   | 2,367           |   | —           |   |
| Net  income (loss)                                                  |   | $           | (4,648 | )                           | $      | (4,648                          | )      | $               | 2,281  |             | $      | 2,367 |   | $ | (4,648 | ) |

 

69

----

 

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF INCOME**

**FOR THE YEAR ENDED JUNE 30, 2001**

**(Amounts in thousands)**

**(Predecessor)**

 
|                                                         |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |   | **ELIMINATION** |   | **CONSOLIDATED** |   |
|--------------------------------------------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|--------|-----------------|--------|------------------|--------|
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Revenues                                                     |   | $           | — |                        | $      | 175,201                         |   | $               | 36,302 |             | $      | — |   | $ | 211,503 |   |
| Costs  of operations                                         |   | —      |   | 132,838                     |   | 29,034                          |   | —          |   | 161,872          |   |
| Gross  profit                                                |   | —      |   | 42,363                      |   | 7,268                           |   | —          |   | 49,631           |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Corporate  operating expenses                                |   | —      |   | 10,783                      |   | —                          |   | —          |   | 10,783           |   |
| Income  from company operations                              |   | —      |   | 31,580                      |   | 7,268                           |   | —          |   | 38,848           |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Equity  in earnings of unconsolidated partnerships           |   | —      |   | 971                         |   | —                          |   | —          |   | 971              |   |
| Operating  income                                            |   | —      |   | 32,551                      |   | 7,268                           |   | —          |   | 39,819           |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Interest  expense, net                                       |   | —      |   | 21,248                      |   | 2,146                           |   | —          |   | 23,394           |   |
| Income  before income taxes                                  |   | —      |   | 11,303                      |   | 5,122                           |   | —          |   | 16,425           |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Provision  for income taxes                                  |   | —      |   | 2,624                       |   | —                          |   | —          |   | 2,624            |   |
| Income  before equity in income of consolidated subsidiaries |   | —      |   | 8,679                       |   | 5,122                           |   | —          |   | 13,801           |   |
|                                                         |   |        |   |                        |   |                            |   |            |   |             |   |
| Equity  in income of consolidated subsidiaries               |   | 13,801      |   | 5,122                       |   | —                          |   | (18,923         | )      | —           |   |
| Net  income                                                  |   | $           | 13,801 |                        | $      | 13,801                          |   | $               | 5,122  |             | $      | (18,923 | ) | $ | 13,801 |   |

 

70

----

 

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSFOR THE YEAR ENDED JUNE 30,****2003****(Amounts in thousands)**

**(Company)**

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

 

71

----

 

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSFOR THE YEAR ENDED JUNE 30, 2002(Amounts in thousands)****(Company)**

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

 

72

----

 

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSFOR THE PERIOD FROM JULY 1, 2001 THROUGH OCTOBER 17, 2001(Amounts in thousands)(Predecessor)**

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

 

73

----

 

**INSIGHT HEALTHSERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSFOR THE YEAR ENDED JUNE 30, 2001(Amounts in thousands)(Predecessor)**

 
| ** **                                                                         |   | **INSIGHT** |   | **GUARANTOR  SUBSIDIARIES** |   | **NON-GUARANTOR  SUBSIDIARIES** |   | **ELIMINATIONS** |   | **CONSOLIDATED** |   |
|------------------------------------------------------------------------------------|--------|-------------|--------|-----------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
|                                                                               |   |        |   |                        |   |                            |   |             |   |             |   |
| OPERATING  ACTIVITIES:                                                             |   |        |   |                        |   |                            |   |             |   |             |   |
| Net  income                                                                        |   | $           | 13,801 |                        | $      | 13,801                          |   | $                | 5,122  |             | $      | (18,923 | ) | $ | 13,801 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |        |   |                        |   |                            |   |             |   |             |   |
| Depreciation  and amortization                                                     |   | —      |   | 34,882                      |   | 6,252                           |   | —           |   | 41,134           |   |
| Equity  in income of consolidated subsidiaries                                     |   | (13,801     | )      | (5,122                      | )      | —                          |   | 18,923           |   | —           |   |
| Cash  provided by (used in) changes in operating assets and liabilities:           |   |        |   |                        |   |                            |   |             |   |             |   |
| Trade  accounts receivables , net                                                  |   | —      |   | (1,274                      | )      | (1,483                          | )      | —           |   | (2,757           | )      |
| Intercompany  receivables, net                                                     |   | 18,209      |   | (21,218                     | )      | 3,009                           |   | —           |   | —           |   |
| Other  current assets                                                              |   | —      |   | 672                         |   | 110                             |   | —           |   | 782              |   |
| Accounts  payable and other accrued expenses                                       |   | —      |   | (2,606                      | )      | 328                             |   | —           |   | (2,278           | )      |
| Net  cash provided by operating activities                                         |   | 18,209      |   | 19,135                      |   | 13,338                          |   | —           |   | 50,682           |   |
|                                                                               |   |        |   |                        |   |                            |   |             |   |             |   |
| INVESTING  ACTIVITIES:                                                             |   |        |   |                        |   |                            |   |             |   |             |   |
| Additions  to property and equipment                                               |   | —      |   | (12,494                     | )      | (10,417                         | )      | —           |   | (22,911          | )      |
| Other                                                                              |   | —      |   | 3,459                       |   | (3,990                          | )      | —           |   | (531             | )      |
| Net  cash used in investing activities                                             |   | —      |   | (9,035                      | )      | (14,407                         | )      | —           |   | (23,442          | )      |
|                                                                               |   |        |   |                        |   |                            |   |             |   |             |   |
| FINANCING  ACTIVITIES:                                                             |   |        |   |                        |   |                            |   |             |   |             |   |
| Proceeds  from stock options and warrants exercised                                |   | 183         |   | —                      |   | —                          |   | —           |   | 183              |   |
| Principal  payments of notes payable and capital lease obligations                 |   | (18,392     | )      | (13,552                     | )      | 185                             |   | —           |   | (31,759          | )      |
| Other                                                                              |   | —      |   | (1,896                      | )      | 2,353                           |   | —           |   | 457              |   |
| Net  cash provided by (used in) financing activities                               |   | (18,209     | )      | (15,448                     | )      | 2,538                           |   | —           |   | (31,119          | )      |
|                                                                               |   |        |   |                        |   |                            |   |             |   |             |   |
| INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                  |   | —      |   | (5,348                      | )      | 1,469                           |   | —           |   | (3,879           | )      |
| Cash,  beginning of year                                                           |   | —      |   | 25,375                      |   | 1,758                           |   | —           |   | 27,133           |   |
| Cash,  end of year                                                                 |   | $           | — |                        | $      | 20,027                          |   | $                | 3,227  |             | $      | — |   | $ | 23,254 |   |

 

74

----

 

**ITEM9.****                                                     CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM9A.****                                            CONTROLSAND PROCEDURES**

 

The Company carried out an evaluation, with the participation of theCompany’s management, includingthe Company’s Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures(pursuant to Rule 15d-15 under the Securities Exchange Act of 1934) as of theend of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that theCompany’s disclosure controlsand procedures are effective in timely alerting them to material informationrelating to the Company (including its consolidated subsidiaries) required tobe included in the Company’speriodic SEC filings.  There has been nochange in the Company’s internalcontrol over financial reporting during the quarter ended June 30, 2003that has materially affected, or is reasonably likely to materially affect, theCompany’s internal control overfinancial reporting.

 

75

----

** **

**PART III**

 

**ITEM10.****                                              DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The stockholders agreementamong the Company, J.W. Childs Equity Partners II, L.P., JWC-InSight Co-investLLC, Halifax Capital Partners, L.P., David W. Dupree, management of InSight andall other holders of capital stock or stock options of the Company obligatesthe Company’s stockholders to appoint up to eight directors nominated by J.W.Childs Equity Partners II, L.P. (as would constitute a majority of the board ofdirectors) and two nominees designated by Halifax Capital Partners, L.P.  Pursuant to the terms of the Acquisition, thereare currently seven directors comprising the board of directors, five of whomhave been nominated by J.W. Childs Equity Partners II, L.P. and two of whomhave been nominated by Halifax Capital Partners, L.P.  The directors are elected annually by, and serve at thediscretion of, the Company’s stockholders. The Company’s executive officers are elected annually by, and serve atthe discretion of the board of directors.

 

The following table sets forththe name, age, position and the years in which they were appointed to theircurrent positions, of the Company’s directors and executive officers, includingthe executive officers of InSight who are deemed executive officers (as definedunder Rule 3b-7 of the Exchange Act) of the Company, as of August 29,2003:

 
| **Name**                  |   | **Age** |   | **Current Position**                                              |   | **Years** |
|---------------------------|--------|---------|--------|-------------------------------------------------------------------|--------|-----------|
|                      |   |    |   |                                                              |   |      |
| Steven T. Plochocki       |   | 52      |   | Director, President and Chief Executive Officer                   |   | 1999      |
| Patricia R. Blank         |   | 53      |   | Executive Vice President and Chief Information Officer of InSight |   | 1998      |
| Michael A. Boylan         |   | 47      |   | Executive Vice President and Chief Development Officer of InSight |   | 2002      |
| Brian G. Drazba           |   | 41      |   | Executive Vice President and Chief Financial Officer              |   | 2003      |
| Marilyn U. MacNiven-Young |   | 52      |   | Executive Vice President, General Counsel and Secretary           |   | 1998      |
| Michael S. Madler         |   | 44      |   | Executive Vice President and Chief Operating Officer of InSight   |   | 2002      |
| Michael N. Cannizzaro     |   | 54      |   | Director and Chairman of the Board                                |   | 2001      |
| Kenneth M. Doyle          |   | 38      |   | Director                                                          |   | 2001      |
| David W. Dupree           |   | 50      |   | Director                                                          |   | 2001      |
| Steven G. Segal           |   | 43      |   | Director                                                          |   | 2001      |
| Mark J. Tricolli          |   | 32      |   | Director                                                          |   | 2001      |
| Edward D. Yun             |   | 36      |   | Director                                                          |   | 2001      |

 

Steven T. Plochocki has been President and Chief Executive Officer anda director of the Company since February 11, 2002.  He has been President and Chief ExecutiveOfficer and a director of InSight since November 22, 1999.  From January 1998 throughNovember 19, 1999, Mr. Plochocki was President and Chief Executive Officerof Centratex Support Services, Inc., a support services company for the healthcare industry.  Mr. Plochocki wasPresident and Chief Operating Officer of Apria Healthcare Group Inc., a homehealth care company, from July 1995 through October 1997.

 

Patricia R. Blank has been InSight’s Executive Vice President and ChiefInformation Officer since September 1, 1999.  Prior to joining InSight, Ms. Blank was the principal of Blank& Company, a consulting firm specializing in health care consulting.  From 1995 to 1998, Ms. Blank served asExecutive Vice President and Chief Operating Officer of HealthHelp, Inc., a Houston,Texas-based radiology services organization managing radiology providernetworks in multiple states. From 1988 to 1995, she was corporate director ofradiology of FHP, a California insurance company.

 

Michael A. Boylan has been InSight’s Executive Vice President and ChiefDevelopment Officer since February 7, 2002.  He was Executive Vice President, Operations, Eastern Division ofInSight from July 1, 2000 to February 7, 2002.  From April 1998 to July 1, 2000,he was Executive Vice President and Chief Development Officer.  From February 1996 to April 1998,he was Senior Vice President-Operations of InSight.  Mr. Boylan has served as Executive Vice President of Maxum HealthCorp. (“MHC”), a wholly owned subsidiary of InSight, since March 1994.  From 1992 to 1994, he served as a regionalVice President of MHC’s principal operating subsidiary, Maxum Health ServicesCorp.  From 1991 to 1992, he served asan Executive Director of certain of MHC’s operations.

 

76

----

 

From 1986 to 1991, Mr. Boylan served in various capacities as anofficer or employee, including President and Chief Operating Officer, withAmerican Medical Imaging Corporation.

 

Brian G. Drazba has been Executive Vice President and Chief FinancialOfficer of the Company and InSight since May 22, 2003.  He was Senior Vice President-Finance andController of the Company from February 11, 2002 and Senior VicePresident-Finance and Controller of InSight from July 1997 untilMay 22, 2003.  From March 1996to July 1997, he served as Vice President-Finance of InSight.  From June 1995, he served as VicePresident-Finance of American Health Services Corp. ("AHS"), a whollyowned subsidiary of Insight.  Mr. Drazbaserved as corporate controller for AHS from 1992 to 1995.  From 1985 to 1992, Mr. Drazba was employedby Arthur Andersen & Co.

 

Marilyn U. MacNiven-Young has been Executive Vice President, GeneralCounsel and Corporate Secretary of the Company since February 11, 2002 andExecutive Vice President, General Counsel and Corporate Secretary of InSight sinceAugust 1998.  FromFebruary 1996 through July 1998, she was an independent consultant toInSight.  From September 1994through June 1995, she was Senior Vice President and General Counsel ofAbbey Healthcare Group, Inc., a home health care company.  From 1991 through 1994, Ms. MacNiven-Youngserved as General Counsel of AHS.

 

Michael S. Madler has been InSight’s Executive Vice President and ChiefOperating Officer since February 7, 2002. He joined InSight as a Senior Vice President in October 1998 and servedas such until June 8, 1999 when he was appointed Executive Vice President,Operations, Western Division.  From 1993through October 1998, Mr. Madler was Chief Operating Officer of PrimeMedical Services, Inc. an Austin, Texas-based lithotripsy services managementcompany.

 

Michael N. Cannizzaro became a member of the Company’s board ofdirectors on October 17, 2001 and was elected chairman of the board onMay 30, 2002.  He is an OperatingPartner of J.W. Childs Associates, L.P. Prior to that, he was President and Chief Executive Officer of BeltoneElectronics Corporation from 1998 to 2000. Prior to that, he was President of Caremark International’s PrescriptionService Division from 1994 to 1997; Vice President, Business Development ofCaremark’s Nephrology Service Division from April 1994 toSeptember 1994; and President of Leica North America from 1993 to1994.  He held numerous positions ingeneral management at Baxter Healthcare Corporation from 1976 to 1993,including the position of President of four different divisions.  He is also a director of National NephrologyAssociates, Inc. and Universal Hospital Services, Inc.

 

Kenneth M. Doyle has been a director and Vice President of the Companysince June 13, 2001.  Mr. Doyle isa Principal of The Halifax Group, L.L.C. Mr. Doyle joined The Halifax Group, L.L.C. in January 2000.  Prior to joining The Halifax Group, L.L.C.Mr. Doyle was an Industry Leader and Vice President at GE Equity, the privateequity subsidiary of GE Capital.  Priorto joining GE Equity, Mr. Doyle spent four years in investment banking as aSenior Associate for the Telecommunications Corporate Finance Group at MerrillLynch and as an Associate with Chase Manhattan Bank in the Media andTelecommunications Group.  Mr. Doylealso spent three years with Ernst & Young in the Entrepreneurial ServicesGroup.  Mr. Doyle currently serves onthe board of directors of National Packaging Solutions Group, Inc., Soil Safe,Inc. and Meineke Car Care Centers, Inc.

 

David W. Dupree became a member of the Company’s board of directors onOctober 17, 2001.  Mr. Dupree is aManaging Director of The Halifax Group, L.L.C. which he founded in January 1999. Prior to joining The Halifax Group, L.L.C., Mr. Dupree was a ManagingDirector and Partner with The Carlyle Group, a global investment firm locatedin Washington, D.C., where he was primarily responsible for investments inhealth care and related sectors.  Priorto joining The Carlyle Group in 1992, Mr. Dupree was a Principal in CorporateFinance with Montgomery Securities and prior to that, he was Co-Head of EquityPrivate Placements at Alex, Brown & Sons Incorporated.  Mr. Dupree currently serves on the board ofdirectors of Whole Foods Markets, Inc., National Packaging Solutions Group,Inc., Soil Safe, Inc. and Meineke Car Care Centers, Inc. and previously servedon InSight’s board of directors, as a designee of The Carlyle Group, fromOctober 1997 to December 1999.

 

Steven G. Segal became a member of the Company’s board of directors onOctober 17, 2001.  He is a Partnerof J.W. Childs Associates, L.P. and has been at J.W. Childs Associates, L.P.since 1995.  Prior to that time, he wasan executive at Thomas H. Lee Company from 1987, most recently holding theposition of Managing Director.  He isalso a director of Quality Stores Inc., Jillian’s Entertainment Corp., NationalNephrology Associates, Inc., Big V

 

77

----

 

Supermarkets, Inc., The NutraSweet Company, Universal HospitalServices, Inc. and is Co-Chairman of the Board of Empire Kosher Poultry, Inc.

 

Mark J. Tricolli has been a director and Vice President of the Companysince June 13, 2001.  Mr. Tricolliis a Senior Associate at J.W. Childs Associates, L.P., which he joined in 2000.  Prior to that Mr. Tricolli was an Associatein the Merchant Banking Division of Goldman Sachs from 1999 to 2000, an Analystat William Blair Capital Partners, a private equity firm based in Chicago,Illinois from 1995 to 1997 and an Analyst at Chemical Securities, Inc. from 1993to 1995.  He is also a director ofEquinox Holdings, Inc.

 

Edward D. Yun became a director and President of the Company onJune 13, 2001.  He became a VicePresident of the Company on February 11, 2002.  He is a Partner of J.W. Childs Associates, L.P. and has been atJ.W. Childs Associates, L.P. since 1996. From 1994 until 1996, he was as Associate at DLJ Merchant Banking,Inc.  He is also a director of Jillian’sEntertainment Corp., Pan Am International Flight Academy, Inc., NationalNephrology Associates, Inc., Equinox Holdings, Inc., Chevys, Inc., UniversalHospital Services, Inc. and Hartz Mountain Corporation.

 

In fiscal 2003, the Company’s board of directors met eight times andtook action by unanimous written consent four times.

 

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.  The board of directors of the Company hasnot established committees.  Instead,upon consummation of the Acquisition, the InSight board of directors, which isidentical to the board of directors of the Company, established the followingcommittees to act with regard to compensation and other matters for theCompany:

 

COMPENSATION COMMITTEE.  TheCompensation Committee currently consists of Messrs. Cannizzaro (chairman),Dupree, Plochocki and Segal.  TheCompensation Committee is responsible for determining the specific forms andlevels of compensation of the executive officers of InSight and itssubsidiaries, since there are no employees of the Company, and administering orassisting the board of directors in administering the Company’s 2001 StockOption Plan, and other stock options granted by the Company.  The Compensation Committee met twice infiscal 2003.

 

One of the members of the Compensation Committee, Mr. Plochocki, is theCompany’s President and Chief Executive Officer.  Mr. Plochocki did not participate in decisions relating to hisown compensation.

 

ACQUISITION COMMITTEE.  TheAcquisition Committee currently consists of Messrs. Doyle, Tricolli and Yun(chairman).  Its principal function isto review de novo and acquisition opportunities of the Company.  The Acquisition Committee met twice infiscal 2003.

 

AUDIT COMMITTEE.  The AuditCommittee currently consists of Messrs. Doyle (chairman), Tricolli andYun.  Its principal functions are toreview, examine and approve those matters which primarily relate to the auditof the Company's financial statements, to review with the Company's independentauditors the Company's quarterly and annual filings with the SEC, and to reviewand approve the engagement of the Company's independent auditors.    The Audit Committee met six times infiscal 2003.

 

EXECUTIVE COMMITTEE.  TheExecutive Committee currently consists of Messrs. Cannizzaro (chairman),Dupree, Plochocki and Segal.  It isauthorized to exercise all the power and authority of the board of directors inthe management of the business of the Company but its authority does not extendto certain fundamental corporate transactions. The Executive Committee did not meet in fiscal 2003.

 

REGULATORY COMPLIANCE COMMITTEE. The Regulatory Compliance Committee currently consisting of Messrs.Doyle, Tricolli (chairman) and Yun is responsible for monitoring regulatorycompliance of the Company’s business. The Regulatory Compliance Committee met twice in fiscal 2003.

 

78

----

 

**ITEM11.****                                              EXECUTIVECOMPENSATION**

 

SUMMARYCOMPENSATION TABLE.  The following tablesets forth information concerning the annual, long-term and all othercompensation for services rendered in all capacities to the Company and itssubsidiaries for the years ended June 30, 2003, 2002 and 2001 of (i) eachof the persons who served as the Company’s chief executive officer during theyear ended June 30, 2003, and (ii) the four most highly compensated executiveofficers (as such term is defined in Rule 3b-7) (other than the chief executiveofficer) of the Company serving as executive officers at June 30, 2003(“Other Executive Officers”), and whose aggregate cash compensation exceeded$100,000 for the year ended June 30, 2003 (collectively, “Named ExecutiveOfficers”):

 

SUMMARY COMPENSATION TABLE

 
|                            |   |                    |   |       |    |             |   |         |   | **LongTerm**      |   |          |   |
|---------------------------------|--------|-------------------------|--------|------------|---------|------------------|--------|--------------|--------|-------------------|--------|---------------|--------|
|                            |   | **Annual Compensation** |   |       |    | **Compensation** |   |         |   |
|                            |   | **Fiscal**              |   |       |    |             |   |         |   | **Awards**        |   |          |   |
|                            |   | **Year**                |   |       |    |             |   |         |   | **Stock Options** |   | **All Other** |   |
| **Name and Principal Position** |   | **Ended**               |   | **Salary** |    | **Bonus(1)**     |   | **Other(2)** |   | **(Shares)**      |   | **Comp(2)**   |   |
|                            |   |                    |   |       |    |             |   |         |   |              |   |          |   |
| Steven T. Plochocki             |   | 2003                    |   | $          | 350,000 |             | $      | —       |   | $                 | 9,000  |          | — |   | $ | 6,418 |   |
| President and Chief Executive   |   | 2002                    |   | 300,000    |    | 75,000           |   | 9,000        |   | 147,000           |   | 1,194,779     |   |
| Officer                         |   | 2001                    |   | 280,000    |    | 238,000          |   | 9,000        |   | 50,000            |   | 3,324         |   |
|                            |   |                    |   |       |    |             |   |         |   |              |   |          |   |
| Michael S. Madler               |   | 2003                    |   | 278,200    |    | —           |   | 9,000        |   | —            |   | 3,179         |   |
| Executive Vice President and    |   | 2002                    |   | 221,100    |    | 60,000           |   | 9,000        |   | 94,000            |   | 545,627       |   |
| Chief Operating Officer         |   | 2001                    |   | 200,000    |    | 119,000          |   | 9,000        |   | 50,000            |   | 6,618         |   |
|                            |   |                    |   |       |    |             |   |         |   |              |   |          |   |
| Marilyn U. MacNiven-Young       |   | 2003                    |   | 262,000    |    | —           |   | 9,000        |   | —            |   | 4,333         |   |
| Executive Vice President,       |   | 2002                    |   | 260,300    |    | 30,000           |   | 9,000        |   | 30,000            |   | 530,431       |   |
| General Counsel and Secretary   |   | 2001                    |   | 243,300    |    | 103,400          |   | 9,000        |   | 10,000            |   | 3,850         |   |
|                            |   |                    |   |       |    |             |   |         |   |              |   |          |   |
| Michael A. Boylan               |   | 2003                    |   | 237,000    |    | —           |   | 9,000        |   | —            |   | 7,150         |   |
| Executive Vice President and    |   | 2002                    |   | 225,000    |    | 50,000           |   | 9,000        |   | 116,990           |   | 1,063,204     |   |
| Chief Development Officer       |   | 2001                    |   | 210,000    |    | 124,950          |   | 9,000        |   | 10,000            |   | 4,365         |   |
|                            |   |                    |   |       |    |             |   |         |   |              |   |          |   |
| Patricia R. Blank               |   | 2003                    |   | 210,000    |    | —           |   | 9,000        |   | —            |   | 7,682         |   |
| Executive Vice President and    |   | 2002                    |   | 198,000    |    | 30,000           |   | 9,000        |   | 30,000            |   | 404,314       |   |
| Chief Information Officer       |   | 2001                    |   | 185,000    |    | 78,625           |   | 9,000        |   | 10,000            |   | 5,168         |   |
|                                 |        |                         |        |            |         |                  |        |              |        |                   |        |               |        |  |  |  |  |

 

----

(1)    Annual bonuses are earned and accrued during thefiscal years indicated, and paid subsequent to the end of each fiscal year.

 

(2)    Amounts of Other Annual Compensation includeperquisites (auto allowances and commissions for contract awards and renewals)and amounts of All Other Compensation include (i) amounts contributed to theCompany’s 401(k) profit sharing plan, (ii) specified premiums on executiveinsurance arrangements,  (iii) specifiedpremiums on executive health insurance arrangements and (iv) cash proceedsreceived from cancelled options in connection with the Acquisition for theNamed Executive Officers.

 

COMPENSATION OFDIRECTORS.  The Company reimburses itsnon-employee directors for all out-of-pocket expenses incurred in theperformance of their duties as directors. The Company does not pay fees to directors for attendance at meetings orfor their services as members of the board of directors or committees thereof.

 

OPTIONGRANTS.  For the year endedJune 30, 2003, there were no options granted by the Company pursuant tostock options agreements to the Named Executive Officers.

 

79

----

 

OPTION EXERCISES AND FISCAL YEAR-END VALUES.  During the year ended June 30, 2003, none of the NamedExecutive Officers exercised any stock options.  The following table sets forth information with respect to theunexercised options to purchase common stock granted under the Company’s 2001Stock Option Plan and pursuant to stock option agreements, for the NamedExecutive Officers as of June 30, 2003:

 
| **Name**                   |   | **Number of  Shares  Acquired on  Exercise** |            | **Value  Realized** |              | **Number of Unexercised Options  Held at June 30, 2003** |            | **Value of Unexercised  In-The-Money Options  at June 30, 2003(1)** |              |
|----------------------------|--------|----------------------------------------------|-----------------|---------------------|-------------------|---------------------------------------------------------------|-----------------|--------------------------------------------------------------------------|-------------------|
|                       |   |                                         | **Exercisable** |                | **Unexercisable** |                                                          | **Exercisable** |                                                                     | **Unexercisable** |   |
|                       |   |                                         |            |                |              |                                                          |            |                                                                     |              |   |   |   |   |
| Steven  T. Plochocki       |   | —                                       |            | $                   | —            |                                                          | 57,250          |                                                                     | 90,250            |   | $ | 566,833 |   | $ | 96,568 |   |
|                       |   |                                         |            |                |              |                                                          |            |                                                                     |              |   |   |   |   |
| Michael  S. Madler         |   | —                                       |            | —              |              | 27,500                                                        |            | 66,500                                                                   |              | 260,545 |   | 71,155 |   |
|                       |   |                                         |            |                |              |                                                          |            |                                                                     |              |   |   |   |   |
| Marilyn  U. MacNiven-Young |   | —                                       |            | —              |              | 1,500                                                         |            | 28,500                                                                   |              | 1,605 |   | 30,495 |   |
|                       |   |                                         |            |                |              |                                                          |            |                                                                     |              |   |   |   |   |
| Michael  A. Boylan         |   | —                                       |            | —              |              | 50,490                                                        |            | 66,500                                                                   |              | 506,538 |   | 71,155 |   |
|                       |   |                                         |            |                |              |                                                          |            |                                                                     |              |   |   |   |   |
| Patricia  R. Blank         |   | —                                       |            | —              |              | 1,500                                                         |            | 28,500                                                                   |              | 1,605 |   | 30,495 |   |
|                            |        |                                              |                 |                     |                   |                                                               |                 |                                                                          |                   |  |  |  |  |  |  |  |

 

----

(1) Based on theprice at which the common stock was valued on that date of $19.07 per share.

 

CANCELLATION OF OPTIONS IN THE ACQUISITION.  On the consummation of the Acquisition, eachholder of an option to purchase shares of common stock of InSight outstandingunder any of InSight’s stock option plans, whether or not vested, received thedifference between $18.00 and the exercise price of each share of common stock theholder could have acquired pursuant to the terms of the stock option agreements(less applicable tax withholding), and the options were terminated; except thatMessrs. Plochocki, Boylan and Madler rolled over certain of their InSight stockoptions into fully vested options to purchase the Company’s common stock underthe Company’s 2001 Stock Option Plan.

 

INDEMNIFICATIONAGREEMENTS.  InSight has entered intoseparate indemnification agreements with each of its directors and executiveofficers that could require InSight, among other things, to indemnify themagainst certain liabilities that may arise by reason of their status or serviceas directors and executive officers of InSight and its affiliates and toadvance expenses incurred by them as a result of any proceedings against themas to which they could be indemnified.

 

EMPLOYMENTAGREEMENTS.  In connection with theAcquisition, the Named Executive Officers entered into new employmentagreements.  The employment agreementwith Mr. Plochocki is for a term of three years, and thereafter for a term oftwelve months on a continuing basis subject to certain termination rights.  Mr. Plochocki will receive an annual basesalary as well as a discretionary bonus of up to 75% of his annual base salaryif InSight achieves its budgetary goals and a discretionary bonus of anadditional 25% of his annual base salary upon the achievement of other goalsmutually agreed upon by Mr. Plochocki and InSight’s board of directors.  Mr. Plochocki’s employment agreement alsoprovides for a life insurance policy of three times the amount of his annualbase salary and entitles him to participate during the term of his employmentin InSight’s life insurance, medical, health and accident and disability planor program, pension plan or other similar benefit plan and the Company’s stockoption plans.  Mr. Plochocki will besubject to a noncompetition covenant and nonsolicitation provisions (relatingto InSight’s employees and customers) during the term of his employmentagreement and continuing for a period of 24 months after the termination of hisemployment.  Mr. Plochocki’s employmentagreement will terminate and he will be entitled to all accrued and unpaidcompensation, as well as 24 months of compensation at the annual salary then ineffect (i) upon his permanent and total disability (as defined in hisemployment agreement); (ii) upon InSight’s 30 days’ written notice to him ofthe termination of his employment without cause (as defined in his employmentagreement); (iii) if he terminates his employment with InSight for good reason(as defined in his employment agreement); and (iv) if his employment isterminated by InSight without cause or he terminates his employment for goodreason within 12 months of a change in control (as defined in his employmentagreement).  In addition, InSight willmaintain at its expense until the earlier of 24 months after the date oftermination or commencement of Mr. Plochocki’s benefits pursuant to full timeemployment with a new employer under such employer’s standard benefits program,all life insurance, medical, health and accident and disability plans orprograms in which Mr. Plochocki was entitled to participate immediately priorto the date of termination.  Mr.Plochocki’s employment will terminate upon his death and the executors oradministrators of his estate or his heirs or legatees (as the case may be) willbe entitled to all accrued and unpaid compensation up to the date of his death.

 

80

----

 

Mr. Plochocki’semployment will immediately terminate and he will not be entitled to receiveany monetary compensation or benefit upon (i) the termination of his employmentby InSight for cause, or (ii) his voluntary termination of his employment withInSight without good reason.

 

The employmentagreement with each of the other four Named Executive Officers provides for aterm of 12 months on a continuing basis, subject to certain terminationrights.  The executive’s employmentagreements provide for an annual salary as well as a discretionary bonus of upto 75% of the executive’s annual base salary if InSight achieves its budgetarygoals and a discretionary bonus of an additional 25% of the executive’s annualbase salary upon the achievement of other goals mutually agreed upon by eachexecutive and InSight’s President and Chief Executive Officer and approved byInSight’s board of directors.  Eachexecutive is provided with a life insurance policy of three times the amount ofhis or her annual base salary and is entitled to participate in InSight’s lifeinsurance, medical, health and accident and disability plan or program, pensionplan or other similar benefit plan and the Company’s stock option plans.  Each executive will be subject to anoncompetition covenant and nonsolicitation provisions (relating to InSight’semployees and customers) during the term of his or her respective employmentagreement and continuing for a period of 12 months after the termination of hisor her respective employment.  Eachexecutive’s employment agreement will terminate and each of them will beentitled to all accrued and unpaid compensation, as well as 12 months ofcompensation at the annual salary rate then in effect (i) upon the executive’spermanent and total disability (as defined in the respective employmentagreement); (ii) upon InSight’s 30 days’ written notice to the executive of thetermination of the executive’s employment without cause (as defined in therespective employment agreement);  (iii)if the executive terminates his or her employment with InSight for good reason(as defined in the respective employment agreement); and (iv) if theexecutive’s employment is terminated by InSight without cause or he or sheterminates his or her employment for good reason within 12 months of a changein control (as defined in the respective employment agreement).  In addition, InSight will maintain at itsexpense until the earlier of 12 months after the date of termination orcommencement of the executive’s benefits pursuant to full time employment witha new employer under such employer’s standard benefits program, all lifeinsurance, medical, health and accident and disability plans or programs, inwhich the executive was entitled to participate immediately prior to the dateof termination.  Each executive’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.  Theexecutive’s employment will terminate and the executive will not be entitled toreceive any monetary compensation or benefit upon (i) the termination of his orher respective employment by InSight for cause, or (ii) his or her voluntarytermination of his or her respective employment with InSight without goodreason.

 

81

----

 

**ITEM12.**                      **SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The followingtable sets forth certain information regarding beneficial ownership of theCompany’s common stock as of August 29, 2003, by:  (i) each person or entity known to theCompany owning beneficially 5% or more of the Company’s common stock; (ii) eachdirector of the Company; (iii) each of the Company’s Named Executive Officers;and (iv) all directors and executive officers (as defined by Rule 3b-7), as agroup.  At August 29, 2003, theCompany’s outstanding securities consisted of approximately 5,468,814 shares ofcommon stock and options to purchase 148,465 shares of common stock which areimmediately exercisable.  Beneficialownership of the securities listed in the table has been determined inaccordance with the applicable rules and regulation promulgated under theExchange Act.

 
| **Names and Addresses of Beneficial Owners**                                                        |   | **Amount and Natureof BeneficialOwnership ofCommon Stock(1)** |   | **Percent ofCommon StockBeneficiallyOwned(1)** |   |
|-----------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                                                |   |                                                          |   |                                           |   |
| J.W. Childs Equity Partners II, L.P.(2)111 Huntington Avenue, Suite 2900Boston, Massachusetts 02199 |   | 4,350,290                                                     |   | 79.5                                           | %      |
|                                                                                                |   |                                                          |   |                                           |   |
| JWC-InSight Co-invest LLC(3)111 Huntington Avenue, Suite 2900Boston, Massachusetts 02199            |   | 338,532                                                       |   | 6.2                                            | %      |
|                                                                                                |   |                                                          |   |                                           |   |
| Halifax Capital Partners, L.P.(4)1133 Connecticut Avenue, N.W.Washington, D.C.  20036          |   | 1,111,112                                                     |   | 20.3                                           | %      |
|                                                                                                |   |                                                          |   |                                           |   |
| Steven G. Segal(5)111 Huntington Avenue, Suite 2900Boston, Massachusetts 02199                      |   | __                                                            |   | __                                             |   |
|                                                                                                |   |                                                          |   |                                           |   |
| Edward D. Yun(6)111 Huntington Avenue, Suite 2900Boston, Massachusetts 02199                        |   | __                                                            |   | __                                             |   |
|                                                                                                |   |                                                          |   |                                           |   |
| Michael N. Cannizzaro(7)111 Huntington Avenue, Suite 2900Boston, Massachusetts 02199                |   | __                                                            |   | __                                             |   |
|                                                                                                |   |                                                          |   |                                           |   |
| Mark J. Tricolli(8)111 Huntington Avenue, Suite 2900Boston, Massachusetts 02199                     |   | __                                                            |   | __                                             |   |
|                                                                                                |   |                                                          |   |                                           |   |
| David W. Dupree(9)1133 Connecticut Avenue, N.W.Washington, D.C.  20036                         |   | 4,092                                                         |   | *                                              |   |
|                                                                                                |   |                                                          |   |                                           |   |
| Kenneth M. Doyle(10)1133 Connecticut Avenue, N.W.Washington, D.C.  20036                       |   | __                                                            |   | __                                             |   |
|                                                                                                |   |                                                          |   |                                           |   |
| Steven T. Plochocki(11)26250 Enterprise Court, Suite 100Lake Forest, CA 92630                       |   | 62,000                                                        |   | 1.1                                            | %      |

 

82

----

 
| **Names and Addresses of Beneficial Owners**                                        |   | **Amount and Natureof BeneficialOwnership ofCommon Stock(1)** |   | **Percent ofCommon StockBeneficiallyOwned(1)** |   |
|-------------------------------------------------------------------------------------|--------|---------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                                |   |                                                          |   |                                           |   |
| Michael A. Boylan(12)110 Gibraltar RoadHorsham, PA 18901                            |   | 53,990                                                        |   | 1.0                                            | %      |
|                                                                                |   |                                                          |   |                                           |   |
| Michael S. Madler(13)26250 Enterprise Court, Suite 100Lake Forest, CA 92630         |   | 31,000                                                        |   | *                                              |   |
|                                                                                |   |                                                          |   |                                           |   |
| Marilyn U. MacNiven-Young(14)26250 Enterprise Court, Suite 100Lake Forest, CA 92630 |   | 3,000                                                         |   | *                                              |   |
|                                                                                |   |                                                          |   |                                           |   |
| Patricia R. Blank(15)26250 Enterprise Court, Suite 100Lake Forest, CA 92630         |   | 3,000                                                         |   | *                                              |   |
|                                                                                |   |                                                          |   |                                           |   |
| All directors and executive officers, as a group (12 persons)                       |   | 159,882                                                       |   | 2.8                                            | %      |

 

----

*                 Lessthan 1%

 

(1)          Forpurposes of this table, a person is deemed to have “beneficial ownership” ofany security that such person has the right to acquire within 60 days afterAugust 29, 2003.

 

(2)          Includes4,011,758 shares of the Company’s common stock owned directly by J.W. ChildsEquity Partners II, L.P. and 338,532 shares of the Company’s common stock owneddirectly by JWC-InSight Co-invest LLC, an affiliate of J.W. Childs EquityPartners II, L.P.  The general partnerof J.W. Childs Equity Partners II, L.P. is J.W. Childs Advisors II, L.P., aDelaware limited partnership.  Thegeneral partner of J.W. Childs Advisors II, L.P. is J.W. Childs Associates,L.P., a Delaware limited partnership. The general partner of J.W. Childs Associates, L.P. is J.W. ChildsAssociates, Inc., a Delaware corporation. J.W. Childs Advisors II, L.P., J.W. Childs Associates, L.P. and J.W.Childs Associates, Inc. may be deemed to beneficially own the 4,350,290 sharesof the Company’s common stock held by J.W. Childs Equity Partners II, L.P. andJWC-InSight Co-invest LLC.

 

(3)          JWC-InSightCo-invest LLC is a Delaware limited liability company and affiliate of J.W.Childs Equity Partners II, L.P.  J.W.Childs Associates Inc. is the managing member of JWC-InSight Co-investLLC.  As the managing member, J.W.Childs Associates Inc. owns the 338,532 shares of the Company’s common stock tobe held directly by JWC-InSight Co-invest LLC. Messrs. Segal, Yun, Cannizzaro and Tricolli are each members ofJWC-InSight Co-invest LLC.

 

(4)          Includes1,107,020 shares of the Company’s common stock owned directly by HalifaxCapital Partners, L.P. and 4,092 shares of the Company’s common stock owneddirectly by Mr. Dupree, a Managing Director of The Halifax Group, L.L.C.  The general partner of Halifax CapitalPartners, L.P. is Halifax Genpar, L.P., a Delaware limited partnership.  The general partner of Halifax Genpar, L.P. isThe Halifax Group, L.L.C. a Delaware limited liability company.  Halifax Genpar, L.P. and The Halifax Group,L.L.C. may be deemed to beneficially own the 1,111,112 shares of the Company’scommon stock held by Halifax Capital Partners, L.P. and its affiliate, Mr.Dupree.  Halifax Capital Partners, L.P.,Halifax Genpar, L.P. and The Halifax Group, L.L.C. disclaim beneficialownership of the 4,092 shares of the Company’s common stock owned directly byMr. Dupree.

 

83

----

 

(5)          Asa Partner of J.W. Childs Associates, L.P., which manages J.W. Childs EquityPartners II, L.P., and a member of JWC-InSight Co-invest LLC, Mr. Segal may bedeemed to beneficially own the 4,011,758 shares of the Company’s common stockowned by J.W. Childs Equity Partners II, L.P. and the 338,532 shares of theCompany’s common stock held directly by JWC-InSight Co-invest LLC.  Mr. Segal disclaims beneficial ownership ofsuch shares of the Company.

 

(6)          Asa Partner of J.W. Childs Associates, L.P., which manages J.W. Childs EquityPartners II, L.P. and a member of JWC-InSight Co-invest LLC, Mr. Yun may bedeemed to beneficially own the 4,011,758 shares of the Company’s common stockowned by J.W. Childs Equity Partners II, L.P., and the 338,532 shares of theCompany’s common stock held directly by JWC-InSight Co-invest LLC.  Mr. Yun disclaims beneficial ownership ofsuch shares of the Company.

 

(7)          Asan Operating Partner of J.W. Childs Associates, L.P., which manages J.W. ChildsEquity Partners II, L.P. and a member of JWC-InSight Co-invest LLC, Mr.Cannizzaro may be deemed to beneficially own the 4,011,758 shares of theCompany’s common stock owned by J.W. Childs Equity Partners II, L.P. and the338,532 shares of the Company’s common stock held directly by JWC-InSightCo-invest LLC.  Mr. Cannizzaro disclaimsbeneficial ownership of such shares of the Company.

 

(8)          Asa Senior Associate at J.W. Childs Associates, L.P., which manages J.W. ChildsEquity Partners II, L.P. and a member of JWC-InSight Co-invest LLC, Mr.Tricolli may be deemed to beneficially own the 4,011,758 shares of the Company’scommon stock owned by J.W. Childs Equity Partners II, L.P. and the 338,532shares of the Company’s common stock held directly by JWC-InSight Co-investLLC.  Mr. Tricolli disclaims beneficialownership of such shares of the Company.

 

(9)          Asa Managing Director of The Halifax Group, L.L.C., which manages Halifax CapitalPartners, L.P., Mr. Dupree may also be deemed to beneficially own the 1,107,020shares of the Company’s common stock owned by Halifax Capital Partners, L.P.and its affiliates.  Mr. Dupreedisclaims beneficial ownership of such shares of the Company.

 

(10)    Asa Principal of The Halifax Group, L.L.C., which manages Halifax CapitalPartners, L.P., Mr. Doyle may be deemed to beneficially own the 1,111,112shares of the Company’s common stock owned by Halifax Capital Partners, L.P.and its affiliates.  Mr. Doyle disclaimsbeneficial ownership of the shares of the Company.

 

(11)    Includes(i) an option to purchase 52,500 shares of the Company’s common stock at anexercise price of $8.37 share which option was granted upon the consummation ofthe Acquisition and is fully vested and immediately exercisable and (ii) anoption to purchase 9,000 shares of the Company’s common stock at an exerciseprice of $18.00 per share.  Does notinclude an option to purchase 85,500 shares of the Company’s common stock at anexercise price of $18.00 per share, which is not currently exercisable.

 

(12)    Includes(i) an option to purchase 46,990 shares of the Company’s common stock at anexercise price of $8.37 per share which option was granted upon theconsummation of the Acquisition and is fully vested and immediately exercisableand (ii) an option to purchase 7,000 shares of the Company’s common stock at anexercise price of $18.00 per share. Does not include an option to purchase 63,000 shares of the Company’scommon stock at an exercise price of $18.00 per share, which is not currentlyexercisable.

 

(13)    Includes(i) an option to purchase 24,000 shares of the Company’s common stock at anexercise price of $8.37 per share which option was granted upon theconsummation of the Acquisition and is fully vested and immediately exercisableand (ii) an option to purchase 7,000 shares of the Company’s common stock at anexercise price of $18.00 per share. Does not include an option to purchase 63,000 shares of the Company’scommon stock at an exercise price of $18.00 per share, which is not currentlyexercisable.

 

(14)    Includesan option to purchase 3,000 shares of the Company’s common stock at an exerciseprice of $18.00 per share.  Does notinclude an option to purchase 27,000 shares of the Company’s common stock at anexercise price of $18.00 per share, which is not currently exercisable.

 

84

----

 

(15)    Includesan option to purchase 3,000 shares of the Company’s common stock at an exerciseprice of $18.00 per share.  Does notinclude an option to purchase 27,000 shares of the Company’s common stock at anexercise price of $18.00 per share, which is not currently exercisable.

 

Except asotherwise noted, the Company believes that each of the stockholders listed inthe table above has sole voting and dispositive power over all shares beneficiallyowned.  Each of the stockholders of theCompany in the table above is party to a stockholders agreement which governsthe transferability and voting of shares of the Company’s common stock held bythem.  See “Item 13.  Certain Relationships and RelatedTransactions -Stockholders Agreement. “

 

EQUITYCOMPENSATION PLAN INFORMATION.  Thefollowing table provides information as of June 30, 2003, with respect tocompensation plans under which the Company’s common stock is authorized forissuance.  These compensation plansinclude:  (i) the 2001 Stock OptionPlan; and (ii) stock options granted pursuant to stock option agreements.  Both of these plans were approved by theCompany’s stockholders.

 
| **Plan  Category**                                  |   | **Number of Shares to be  Issued Upon Exercise of  Outstanding Options** |   | **Weighted Average  Exercise Price of  Outstanding Options** |   | **Number of Shares  Remaining Available for  Future Issuance Under  Equity Compensation  Plans (Excluding Shares  Reflected in Column (a))** |    |
|-----------------------------------------------------|--------|--------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|---------|
|                                                |   | **(a)**                                                                  |   | **(b)**                                                      |   | **(c)**                                                                                                                                      |    |
| Equity  compensation plans approved by stockholders |   | 632,815                                                                  |   | $                                                            | 16.16  |                                                                                                                                         | 113,125 |   |
|                                                     |        |                                                                          |        |                                                              |        |                                                                                                                                              |         |  |

 

85

----

 

**ITEM 13**.               **CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

MANAGEMENT AGREEMENT.  Upon thecompletion of the Acquisition, the Company entered into a management agreementwith J.W. Childs Advisors II, L.P., the general partner of J.W. Childs EquityPartners II, L.P. and Halifax Genpar, L.P., the general partner of HalifaxCapital Partners, L.P.  Under the agreement,InSight paid J.W. Childs Advisors II, L.P. and Halifax Genpar, L.P. atransaction fee of $4,500,000 and $1,125,000, respectively, for servicesrendered in connection with the Acquisition during the year ended June 30,2002.  Additionally, J.W. ChildsAdvisors II, L.P. and Halifax Genpar, L.P. will provide business, managementand financial advisory services to 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.  The Company will also reimburse suchentities for all travel and other out-of-pocket expenses incurred by suchentities in connection with their performance of the advisory services underthe agreement.  The management agreementhas an initial term of five years, which term will automatically renew for oneyear periods thereafter and is subject to earlier termination by the board ofdirectors of the Company.  Furthermore,the Company and InSight have agreed to indemnify and hold harmless J.W. ChildsAdvisors II, L.P. and Halifax Genpar, L.P. and their affiliates, from andagainst any and all claims, losses, damages and expenses arising out of theAcquisition or the performance by J.W. Childs Advisors II, L.P. and HalifaxGenpar, L.P. of their obligations under the management agreement.

 

STOCKHOLDERS AGREEMENT.  TheCompany, J.W. Childs Equity Partners II, L.P., JWC-InSight Co-invest LLC,Halifax Capital Partners, L.P., Mr. Dupree, management of InSight and all otherholders of capital stock or stock options of the Company have entered into astockholders agreement.  Under thestockholders agreement, the Company and each stockholder have a right of firstrefusal to purchase any stock proposed to be sold by all other stockholders,except J.W. Childs Equity Partners II, L.P. and JWC-InSight Co-invest LLC.  Additionally, the stockholders agreementaffords:  (i) stockholders, other thanJ.W. Childs Equity Partners II, L.P. and JWC-InSight Co-invest LLC, so-called “tag-along” rights with respectto proposed sales of capital stock of the Company by J.W. Childs EquityPartners II, L.P. and JWC - InSight Co-invest LLC; (ii) J.W. Childs EquityPartners II, L.P. and JWC-InSight Co-invest LLC so-called “drag-along” rightswith respect to proposed sales of a majority of the capital stock of theCompany; and (iii) all stockholders certain registration rights with respect tothe capital stock of the Company. Furthermore, the stockholders agreement contains put and call featureson capital stock and stock options held by InSight management which aretriggered upon termination of such individual’s employment with InSight.  The stockholders agreement also obligatesthe Company and the stockholders to take all necessary action to appoint, asdirectors of the Company, up to eight nominees designated by J.W. Childs EquityPartners II, L.P. (as would constitute a majority of the Company’s entire boardof directors) and two nominees designated by Halifax Capital Partners, L.P.

 

SEVERANCEARRANGEMENTS.  Pursuant to the terms ofa resignation agreement with the Company, Thomas V. Croal, the Company’s formerExecutive Vice President and Chief Financial Officer, will receive severanceequal to 12 months salary at his level of compensation as of May 19,2003.  In addition, pursuant to theterms of the stockholders agreement described above the Company exercised itsoption to purchase Mr. Croal’s vested stock options covering 56,000 shares ofthe Company’s common stock at a price equal to the difference between $19.07,the fair market value of the Company’s common stock on the date of purchase,and the exercise price per share.  Allof Mr. Croal’s unvested stock options were cancelled.

 

86

----

 

**ITEM 14.               PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

AUDIT FEES.  PricewaterhouseCoopers LLP (“PWC”) billedthe Company $178,000 in the aggregate for professional services rendered bythem for the audit of the Company’s annual financial statements for the fiscalyear ended June 30, 2003, and the reviews of the interim financialstatements included in the Company’s Forms 10-Q filed during the year endedJune 30, 2003.

 

TRANSACTIONFEES.  PWC billed the Company $330,000in the aggregate for due diligence and related services primarily with regardto the acquisition of certain assets during the year ended June 30, 2003.

 

TAX FEES.  PWC billed the Company $77,000 in theaggregate for services related to a review of the Company’s federal and stateincome tax returns and other tax planning services.

 

AUDIT RELATEDFEES.  PWC billed the Company $39,000 inthe aggregate for professional services rendered by them for the audit of theInSight 401(k) profit sharing plan’s annual financial statements for the yearsended December 31, 2003 and 2002.

 

87

----

 

**PARTIV**

 

**ITEM 15.               EXHIBITS, FINANCIAL STATEMENTSCHEDULES AND REPORTS ON FORM 8-K**

 

ITEM 15 (a) (1).  FINANCIALSTATEMENTS

 

Included in Part II of this report:

 
| Report of Independent Auditors                        |
|-------------------------------------------------------|
| Report of Independent Public Accountants              |
| Consolidated Balance Sheets                           |
| Consolidated Statements of Operations                 |
| Consolidated Statements of Stockholders’  Equity |
| Consolidated Statements of Cash Flows                 |
| Notes to Consolidated Financial Statements            |

 

ITEM 15 (a) (2).  FINANCIALSTATEMENT SCHEDULES

 
| Report of Independent Auditors on Financial  Statement Schedule |
|-----------------------------------------------------------------|
| Report of Independent Public Accountants                        |
| Schedule II  - Valuation and Qualifying Accounts           |

 

All other schedules have been omitted because they are either notrequired or not applicable, or the information is presented in the consolidatedfinancial statements or notes thereto.

 

88

----

 

ITEM 15 (a) (3).   EXHIBITS

 
| **EXHIBIT NUMBER** |   | **DESCRIPTION AND REFERENCES**                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *2.1               |   | Agreement and Plan of Merger, dated as of June 29, 2001, by and  among InSight Health Services Holdings Corp., JWCH Merger Corp. and InSight  Health Services Corp. (“InSight”), previously filed and incorporated herein by  reference from InSight’s Current Report on Form 8-K, filed on July 2,  2001.                                                                                                                                 |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *2.2               |   | Amendment No. 1 to Agreement and Plan of Merger, dated as of  June 29, 2001, by and among InSight Health Services Holdings Corp., JWCH  Merger Corp. and InSight, previously filed and incorporated by reference from  InSight’s Annual Report on Form 10-K, filed on September 14, 2001.                                                                                                                                                            |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *2.3               |   | Amendment No. 2 to Agreement and Plan of Merger, dated as of  October 9, 2001, by and among InSight Health Services Holdings Corp., InSight  Health Services Acquisition Corp. and InSight, previously filed and  incorporated herein by reference from InSight’s Current Report on Form 8-K,  filed on October 9, 2001.                                                                                                                             |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *2.4               |   | Third Amended and Restated Stockholders Agreement, dated as of October 10,  2002, among InSight Health Services Holdings Corp., the JWC Holders (as  defined therein), the Halifax Holders (as defined therein), the Management  Holders (as defined therein) and the Additional Holders (as defined therein),  previously filed and incorporated herein by reference from the Company’s  Quarterly Report on Form 10-Q, filed on February 14, 2003. |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *2.5               |   | Management Agreement, dated as of October 17, 2001, by and among  J.W. Childs Advisors II, L.P., Halifax Genpar, L.P., InSight Health Services  Holdings Corp. and InSight, previously filed and incorporated herein by  reference from InSight’s Registration Statement on Form S-4, filed on  December 27, 2001.                                                                                                                                   |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *2.6               |   | Asset Purchase Agreement, dated January 6, 2003, by and among  InSight Health Corp., Comprehensive Medical Imaging Centers, Inc.,  Comprehensive Medical Imaging, Inc. and Cardinal Health 414, Inc., previously  filed and incorporated herein by reference from the Company’s Current Report  on Form 8-K, filed on April 16, 2003.                                                                                                                |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *2.7               |   | Amendment No. 1 to Asset Purchase Agreement, dated February 21,  2003, by and among InSight Health Corp., Comprehensive Medical Imaging  Centers, Inc., Comprehensive Medical Imaging, Inc. and Cardinal Health 414,  Inc., previously filed and incorporated herein by reference from the  Company’s Current Report on Form 8-K, filed on April 16, 2003.                                                                                           |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *2.8               |   | Amendment No. 2 to Asset Purchase Agreement, dated March 31,  2003, by and among InSight Health Corp., Comprehensive Medical Imaging  Centers, Inc., Comprehensive Medical Imaging, Inc. and Cardinal Health 414,  Inc., previously filed and incorporated herein by reference from the  Company’s Current Report on Form 8-K, filed on April 16, 2003.                                                                                              |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *2.9               |   | Asset Purchase Agreement, dated June 19, 2003, by and among  InSight Health Corp., CDL Medical Technologies, Inc., Keith E. Loiselle and  David J. Simile, previously filed and incorporated by reference from the  Company’s Current Report on Form 8-K, filed on August 11, 2003.                                                                                                                                                                  |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *3.1               |   | Certificate of Incorporation of InSight Health Services Holdings  Corp., as amended, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                                                                               |

 

89

----

 
| *3.2      |   | Bylaws of InSight Health Services Holdings Corp., previously filed  and incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                                                                                                                                                                                                                                    |
|-----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| *4.1      |   | Indenture with respect to 9 7/8% Senior Subordinated Notes due 2011  with State Street Bank and Trust Company, N.A., as Trustee, dated  October 30, 2002, previously filed and incorporated herein by reference  from InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                                                                                       |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| *4.2      |   | Supplemental Indenture with respect to Wilkes-Barre Imaging, L.L.C.  with State Street Bank and Trust Company, N.A., dated February 25, 2002,  previously filed and incorporated herein by reference from InSight’s  Amendment No. 1 to Registration Statement on Form S-4, filed on March 25,  2002.                                                                                                                                                                                                                                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|  4.3 |   | Supplemental Indenture with respect to Valencia MRI, L.L.C., Orange  County Regional PET Center - Irvine, L.L.C. and San Fernando Valley Regional  PET Center, L.L.C. with U.S. Bank Trust, National Association (formerly known  as State Street Bank and Trust Company, N.A.), dated April 2, 2003,  filed herewith.                                                                                                                                                                                                                           |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| *4.4      |   | Purchase Agreement, dated October 25, 2001, by and among  InSight, Banc of America Securities LLC and First Union Securities, LLC with  respect to the 9 7/8% Senior Subordinated Notes due 2011, previously filed  and incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                                                                               |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| *4.5      |   | Registration Rights Agreement, dated October 30, 2001, by and  among InSight, Banc of America Securities LLC and First Union Securities, LLC  with respect to the 9 7/8% Senior Subordinated Notes due 2011, previously  filed and incorporated herein by reference from InSight’s Registration  Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                    |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| *10.1     |   | Credit Agreement, dated October 17, 2001, by and among InSight,  Banc of America Securities LLC and First Union Securities, LLC, previously  filed and incorporated herein by reference from InSight’s Registration  Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                                                                                                |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| *10.2     |   | First Amendment to Credit Agreement, Waiver and Consent, dated as of  January 24, 2003, by and among InSight, InSight Health Services Holdings  Corp., the Subsidiary Guarantors party thereto, the Lenders from time to time  party thereto, Bank of America, N.A. as Administrative Agent, Wachovia Bank,  N.A. as Syndication Agent and The CIT Group/Business Credit, Inc. as  Documentation Agent, previously filed and incorporated herein by reference  from the Company’s Quarterly Report on Form 10-Q filed on May 15, 2003. |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.3      |   | Second Amendment to Credit Agreement, Waiver and Consent, dated as of  July 11, 2003, by and among InSight, InSight Health Services Holdings  Corp., the Subsidiary Guarantors party thereto, the Lenders from time to time  party thereto, Bank of America, N.A. as Administrative Agent, Wachovia Bank,  N.A. as Syndication Agent and The CIT Group/Business Credit, Inc. as  Documentation Agent, filed herewith.                                                                                                                            |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| *10.4     |   | Note Purchase Agreement, dated as of October 17, 2001, by and  among InSight Health Services Acquisition Corp., InSight, InSight Health  Services Holdings Corp., the Subsidiary Guarantors (as defined therein), Banc  of America Bridge LLC, and Banc of America Securities LLC, previously filed  and incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                              |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| *10.5     |   | InSight Health  Services Holdings Corp. 2001 Stock Option Plan, previously filed and  incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                                                                                                                                                                                                                      |

 

90

----

 
| *10.6  |   | InSight Health  Services Holdings Corp. 2001 Stock Option Plan Stock Option Agreement, dated  June 29, 2001, by and between InSight Health Services Holdings Corp. and  Steven T. Plochocki, previously filed and incorporated herein by reference  from InSight’s Registration Statement on Form S-4, filed on December 27,  2001. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| *10.7  |   | InSight Health  Services Holdings Corp. 2001 Stock Option Plan Stock Option Agreement, dated  June 29, 2001, by and between InSight Health Services Holdings Corp. and  Michael A. Boylan, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.   |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| *10.8  |   | InSight Health  Services Holdings Corp. 2001 Stock Option Plan Stock Option Agreement, dated  June 29, 2001, by and between InSight Health Services Holdings Corp. and  Thomas V. Croal, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.     |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| *10.9  |   | InSight Health  Services Holdings Corp. 2001 Stock Option Plan Stock Option Agreement, dated  June 29, 2001, by and between InSight Health Services Holdings Corp. and  Michael S. Madler, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.   |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| *10.10 |   | Executive  Employment Agreement, dated June 29, 2001, between InSight and Steven T.  Plochocki, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| *10.11 |   | Executive  Employment Agreement, dated June 29, 2001, between InSight and Patricia  R. Blank, previously filed and incorporated herein by reference from InSight’s  Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| *10.12 |   | Executive  Employment Agreement, dated June 29, 2001, between InSight and Michael  A. Boylan, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| *10.13 |   | Executive  Employment Agreement, dated June 29, 2001, between InSight and Thomas V.  Croal, previously filed and incorporated herein by reference from InSight’s  Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| *10.14 |   | Executive  Employment Agreement, dated June 29, 2001, between InSight and Brian G.  Drazba, previously filed and incorporated herein by reference from InSight’s  Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| *10.15 |   | Executive  Employment Agreement, dated June 29, 2001, between InSight and Michael  S. Madler, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| *10.16 |   | Executive  Employment Agreement, dated December 27, 2001, between InSight and  Marilyn U. MacNiven-Young, previously filed and incorporated herein by  reference from InSight’s Registration Statement on Form S-4, filed on  December 27, 2001.                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| *10.17 |   | Form of InSight  Health Services Holdings Corp. Performance Based Option Agreement, previously  filed and incorporated herein by reference from InSight’s Registration  Statement on Form S-4, filed on December 27, 2001.                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                               |
| 21     |   | Subsidiaries of  the Company, filed herewith.                                                                                                                                                                                                                                                                                                      |

 

91

----

 
| 31.1   |   | Certification of  Steven T. Plochocki, the Company’s Chief Executive Officer, pursuant to Rule  15d-14 of the Securities Exchange Act of 1934, filed herewith.                                                      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                     |
| 31.2   |   | Certification of  Brian G. Drazba, the Company’s Chief Financial Officer, pursuant to Rule  15d-14 of the Securities Exchange Act of 1934, filed herewith.                                                          |
|   |   |                                                                                                                                                                                                                     |
| 32.1   |   | Certification of  Steven T. Plochocki, the Company’s Chief Executive Officer, pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, filed herewith. |
|   |   |                                                                                                                                                                                                                     |
| 32.2   |   | Certification of  Brian G. Drazba, the Company’s Chief Financial Officer, pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002, filed herewith.     |

 

----

| *              Previously filed. |
|---------------------------------------------------------------------------------------------------|
|                                                                                              |   |   |
| ITEM 15 (b).                                                                                      |   | REPORTS ON FORM  8-K. The Company filed a current report on Form 8-K with the SEC on  May 14, 2003, under Item 7 thereof, with financial statements and pro  forma financial information relative to an acquisition. |
|                                                                                              |   |   |
| ITEM 15 (c).                                                                                      |   | The Exhibits  described above in Item 15(a)(3) are attached hereto or incorporated by  reference herein, as noted. |
|                                                                                              |   |   |
| ITEM 15 (d).                                                                                      |   | Not applicable. |

 

92

----

 

**SIGNATURES**

 

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

 
|   | INSIGHT HEALTH SERVICES HOLDINGS CORP. |
|--------|----------------------------------------|
|   |                                   |
|   | By                                     | /s/  Steven T. Plochocki |   |
|   |                                   | Steven T. Plochocki, President and |   |
|   |                                   | Chief Executive Officer |   |
|   |                                   |
|   | Date:  September 25, 2003    |

 

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/ Steven T. Plochocki |   |      | Director, President and       |     | September 25, 2003 |
| Steven T. Plochocki     |   |      | Chief Executive Officer       |     |   |
|                    |   |      | (Principal Executive Officer) |     |   |
|                    |   |      |                          |     |   |
|                    |   |      |                          |     |   |
| /s/ Brian G. Drazba     |   |      | Executive Vice President      |     | September 25, 2003 |
| Brian G. Drazba         |   |      | and Chief Financial Officer   |     |   |
|                    |   |      | (Principal  Financial and     |     |   |
|                    |   |      | Accounting  Officer)          |     |   |
|                    |   |      |                          |     |   |
|                    |   |      |                          |     |   |
|                    |   |      | Director                      |     | September , 2003 |
| Michael N. Cannizzaro   |   |      |                          |     |   |
|                    |   |      |                          |     |   |
|                    |   |      |                          |     |   |
| /s/ Kenneth M. Doyle    |   |      | Director                      |     | September 25, 2003 |
| Kenneth M. Doyle        |   |      |                          |     |   |
|                    |   |      |                          |     |   |
|                    |   |      |                          |     |   |
| /s/ David W. Dupree     |   |      | Director                      |     | September 25, 2003 |
| David W. Dupree         |   |      |                          |     |   |
|                    |   |      |                          |     |   |
|                    |   |      |                          |     |   |
|                    |   |      | Director                      |     | September , 2003 |
| Steven G. Segal         |   |      |                          |     |   |
|                    |   |      |                          |     |   |
|                    |   |      |                          |     |   |
| /s/ Mark J. Tricolli    |   |      | Director                      |     | September 25, 2003 |
| Mark J. Tricolli        |   |      |                          |     |   |
|                    |   |      |                          |     |   |
|                    |   |      |                          |     |   |
|                    |   |      | Director                      |     | September , 2003 |
| Edward D. Yun           |   |      |                          |     |   |

 

93

----

 

**REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENTSCHEDULE**

** **

To the Board of Directors of InSight Health Services Holdings Corp.:

 

Our audits of theconsolidated financial statements referred to in our report datedSeptember 18, 2003, appearing in this Annual Report on Form 10-K alsoincluded an audit of the financial statement schedule listed in Item15(a)(2) of this Form 10-K.  In ouropinion, this financial statement schedule presents fairly, in allmaterial respects, the information set forth therein when read in conjunctionwith the related consolidated financial statements.

 
| /s/PRICEWATERHOUSECOOPERS LLP |   |
|-------------------------------|--------|
| Orange County, California     |
| September 18, 2003       |

 

94

----

 

**REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS**

** **

**The following report is a copy of a reportpreviously issued by Arthur Andersen LLP and has not been reissued by ArthurAndersen LLP.**

 

To the Stockholders of InSight Health Services Corp.:

 

We have audited in accordance with auditing standards generallyaccepted in the United States the consolidated financial statements of InSightHealth Services Corp. and subsidiaries included in this Form 10-K and haveissued our report thereon dated August 29, 2001.  Our audit was made for the purpose of forming an opinion on thebasic consolidated financial statements taken as a whole.  The schedule listed in the index toconsolidated financial statements is the responsibility of the Company’smanagement and is presented for purposes of complying with the Securities andExchange Commission’s rules and is not part of the basic financialstatements.  The schedule has beensubjected to the auditing procedures applied in the audit of the basicfinancial statements and, in our opinion, fairly states in all materialrespects the financial data required to be set forth therein in relation to thebasic financial statements taken as a whole.

 

ARTHUR ANDERSEN LLP

Orange County, California

August 29, 2001

 

95

----

 

**SCHEDULEII**

**INSIGHT HEALTH SERVICES HOLDINGS CORP. ANDSUBSIDIARIES**

**VALUATION AND QUALIFYING ACCOUNTS**

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

**AND FOR THE YEAR ENDED JUNE 30, 2001**

(amounts in thousands)

 
|                                                         |   | **Balance at  Beginning of  Year** |   | **Charges to  Cost and  Expenses** |   | **Charges to  Revenues** |   | **Other** |    | **Balance at  End of  Year** |   |
|--------------------------------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|--------------------------|--------|-----------|---------|------------------------------|--------|
|                                                         |   |                               |   |                               |   |                     |   |      |    |                         |   |
| Company                                                      |   |                               |   |                               |   |                     |   |      |    |                         |   |
| June 30, 2002:                                               |   |                               |   |                               |   |                     |   |      |    |                         |   |
| Allowance for doubtful accounts and  contractual adjustments |   | $                                  | — |                               | $      | 2,785                    |   | $         | 71,185  |                         | $      | (47,480 | )(A)(B) | $ | 26,490 |   |
|                                                         |   |                               |   |                               |   |                     |   |      |    |                         |   |
| June 30, 2003:                                               |   |                               |   |                               |   |                     |   |      |    |                         |   |
| Allowance for doubtful accounts and  contractual adjustments |   | $                                  | 26,490 |                               | $      | 4,154                    |   | $         | 122,101 |                         | $      | (116,472 | )(A) | $ | 36,273 |   |
|                                                         |   |                               |   |                               |   |                     |   |      |    |                         |   |
| Predecessor                                                  |   |                               |   |                               |   |                     |   |      |    |                         |   |
| June 30, 2001:                                               |   |                               |   |                               |   |                     |   |      |    |                         |   |
| Allowance for doubtful accounts and  contractual adjustments |   | $                                  | 22,291 |                               | $      | 3,594                    |   | $         | 83,133  |                         | $      | (82,407 | )(A) | $ | 26,611 |   |
|                                                         |   |                               |   |                               |   |                     |   |      |    |                         |   |
| October 17, 2001:                                            |   |                               |   |                               |   |                     |   |      |    |                         |   |
| Allowance for doubtful accounts and  contractual adjustments |   | $                                  | 26,611 |                               | $      | 1,110                    |   | $         | 26,740  |                         | $      | (27,963 | )(A) | $ | 26,498 |   |

 

----

(A) Write-offs of uncollectible accounts.

(B) In connection with the Acquisition, the Company acquired thevaluation and qualifying accounts related to InSight.

 

96

----

 

**EXHIBIT INDEX**

** **
| **EXHIBIT NUMBER** |   | **DESCRIPTION  AND REFERENCES**                                                                                                                                                                                                                                                                                                                                                                                            |
|--------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.3                |   | Supplemental  Indenture with respect to Valencia MRI, L.L.C., Orange County Regional PET  Center – Irvine, L.L.C and San Fernando Valley Regional PET Center L.L.C.  with U.S. Bank Trust, National Association (formerly known as State Street  Bank and Trust Company, N.A.), dated April 2, 2003, filed herewith.                                                                                             |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.3               |   | Second  Amendment to Credit Agreement, Waiver and Consent, dated as of July 11,  2003, by and among InSight, InSight Health Services Holdings Corp., the  Subsidiary Guarantors party thereto, the Lenders from time to time party  thereto, Bank of America, N.A. as Adminstrative Agent, Wachovia Bank, N.A. as  Syndication Agent and The CIT Group/Business Credit, Inc. as Documentation  Agent, filed herewith. |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 21                 |   | Subsidiaries  of the Company, filed  herewith.                                                                                                                                                                                                                                                                                                                                                                             |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.1               |   | Certification of  Steven T. Plochocki, the Company’s Chief Executive Officer, pursuant to Rule  15d-14 of the Securities Exchange Act of 1934, filed herewith.                                                                                                                                                                                                                                                        |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.2               |   | Certification of  Brian G. Drazba, the Company’s Chief Financial Officer, pursuant to Rule  15d-14 of the Securities Exchange Act of 1934, filed herewith.                                                                                                                                                                                                                                                            |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 32.1               |   | Certification of  Steven T. Plochocki, the Company’s Chief Executive Officer, pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                                                   |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 32.2               |   | Certification of  Brian G. Drazba, the Company’s Chief Financial Officer, pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002, filed herewith.                                                                                                                                                                                                            |

 

97

----