** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-K**

**(Mark One)**

**x****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES**

**EXCHANGE ACT OF 1934**

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

**OR**

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

**EXCHANGE ACT OF 1934**

** **

**FOR THE TRANSITION PERIODFROM                 TO                 **

**COMMISSIONFILE NUMBER 333-75984**

**INSIGHT HEALTH SERVICES HOLDINGS CORP.**

(Exact name of Registrant asspecified in its charter)

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

** **

| **26250 ENTERPRISE COURT, SUITE 100, LAKE FOREST, CA 92630**                                                                                                                                                                                                                                                     |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (Address of  principal executive offices)                                          (Zip  code) |

** **

**(949) 282-6000**

(Registrant’s telephonenumber including area code)

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

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

(Title of Class)

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

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

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 Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x  No o

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein and will not becontained, to the best of the Registrant’s knowledge, in definitive proxy orinformative statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. x

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

Largeaccelerated filer         o         Accelerated filer         o         Non-accelerated filer        x

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes o No x

Theaggregate market value of the voting and non-voting common stock held by non-affiliatesof the Registrant as of December 31, 2005 (based on the price at which thecommon stock was valued on that date) was $46,103.  The number of shares outstanding of theRegistrant’s common stock as of August 31, 2006 was 5,468,814.

 

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**INSIGHT HEALTH SERVICES HOLDINGSCORP.**

**ANNUAL REPORT ON FORM 10-K**

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

 

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**PART I**

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

**OVERVIEW**

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

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

We serve a diverseportfolio of customers, including healthcare providers, such as hospitals andphysicians, and payors, such as managed care organizations, Medicare, Medicaidand insurance companies.  We operate inmore than 30 states with a substantial presence in California, Arizona,New England, the Carolinas, Florida and the Mid-Atlantic states.   While we generated approximately 69% of ourtotal revenues from MRI services during the year ended June 30, 2006, weprovide a comprehensive offering of diagnostic imaging and treatment services,including PET, PET/CT, CT, mammography, bone densitometry, ultrasound,lithotripsy and x-ray.

As of June 30, 2006, our network consists of 116fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imagingservices to better meet the needs of our customers. Our fixed-site centers includefreestanding centers and joint ventures with hospitals and radiology groups.Our mobile facilities provide hospitals and physician groups access to imagingtechnologies when they lack either the resources or patient volume to providetheir own imaging services or require incremental capacity. We enter intoagreements with radiologists to provide professional services, which includesupervision and interpretation of radiological procedures and qualityassurance. We do not engage in the practice of medicine.  We have two reportable segments:  mobile operations and fixed operations.  Our mobile operations include 32 parkedmobile facilities, each of which serves a single customer.  Our fixed operations include four mobilefacilities as part of our fixed operations in Maine.  Certain financial information regarding ourreportable segments is included in Note 16 to the consolidated financialstatements, which are a part of this Form 10-K.

Historically, wepursued a strategy that was largely focused on growth through the acquisitionof imaging businesses in various parts of the country.  We are in the process of implementing astrategy based on core markets.  A coremarket strategy may allow us more operating efficiencies and synergies than areavailable in a nationwide strategy.  Acore market will be based on many factors and not just the number of fixed-sitecenters or mobile facilities in an area. Other factors would include, without limitation, the capabilities of ourcontracted radiologists, any hospital affiliations, the strength of returns oncapital investment, the potential for growth and sustainability of our businessin the area, the reimbursement environment for the area, the strength ofcompeting providers in the area, population growth trends, and any regulatoryrestrictions.  We expect that thisstrategy will result in us exiting some markets while increasing our presencein others, which may be accomplished through business or asset sales, swaps,purchases, closures and the development of new fixed-site centers.

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

Our principal executive officesare located at 26250 Enterprise Court, Suite 100, Lake Forest, California92630, and our telephone number is (949) 282-6000.  Our Internet address iswww.insighthealth.com. www.insighthealth.com is a textual reference only,meaning that the information contained on the website is not part of this Form10-K and is

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not incorporated byreference in this Form 10-K or in any other filings we make with the Securitiesand Exchange Commission, or SEC.

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

450 Fifth Street, N.W.

Room 1024

Washington, D.C.20549

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

**Fixed-Site Business**

Our fixed-site centers provide a full spectrum ofdiagnostic imaging services to patients, physicians, insurance payors andmanaged care organizations.  Of our 116fixed-site centers, 73 offer MRI services exclusively and three offer eitherPET or CT exclusively.  Our remaining 40fixed-site centers are multi-modality sites typically offering MRI and one or moreof PET, CT, x-ray, mammography, ultrasound, nuclear medicine, bone densitometryand nuclear cardiology. Diagnostic services are provided to a patient uponreferral by a physician.  Physiciansrefer patients to our fixed-site centers based on our service reputation,equipment, breadth of managed care contracts and convenient locations. Ourfixed-site centers provide the equipment and technologists for the procedures,contract with radiologists to interpret the procedures, and bill payorsdirectly.  We have more than 1,000managed care contracts with managed care organizations at our fixed-sitecenters.  These managed care contractsoften last for a period of multiple years because (1) they do not have specificterms or specific termination dates or (2) they contain annual “evergreen”provisions that provide for the contract to automatically renew unless eitherparty terminates the contract.

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

**Mobile Business**

Hospitals can access our diagnostic imaging technologythrough our network of 108 mobile facilities. We currently have contracts withmore than 300 hospitals, physician groups and other healthcare providers. Weenable hospitals, physician groups and other healthcare providers to benefitfrom our advanced equipment without investing their own capital directly.  Interpretation services are generallyprovided by the hospital’s radiologists or physician groups and not by us.

After reviewing the needs of our customers, routepatterns, travel times, fuel costs and equipment utilization, our fieldmanagers implement planning and route management to maximize the utilization ofour mobile facilities while controlling the costs to locate and relocate themobile facilities. Our mobile facilities are scheduled for as little asone-half day and up to seven days per week at any particular site. We generallyenter into one to five year-term contracts with our mobile customers underwhich they assume responsibility for billing and collections. We are paiddirectly by our mobile customers on a contracted amount for our services,regardless of whether they are reimbursed.

Our mobile business provides a significant advantagefor establishing long-term arrangements with hospitals, physician groups andother healthcare providers and expanding our fixed-site business. We establishmobile routes in selected markets with the intent of growing with ourcustomers. Our mobile facilities give us the flexibility to (1)

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supplement fixed-site centers operating at or nearcapacity until volume has grown sufficiently to warrant additional fixed-sitecenters, and (2) test new markets on a short-term basis prior to establishingnew mobile routes or opening new fixed-site centers. Our goal is to enter intolong-term joint venture relationships with our mobile customers once the localmarket matures and sufficient patient volume is achieved to support afixed-site center.

**DIAGNOSTIC IMAGING TECHNOLOGY**

Our diagnostic imaging systems consist of MRI systems,PET/CT systems, PET systems, CT systems, digital ultrasound systems,x-ray, mammography, radiography/fluoroscopy systems and bone densitometry.  Each of these types of imaging systems (otherthan x-ray) represents the marriage of computer technology and various medicalimaging modalities. The following highlights our primary imaging systems:

*Magnetic Resonance Imaging or MRI*

MRI is a technique that involves the use ofhigh-strength magnetic fields to produce computer-processed, three-dimensional,cross-sectional images of the body. The resulting image reproduces soft tissueanatomy (as found in the brain, breast tissue, spinal cord and interiorligaments of body joints such as the knee) with superior clarity, not availableby any other currently existing imaging modality, and without exposing patientsto ionizing radiation.  MRI systems areclassified into two classes, conventional MRI systems and Open MRIsystems.  The structure of conventionalMRI systems allows for higher magnet field strengths, better image quality andfaster scanning times than Open MRI systems. However, Open MRI systems are able to service patients who have accessdifficulties with conventional MRI systems, including pediatric patients andpatients suffering from post-traumatic stress, claustrophobia or significantobesity.  A typical conventional MRIexamination takes from 20 to 45 minutes. A typical Open MRI examination takes from 30 to 60 minutes.  MRI generally reduces the cost and amount ofcare needed and often eliminates the need for invasive diagnosticprocedures.  MRI systems are typicallypriced in the range of $0.9 million to $2.5 million each.

*Positron Emission Tomography or PET*

PET is a nuclear medicine procedure that producespictures of the body’s metabolic and biological functions. PET can provideearlier detection as well as monitoring of certain cancers, coronary diseasesor neurological problems than other diagnostic imaging systems. The informationprovided by PET technology often obviates the need to perform further highlyinvasive or diagnostic surgical procedures. Interest in PET has increased dueto several factors including a growing recognition by clinicians that PET is apowerful diagnostic tool, increased third-party payor coverage and theavailability of the isotopes used for PET scanning.  PET/CT systems fuse together the results of aPET scan and CT scan, which makes it possible to collect both anatomical andbiological information during a single procedure.  A typical PET or PET/CT examination takesfrom 20 to 60 minutes.  PET systems aretypically priced in the range of $0.8 million to $1.2 million each.PET/CT systems are typically priced in the range of $1.8 million to $2.3 millioneach.

*Computed Tomography or CT*

In CT imaging, a computer analyzes the informationreceived from x-ray beams to produce multiple cross-sectional images of aparticular organ or area of the body. CT imaging is used to detect tumors andother conditions affecting bones and internal organs. A typical CT examinationtakes from five to 20 minutes.  CTsystems are typically priced in the range of $0.7 million to$1.8 million each.

*Other Imaging Technologies*

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

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

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·                  Mammography is alow-level conventional examination of the breasts. Its primary purpose is todetect lesions in the breast that may be too small or deeply buried to be feltin a regular breast examination.

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

**BUSINESS DEVELOPMENT**

Ourobjective is to be the leading provider of diagnostic imaging services in ourcore markets.  Our efforts are focused ontwo components.

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

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

·                  focusing ourmarketing efforts on attracting additional managed care customers;

·                  emphasizingquality of care and convenience to our customers;

·                  expandingcurrent imaging applications of existing modalities to increase overallprocedure volume; and

·                  maximizing costefficiencies through increased purchasing power and continued reduction ofexpenses.

Secondly, we intend toimplement our core market strategy by:

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

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

Generally, theseactivities are aimed at increasing revenues and gross profit, maximizingutilization of existing capacity and increasing economies of scale. Incremental gross profit resulting from such activities will vary depending ongeographic location, whether facilities are mobile or fixed, the range ofservices provided and the strength of our joint venture partners.  Webelieve that implementing our core market strategy is a key factor in improvingour operating results.

**GOVERNMENTREGULATION**

Thehealthcare industry is highly regulated and changes in laws and regulations canbe significant. Changes in the law or new interpretation of existing laws canhave a material effect on our permissible activities, the relative costsassociated with doing business and the amount of reimbursement by governmentand other third-party payors. The federal government and all states in which wecurrently operate regulate various aspects of our business. Failure to complywith these laws could adversely affect our ability to receive reimbursement forour services and subject us and our officers and agents to civil and criminalpenalties.

*Federal False Claims Act:* The federalFalse Claims Act and, in particular, the False Claims Act’s “qui tam” or “whistleblower”provisions  allow a private individual tobring actions in the name of the government alleging that a defendant has madefalse claims for payment from federal funds. After the individual has initiatedthe lawsuit, the government must decide whether to intervene in the lawsuit andto become the primary prosecutor. Until the government makes a decision, thelawsuit is kept secret. If the government declines to join the lawsuit, theindividual may choose to pursue the case alone, in which case the individual’scounsel will have primary control over the prosecution, although the governmentmust be kept apprised of the progress of the lawsuit, and may

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intervenelater. Whether or not the federal government intervenes in the case, it willreceive the majority of any recovery. If the litigation is successful, theindividual is entitled to no less than 15%, but no more than 30%, of whateveramount the government recovers that is related to the whistleblower’sallegations. The percentage of the individual’s recovery varies, depending onwhether the government intervened in the case and other factors.  In recent years the number of suits broughtagainst healthcare providers by government regulators and private individualshas increased dramatically. In addition, various states are considering or haveenacted laws modeled after the federal False Claims Act, penalizing falseclaims against state funds. If a whistleblower action is brought against us,even if it is dismissed with no judgment or settlement, we may incursubstantial legal fees and other costs relating to an investigation.  Actions brought under the False Claims Actmay result in significant fines and legal fees and distract our management’sattention, which would adversely affect our financial condition and results ofoperations.

When anentity is determined to have violated the federal False Claims Act, it must paythree times the actual damages sustained by the government, plus mandatorycivil penalties of between $5,500 to $11,000 for each separate false claim, aswell as the government’s attorneys’ fees. Liability arises when an entityknowingly submits, or causes someone else to submit, a false claim forreimbursement to the federal government or submits a false claim with recklessdisregard for, or in deliberate ignorance of, its truth or falsity. Simplenegligence should not give rise to liability. Examples of the other actionswhich may lead to liability under the False Claims Act:

·                  Failureto comply with the many technical billing requirements applicable to ourMedicare and Medicaid business.

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

·                  Failureof our hospital customers to accurately identify and report our reimbursableand allowable services to Medicare.

·                  Failureto comply with the prohibition against billing for services ordered orsupervised by a physician who is excluded from any federal healthcare programs,or the prohibition against employing or contracting with any person or entityexcluded from any federal healthcare programs.

·                  Failureto comply with the Medicare physician supervision requirements for the serviceswe provide, or the Medicare documentation requirements concerning physiciansupervision.

·                  Thepast conduct of the businesses we have acquired.

Westrive to ensure that we meet applicable billing requirements. However, thecosts of defending claims under the False Claims Act, as well as sanctionsimposed under the Act, could significantly affect our business, financialcondition and results of operations.

*Anti-kickback Statutes:* We are subject tofederal and state laws which govern financial and other arrangements betweenhealthcare providers. These include the federal anti-kickback statute which,among other things, prohibits the knowing and willful solicitation, offer,payment or receipt of any remuneration, direct or indirect, in cash or in kind,in return for or to induce the referral of patients for items or servicescovered by Medicare, Medicaid and certain other governmental health programs.Violation of the anti-kickback statute may result in civil or criminalpenalties and exclusion from the Medicare, Medicaid and other federalhealthcare programs. In addition, it is possible that private parties may file “quitam” actions based on claims resulting from relationships that violate thisstatute, seeking significant financial rewards. Many states have enactedsimilar statutes, which are not limited to items and services paid for underMedicare or a federally funded healthcare program. In recent years, there hasbeen increasing scrutiny by law enforcement authorities, the Department ofHealth and Human Services, or HHS, the courts and Congress of financialarrangements between healthcare providers and potential sources of referrals toensure that such arrangements do not violate the anti-kickback provisions. HHSand the federal courts interpret “remuneration” broadly to apply to a widerange of financial incentives, including, under certain circumstances,

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distributionsof partnership and corporate profits to investors who refer federal healthcareprogram patients to a corporation or partnership in which they have anownership interest and payments for service contracts and equipment leases thatare designed, even if only in part, to provide direct or indirect remunerationfor patient referrals or similar opportunities to furnish reimbursable items orservices. HHS has issued “safe harbor” regulations that set forth certainprovisions which, if met, will assure that healthcare providers and otherparties who refer patients or other business opportunities, or who providereimbursable items or services, will be deemed not to violate the anti-kickbackstatutes. The safe harbors are narrowly drawn and some of our relationships maynot qualify for any “safe harbor”; however, failure to comply with a “safeharbor” does not create a presumption of liability. We believe that ouroperations materially comply with the anti-kickback statutes; however, becausethese provisions are interpreted broadly by regulatory authorities, we cannotbe assured that law enforcement officials or others will not challenge ouroperations under these statutes.

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

Inaddition, in 1996, Congress created a new federal crime:  healthcare fraud and false statementsrelating to healthcare matters. The healthcare fraud statute prohibitsknowingly and willfully executing a scheme to defraud any healthcare benefitprogram, including private payors. A violation of this statute is a felony andmay result in fines, imprisonment or exclusion from government sponsoredprograms such as the Medicare and Medicaid programs. The false statementsstatute prohibits knowingly and willfully falsifying, concealing or covering upa material fact or making any materially false, fictitious or fraudulentstatement in connection with the delivery of or payment for healthcare benefits,items or services, including those provided by private payors. A violation ofthis statute is a felony and may result in fines or imprisonment.

Webelieve that our operations materially comply with the CMP law and thehealthcare fraud and false statements statutes. These prohibitions, however,are broadly worded and there is limited authority interpreting theirparameters. Therefore, we can give no assurance that the government will notpursue a claim against us based on these statutes. Such a claim would divertthe attention of management and could result in substantial penalties whichcould adversely affect our financial condition and results of operations.

*Health Insurance Portability and Accountability Act:*In 1996, Congress passed the Health Insurance Portability and AccountabilityAct, or HIPAA. Although the main focus of HIPAA was to make health insurancecoverage portable, HIPAA has become a short-hand reference to new standards forelectronic transactions and privacy and security obligations imposed onproviders and others who handle personal health information. HIPAA requireshealthcare providers to adopt standard formats for common electronictransactions with health plans, and to maintain the privacy and security ofindividual patients’ health information. The privacy standards went into effecton April 14, 2003, the electronic standards for transactions went intoeffect on October 16, 2003 and the security standards went into effect onApril 20, 2005.  A violation of HIPAA’sstandard transactions, privacy and security provisions may result in criminaland civil penalties, which could adversely affect our financial condition andresults of operations.

*Stark II, State Physician Self-referral Laws:*The federal Physician Self-Referral or “Stark” Law prohibits a physician fromreferring Medicare patients for certain “designated health services” to anentity with which the physician (or an immediate family member of thephysician) has a financial relationship unless an exception applies. Inaddition, the receiving entity is prohibited from billing for services providedpursuant to the prohibited referral.

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

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Sanctionsfor violating Stark include denial of payment, mandatory refunds, civil moneypenalties and/or exclusion from the Medicare program. In addition, some courtshave allowed federal False Claims Act lawsuits premised on Stark Lawviolations.

Thefederal Stark Law prohibition is expansive, and its statutory language andimplementing regulations are ambiguous. Consequently, the statute has beendifficult to interpret. In 1995, the Centers for Medicare and MedicaidServices, or CMS, published final regulations interpreting the Starkprohibition as applied to clinical laboratory services.  In 2001, CMS published Phase I of thefinal Stark regulations relating to all designated health services (includingclinical laboratory services) which went into effect in January 2002. OnMarch 26, 2004, CMS published Phase II of the final Stark regulationswhich became effective in July 2004. Phase II included some additionalregulatory exceptions and definitions providing more flexibility in some areasand more specificity in others, but did not extend designated health servicesto PET or nuclear medicine.  In November2005, CMS published final regulations that designated PET, PET/CT and nuclearmedicine as designated health services under Stark Law but delayedimplementation until January 1, 2007.

Witheach set of regulations, CMS’ interpretation of the statute has evolved. Thishas resulted in considerable confusion concerning the scope of the referralprohibition and the requirements of the various exceptions. It is noteworthy,however, that CMS has taken the position that the Stark Law isself-effectuating and does not require implementing regulations. Thus, thegovernment believes that physicians and others must comply with the Stark Lawprohibitions regardless of the state of the regulatory guidance.

TheStark Law does not directly prohibit referral of Medicaid patients, but ratherdenies federal financial participation to state Medicaid programs for servicesprovided pursuant to a tainted referral. Thus, Medicaid referrals are subjectto whatever sanctions the relevant state has adopted.  Several states in which we operate haveenacted or are considering legislation that prohibits “self-referral”arrangements or requires physicians or other healthcare providers to discloseto patients any financial interest they have in a healthcare provider to whomthey refer patients. Possible sanctions for violating these state statutesinclude loss of licensure, civil fines and criminal penalties. The laws varyfrom state to state and seldom have been interpreted by the courts orregulatory agencies. Nonetheless, strict enforcement of these requirements is likely.

Webelieve our operations materially comply with the federal and state physicianself-referral laws. However, given the ambiguity of these statutes, theuncertainty of the regulations and the lack of judicial guidance on many keyissues, we can give no assurance that the Stark Law or other physicianself-referral regulations will not be interpreted in a manner that couldadversely affect our financial condition and results of operations.

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

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

*Radiologist and Facility Licensing:* Theradiologists with whom we contract to provide professional services are subjectto licensing and related regulations by the states, including registrations touse radioactive materials. As a result, we require our radiologists to have andmaintain appropriate licensure and registrations. In addition, some

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statesalso impose licensing or other requirements on us at our facilities and otherstates may impose similar requirements in the future. Some local authoritiesmay also require us to obtain various licenses, permits and approvals. Webelieve that we have obtained all required licenses and permits; however, thecriteria governing licensing or permitting may change or additional laws andlicensing requirements governing our facilities may be enacted. These changescould adversely affect our financial condition and results of operations.

*Liability Insurance:* The hospitals,physician groups and other healthcare providers who use our diagnostic imagingsystems are involved in the delivery of healthcare services to the public and,therefore, are exposed to the risk of liability claims. Our position is that wedo not engage in the practice of medicine. We provide only the equipment andtechnical components of diagnostic imaging, including certain limited nursingservices, and we have not experienced any material losses due to claims formalpractice. Nevertheless, claims for malpractice have been asserted against usin the past and any future claims, if successful, could entail significantdefense costs and could result in substantial damage awards to the claimants,which may exceed the limits of any applicable insurance coverage. We maintainprofessional liability insurance in amounts we believe are adequate for ourbusiness of providing diagnostic imaging, treatment and management services. Inaddition, the radiologists or other healthcare professionals with whom wecontract are required by such contracts to carry adequate medical malpracticeinsurance. Successful malpractice claims asserted against us, to the extent notcovered by our liability insurance, could adversely affect our financialcondition and results of operations.

*Independent Diagnostic Treatment Facilities:*CMS has established a category of Medicare provider referred to as IndependentDiagnostic Treatment Facilities, or IDTFs. Imaging centers have the option toparticipate in the Medicare program as either IDTFs or medical groups. Most ofour fixed-site centers are IDTFs. In August 2006, CMS proposed newcertification standards for IDTFs. Although we expect our IDTFs to meet these new certification standards,CMS may increase its oversight to ensure compliance with the newstandards.  In addition, IDTFs are beingmonitored by CMS, particularly with respect to physician supervisionrequirements.  If CMS exercises increasedoversight of IDTFs, our financial condition and results of operations could beadversely affected.

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

 

*Environmental, Health and Safety Laws:***** Our PET andPET/CT services and some of our other imaging services require the use ofradioactive materials, which are subject to federal, state and localregulations governing the storage, use and disposal of materials and wasteproducts. We could incur significant costs in order to comply with current orfuture environmental, health and safety laws and regulations.  However, we believe that environmental,health and safety laws and regulations will not (1) cause us to incur anymaterial capital expenditures in our current year or the succeeding year,including costs for environmental control facilities or (2) materially impactour revenues or our competitive position.

**SALES AND MARKETING**

We engage in marketingactivities to obtain new sources of revenues, expand business relationships,grow revenues at existing facilities, and maintain present business alliancesand contractual relationships. Marketing activities for our fixed operationsinclude educating physicians on new applications and uses of the technology andcustomer service programs. In addition, we leverage our core marketconcentration to develop contractual relationships with managed care payors toincrease patient volume. Marketing activities for our mobile business includedirect marketing to hospitals and developing leads through current customers,equipment manufacturers, and other vendors. In addition, marketing activitiesfor our mobile operations include contacting referring physicians associatedwith hospital customers and educating physicians.

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**COMPETITION**

The healthcareindustry in general, and the market for diagnostic imaging services inparticular, is highly competitive and fragmented, with only a few nationalproviders. We compete principally on the basis of our service reputation,equipment, breadth of managed care contracts and convenient locations. Ouroperations must compete with groups of radiologists, established hospitals andcertain other independent organizations, including equipment manufacturers andleasing companies that own and operate imaging equipment. We will continue toencounter substantial competition from hospitals and independent organizations,including Alliance Imaging, Inc., HEALTHSOUTH Corporation, Primedex HealthSystems, Inc. doing business as Radnet, MedQuest, Inc., Radiologix, Inc.,Shared Imaging and Otter Tail Corporation doing business as DMS Imaging.  Some of our direct competitors may haveaccess to greater financial resources than we do.

Certain hospitals,particularly the larger or more financially stable hospitals, have and may beexpected to directly acquire and operate imaging equipment on-site as part oftheir overall inpatient servicing capability, assume the associated financialrisk, employ the necessary technologists and satisfy applicable CON andlicensure requirements, if any.  Historically,smaller hospitals have been reluctant to purchase imaging equipment, but somehave chosen to do so with attractive financing offered by equipmentmanufacturers.  Some physician practiceshave also established diagnostic imaging centers or purchased imaging equipmentfor their own offices, and we anticipate that others will as well

**CUSTOMERSAND CONTRACTS**

Our revenues areprimarily generated from patient services and contract services. Patientservices revenues are generally earned from services billed directly topatients or third-party payors (such as managed care organizations, Medicare,Medicaid, commercial insurance carriers and workers’ compensation funds) on afee-for-service basis.   Patient servicesrevenues and management fees are primarily earned through fixed-site centers.Contract services revenues are generally earned from services billed to ahospital, physician group or other healthcare provider, which includefee-for-service arrangements in which revenues are based upon a contractual rateper procedure and fixed fee contracts. Contract services revenues are primarily earned through mobilefacilities pursuant to contracts with a term from one to five years.  A significant number of our mobile contractswill expire each year.  Our mobile facilitycontract renewal rate was 80% for the year ended June 30, 2006.  However, we expect that some high volumecustomer accounts will elect not to renew their contracts and instead willpurchase or lease their own diagnostic imaging equipment and some customers maychoose an alternative services provider.

During the yearended June 30, 2006, approximately 56% of our revenues were generated frompatient services and approximately 44% were generated from contract services.

**DIAGNOSTICIMAGING AND OTHER EQUIPMENT**

As of June 30,2006, we owned or leased 271 diagnostic imaging and treatment systems, with thefollowing classifications: 3.0 Tesla MRI, 1.5 Tesla MRI, 1.0 Tesla MRI, OpenMRI, PET, PET/CT, CT and other technology. Magnetic field strength is the measurement of the magnet used inside anMRI system.  If the magnetic fieldstrength is increased the image quality of the scan is improved and the timerequired to complete scans is decreased. Magnetic field strength on our MRI systems currently ranges from 0.2 to3.0 Tesla.  Of our 169 conventional MRIsystems, 155 have a magnet field strength of 1.5 Tesla, which is the industrystandard magnet strength for conventional fixed and mobile MRI systems.

We continue toevaluate the mix of our diagnostic imaging equipment in response to changes intechnology and to any overcapacity in the marketplace. We continue to improveour equipment through upgrades, disposal and/or trade-in of older equipment andthe purchase or execution of leases for new equipment in response to marketdemands.

Several largecompanies presently manufacture MRI (including Open MRI), PET, PET/CT, CT andother diagnostic imaging equipment, including General Electric Health Care,Hitachi Medical Systems, Siemens Medical Systems, Toshiba American MedicalSystems and Phillips Medical Systems. We have acquired MRI and CT systems that weremanufactured by each of the foregoing companies.  We have acquired PET or PET/CT systems thatwere

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manufactured by General Electric Health Care and Siemens MedicalSystems.  We enter into individualpurchase orders for each system that we acquire, and we do not have long-termpurchase arrangements with any equipment manufacturer.  We maintain good working relationships withmany of the major manufacturers to better ensure adequate supply as well asaccess to those types of diagnostic imaging systems which appear mostappropriate for the specific imaging facility to be established.

 

**INFORMATIONSYSTEMS**

Our internalinformation technology systems allow us to manage our operations, accountingand finance, human resources, payroll, document imaging, and data warehousing.Our primary operating system is the InSight Radiology Information System, orIRIS, our proprietary information system. IRIS provides front-office supportfor scheduling and administration of imaging procedures and back office supportfor billing and collections. Additional functionality includes workflow,transcription, and image management. In addition, we are installing new picturearchiving and communication systems, or PACS, in our fixed-site centers for themanagement of diagnostic images. For the year ended June 30, 2006, we spentapproximately $2.3 million on PACS installation.

**COMPLIANCE PROGRAM**

We have voluntarilyimplemented a program to monitor compliance with federal and state laws andregulations applicable to healthcare organizations. We have appointed acompliance officer who is charged with implementing and supervising ourcompliance program, which includes a code of ethical conduct for our employeesand affiliates and a process for reporting regulatory or ethical concerns toour compliance officer, including a toll-free telephone hotline. We believethat our compliance program meets the relevant standards provided by the Officeof Inspector General of the HHS. An important part of our compliance programconsists of conducting periodic reviews of various aspects of our operations.Our compliance program also contemplates mandatory education programs designedto familiarize our employees with the regulatory requirements and specificelements of our compliance program.

**EMPLOYEES**

As of August 31,2006, we had approximately 1,684 full-time, 122 part-time and532 per diem employees.  None of ouremployees is covered by a collective bargaining agreement. Management believesits employee relations to be satisfactory.

**FORWARD-LOOKINGSTATEMENTS DISCLOSURE**

This Form 10-K includes “forward-lookingstatements.”  Forward-looking statementsinclude statements concerning our plans, objectives, goals, strategies, futureevents, future revenues or performance, capital projects, financing needs, debtrepurchases, plans or intentions relating to acquisitions and new fixed-sitedevelopments, competitive strengths and weaknesses, business strategy and the trendsthat we anticipate in the industry and economies in which we operate and otherinformation that is not historical information. When used in this Form 10-K the words “estimates,” “expects,” “anticipates,”“projects,” “plans,” “intends,” “believes,” and variations of such words orsimilar expressions are intended to identify forward-looking statements.  All forward-looking statements, including,without limitation, our examination of historical operating trends, are basedupon our current expectations and various assumptions.  Our expectations, beliefs and projections areexpressed in good faith, and we believe there is a reasonable basis for them,but we can give no assurance that our expectations, beliefs and projectionswill be realized.

There are a number ofrisks and uncertainties that could cause our actual results to differmaterially from the forward-looking statements contained in this Form10-K.  Important factors that could causeour actual results to differ materially from the forward-looking statementsmade in this Form 10-K are set forth in this Form 10-K, including the factorsdescribed in Item 1A. “Risk Factors” below and the following:

·                  overcapacity andcompetition in our markets;

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

·                  contractrenewals and financial stability of customers;

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·                  conditionswithin the healthcare environment;

·                  the potentialfor rapid and significant changes in technology and their effect on ouroperations;

·                  operating,legal, governmental and regulatory risks;

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

·                  our ability tosuccessfully integrate acquisitions.

If any of these risks oruncertainties materializes, or if any of our underlying assumptions isincorrect, our actual results may differ significantly from the results that weexpress in or imply by any of our forward-looking statements.    We disclaim any intention or obligation toupdate or revise forward-looking statements to reflect future events orcircumstances.

**ITEM 1A.****                    RISK FACTORS**

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

RISKS RELATING TO OURINDEBTEDNESS

***Our substantial indebtedness couldadversely affect our financial condition.***

As ofJune 30, 2006, we had total indebtedness of approximately$503.4 million.  Our substantialindebtedness could have important consequences to us. For example, it could:

·                  make it moredifficult for us to satisfy our obligations with respect to our senior secured floatingrate notes, our unsecured senior subordinated notes and our amended creditfacility;

·                  increase ourvulnerability to general adverse economic and industry conditions;

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

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

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

·                  limit ourability to borrow additional funds.

Inaddition, we may incur substantial additional indebtedness in the future.  The terms of the agreements governing ourmaterial indebtedness allow us to issue and incur additional debt subject tocertain limitations.  If additional debtis added to current debt levels, the related risks described above couldincrease.

***Our operations may be restricted by theterms of our debt, which could adversely affect us and increase our creditrisk.***

Theagreements governing our material indebtedness include a number of significantrestrictive covenants.  These covenantscould adversely affect us, and adversely affect investors, by limiting ourability to plan for or react to market conditions or to meet our capital needs.These covenants will, among other things, restrict our ability to:

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·                  incur more debt;

·                  create liens;

·                  pay dividendsand make distributions or repurchase stock;

·                  makeinvestments;

·                  merge orconsolidate or transfer or sell assets; and

·                  engage intransactions with affiliates.

A breach of acovenant or other provision in any debt instrument governing our current or futureindebtedness could result in a default under that instrument and, due tocross-default and cross-acceleration provisions, could result in a defaultunder our other debt instruments. Upon the occurrence of an event of defaultunder our debt instruments, the lenders may be able to elect to declare allamounts outstanding to be immediately due and payable and terminate allcommitments to extend further credit. If we are unable to repay those amounts,the lenders could proceed against the collateral granted to them, if any, tosecure the indebtedness. If the lenders under our current or futureindebtedness accelerate the payment of the indebtedness, we cannot assure youthat our assets or cash flow would be sufficient to repay in full ouroutstanding indebtedness.  Substantiallyall of our assets, other than those assets consisting of accounts receivablesand related assets or cash accounts related to receivables, which are securedby our amended revolving credit facility, and a portion of InSight’s stock andthe stock of its subsidiaries and our real estate, are subject to the liens infavor of the holders of our senior secured floating rate notes. This mayfurther limit our flexibility in obtaining secured or unsecured financing inthe future.

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

Ourability to make scheduled payments on or to refinance our obligations withrespect to our indebtedness will depend on our financial and operatingperformance, which will be affected by general economic, financial,competitive, business and other factors beyond our control. We cannot assureyou that our business will generate sufficient cash flow from operations orthat future borrowings will be available to us in an amount sufficient toenable us to service our indebtedness or to fund our other liquidity needs.

If we are unableto service our indebtedness or fund our other liquidity needs, we may need torestructure or refinance all or a portion of our indebtedness on or beforematurity or sell certain of our assets. We cannot assure you that we will beable to restructure or refinance any of our indebtedness on commerciallyreasonable terms, if at all, which could cause us to default on our indebtednessand impair our liquidity. Any refinancing of our indebtedness could be athigher interest rates and may require us to comply with more onerous covenants,which could further restrict our business operations.

***Ifthere is a default under the agreements governing our material indebtedness,the value of our assets may not be sufficient to repay our creditors.***

Our property andequipment (other than land, building and leasehold improvements and assetssecuring our capital lease obligations), which make up a significant portion ofour tangible assets, had a net book value as of June 30, 2006 of approximately$148.0 million.  The book value of theseassets should not be relied on as a measure of realizable value for suchassets.  The realizable value may begreater or lower than such net book value. The value of our assets in the event of liquidation will depend uponmarket and economic conditions, the availability of buyers and similarfactors.  A sale of these assets in abankruptcy or similar proceeding would likely be made under duress, which wouldreduce the amounts that could be recovered. Furthermore, such a sale could occur when other companies in ourindustry also are distressed, which might increase the supply of similar assetsand therefore reduce the amounts that could be recovered.  Our intangible assets had a net book value asof June 30, 2006 of approximately $125.9 million.  These assets primarily consist of the excessof the acquisition cost over the fair market value of the net assets acquiredin purchase transactions.  The value ofthese intangible assets will continue to depend significantly upon the successof our business as a going concern and the growth in future cash flows.  As

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a result, in theevent of a default under the agreements governing our material indebtedness orany bankruptcy or dissolution of our company, the realizable value of theseassets will likely be substantially lower and may be insufficient to satisfythe claims of our creditors.

The condition ofour assets will likely deteriorate during any period of financial distresspreceding a sale of our assets.  Inaddition, much of our assets consists of illiquid assets that may have to besold at a substantial discount in an insolvency situation.  Accordingly, the proceeds of any such sale ofour assets may not be sufficient to satisfy, and may be substantially lessthan, amounts due to our creditors.

***Rises in interest rates could adversely affect our financialcondition.***

An increase inprevailing interest rates would have an immediate effect on the interest ratescharged on our variable rate indebtedness, which rise and fall upon changes ininterest rates.  At June 30, 2006,approximately 59.4% of our debt was variable rate debt; however, in January2006, we entered into a two-year interest rate cap contract with a notionalamount of $100 million.  During thetwo-year term of this contract our exposure on variable rate debt is reduced by$100 million, or to approximately 39.6%. Increases in interest rates would also impact the refinancing of ourfixed rate debt.  If interest rates arehigher when our fixed debt becomes due, we may be forced to borrow at thehigher rates.  If prevailing interestrates or other factors result in higher interest rates, the increased interestexpense would adversely affect our cash flow and our ability to service ourdebt.  As a protection against risinginterest rates, we may enter into agreements such as interest rate swaps, caps,floors and other interest rate exchange contracts.  These agreements, however, increase our risksas to the other parties to the agreements not performing or that the agreementscould be unenforceable.

*RISKS RELATING TO OUR BUSINESS*

***Changes in therates or methods of third-party reimbursements for our services could result inreduced demand for our services or create downward pricing pressure, whichwould result in a decline in our revenues and harm our financial position.***

For fiscal 2006 we derived approximately 56% of ourrevenues from direct billings to patients and third-party payors such asMedicare, Medicaid, managed care and private health insurance companies.Changes in the rates or methods of reimbursement for the services we providecould have a significant negative impact on those revenues. Moreover, ourhealthcare provider customers on whom we depend for approximately 44% of ourrevenues generally rely on reimbursement from third-party payors. To the extentour provider customers’ reimbursement from third-party payors is reduced, itwill likely have an adverse impact on our financial condition and results ofoperations since our provider customers will seek to offset decreasedreimbursement rates. In addition, the Medicare Payment Advisory Commission, inits March 2005 report to Congress, recommended that the government adoptstandards for physicians and providers who bill Medicare for interpretingdiagnostic imaging studies and adopt utilization management techniques used bythird-party private payors, such as the credentialing of physicians, in anattempt to control the rise of imaging costs.

Certain third-party payors have proposed andimplemented initiatives which have the effect of substantially decreasingreimbursement rates for diagnostic imaging services provided at non-hospitalfacilities, and third-party payors are continuing to monitor reimbursement fordiagnostic imaging services.  Athird-party payor has instituted a requirement of participation thatfreestanding imaging center providers be multi-modality and not simply offerone type of diagnostic imaging service. Similar initiatives enacted in thefuture by numerous additional third-party payors would have a material adverseimpact on our financial condition and our results of operations.

Under Medicare’s prospective payment system forhospital outpatient services, or OPPS, a hospital is paid for outpatientservices on a rate per service basis that varies according to the ambulatorypayment classification group, or APC, to which the service is assigned ratherthan on a hospital’s costs. OPPS was implemented on August 1, 2000 and due tothe anticipated adverse economic effect on hospitals, Congress provided foroutlier payments for especially costly cases, as well as transitional paymentsfor new technologies and innovative medical devices, drugs and biologics. Whilemost of the transitional payments expired in 2003, CMS continues to makepayments for new technology until sufficient data is collected to assign thenew technology to an APC. Each year CMS publishes new

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APC rates that are determined in accordance with thepromulgated methodology. The overall effect of OPPS has been to decreasereimbursement rates from those paid under the prior cost-based system.

In November 2004, CMS announced a 21% reduction inhospital reimbursement rates for PET, effective January 1, 2005. On a long-termbasis, this rate reduction will have a negative impact on our PET and PET/CTrevenues as more hospital customers (both existing and future) negotiate lowerrates with us. Furthermore, under an August 2006 proposed rule for OPPS, expectedto take effect January 1, 2007, technical fees for PET will be reduced furtherand PET/CT will be reimbursed at the same rate as PET, resulting in asignificant reduction in reimbursement for PET/CT.  Because unfavorable reimbursement policiesconstrict the profit margins of the mobile customers we bill directly, we havelowered, and may continue to lower, our fees to retain existing PET and PET/CTcustomers and attract new ones.  AlthoughCMS continues to expand reimbursement for new applications of PET, suchexpanded application is unlikely to significantly offset the anticipatedoverall reductions in reimbursement.  Anymodifications under OPPS further reducing reimbursement to hospitals mayadversely impact our financial condition and our operations since hospitalswill seek to offset such modifications.

In addition, inAugust 2005, CMS published proposed regulations that apply to hospitaloutpatient services that significantly decrease the reimbursement fordiagnostic procedures performed together on the same day.  Under the new methodology, CMS has identifiedfamilies of imaging procedures by imaging modality and contiguous body area.Medicare will pay 100% of the technical component of the higher priced procedureand 50% for the technical component of each additional procedure for proceduresinvolving contiguous body parts within a family of codes when performed in thesame session. Under the current methodology, Medicare pays 100% of thetechnical component of each procedure. In November 2005, CMS announced thatthese proposed regulations would not be finalized for 2006, but CMS will studythem further.  In August 2006, CMSpublished proposed regulations that further delay the implementation of thisreimbursement methodology.  If theseregulations are implemented, our financial condition and results of operationswould be adversely affected since our hospital customers will seek to offsettheir reduced reimbursement through lower rates with us.  If third-party payors reduce the amount oftheir payments to our customers, our customers will likely seek to reduce theirpayments to us or seek an alternate supplier of diagnostic imaging services.Because unfavorable reimbursement policies have constricted and may continue toconstrict the profit margins of the hospitals, physician groups and otherhealthcare providers that we bill directly, we have lowered and may continue toneed to lower our fees to retain existing customers and attract new ones.  These reductions would have a significantadverse effect on our revenues and financial results by decreasing demand forour services or creating downward pricing pressure.

Services provided in non-hospital based freestandingfacilities, including independent diagnostic treatment facilities, or IDTFs,are paid under the Medicare Part B fee schedule.  In November 2005, CMS published finalregulations, which would implement the same multi-procedure methodology ratereduction proposed for hospital outpatient services, for procedures reimbursedunder the Part B fee schedule.  CMSproposed phasing this rate reduction in over two years, 25% in 2006, andanother 25% in 2007.  The first phase ofthe rate reduction was effective January 1, 2006; however, under proposedregulations published in August 2006, CMS is proposing not to implement thesecond phase of the rate reduction in 2007.

The Deficit Reduction Act of 2005, or DRA, was signedinto law by President Bush in February 2006. The DRA will result in significant reductions in reimbursement forradiology services for Medicare beneficiaries, with anticipated savings to thefederal government.  The DRA provides,among other things, that reimbursement for the technical component for imagingservices (excluding diagnostic and screening mammography) in non-hospital basedfreestanding facilities will be the lesser of OPPS or the Medicare Part B feeschedule. These reductions will become effective on January 1, 2007.  We believe that the implementation of thereimbursement reductions in the DRA will have a material adverse effect on ourfinancial condition and results of operations. An analysis regarding the effectof the Medicare reimbursement reductions is presented elsewhere in this Form10-K under Item 7. “Management’s Discussion and Analysis of Financial Conditionand Results of Operations.”

We do not know to what extent other third-party payorsmay propose similar reimbursement reductions. We have received notice or indications from a few third-party payorsthat they intend to implement the reduction for multiple images on contiguousbody parts and additional payors may propose to implement this reduction aswell.  If additional third-party payorswere to propose such reductions, and such proposals were implemented, it wouldfurther negatively affect our financial condition and results of operations.

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Finally, in August 2006, CMS proposed an overalldecrease of 5.1% in the Medicare Part B fee schedule beginning January 1,2007.  The implementation of thisdecrease would further adversely impact our financial condition and results ofoperations.

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

***Trendsaffecting our actual or anticipated results may lead to charges that wouldadversely affect our results of operations.***

As a result of thevarious factors that affect our industry generally and our businessspecifically, we may from time to time be required to record charges in ourresults of operations.  For example werecorded non-cash impairment charges related to our goodwill and otherintangible assets of approximately $190.8 million in the year ended June 30,2006.  Depending on the severity of ouranticipated negative financial trends, we may (1) have difficulty funding ourcapital projects, and (2) need to take additional impairment charges againstour goodwill and other intangible assets, which represented approximately 30.9%of our consolidated assets as of June 30, 2006.

***If weare unable to renew our existing customer contracts on favorable terms or atall, our financial results would be adversely affected.***

Our financialresults depend on our ability to sustain and grow our revenues from existingcustomers.  Our revenues would decline ifwe are unable to renew our existing customer contracts or renew these contractson favorable terms. For our mobile facilities, we generally enter intocontracts with hospitals having one to five year terms. A significant number ofour mobile contracts will expire each year. Our mobile facility contract renewal rate was 80% for the year endedJune 30, 2006.  We may not, however,achieve these renewal rates in the future. To the extent we do not renew a customer contract, it is not alwayspossible to immediately obtain replacement customers.  Historically, many replacement customers havebeen smaller, which have lower procedure volumes.  In addition, attractive financing fromequipment manufacturers, as well as attractive gross margins have causedhospitals and physician groups who have utilized shared mobile services fromour company and our competitors to purchase and operate their ownequipment.  Although the reductions inreimbursement under the Medicare physician fee schedule may dissuade physiciangroups from operating their own equipment, we expect that some high volumecustomer accounts will continue to elect not to renew their agreements with usand instead acquire their own diagnostic imaging equipment.  This would adversely affect our financialcondition and results of operations. Although the non-renewal of a single customer contract would not have amaterial impact on our contract services revenues, non-renewal of severalcontracts on favorable terms or at all could have a significant negative impacton our financial condition and results of operations.

***Wehave experienced, and will continue to experience, competition from hospitals,physician groups and other diagnostic imaging companies and this competitioncould adversely affect our revenues and our business.***

The healthcareindustry in general, and the market for diagnostic imaging services inparticular, is highly competitive and fragmented, with only a few nationalproviders.  We compete principally on thebasis of our service reputation, equipment, breadth of managed care contractsand convenient locations.  Our operationsmust compete with physician groups, established hospitals and certain otherindependent organizations, including equipment manufacturers and leasingcompanies that own and operate imaging equipment.  We have encountered and we will continue toencounter competition from hospitals and physician groups that purchase theirown diagnostic imaging equipment.  Someof our direct competitors may have access to greater financial resources thanwe do. If we are unable to successfully compete, our customer base woulddecline and our financial condition and results of operations would beadversely affected.

***Consolidation in the imaging industry could adversely affectour revenues and business.***

We compete withseveral national and regional providers of diagnostic imaging services, as wellas local providers.  As a result of thereimbursement reductions by Medicare and other third party payors, some ofthese competitors may consolidate their operations in order to obtain certaincost structure advantages and improve equipment utilization.  Recently, two fixed-site competitors agreedto consolidate and form a combined business that would be the largest nationalprovider of fixed-site imaging services. These consolidated companies could achieve certain

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advantages over usincluding increased financial and business resources, economies of scale,breadth of service offerings, and favored relationships with equipment vendors,hospital systems, leading radiologists and third party payors.  We may be forced to reduce our prices in aneffort to retain and attract customers. These pressures could adversely affect our financial condition andresults of operations.

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

Our fixed-sitecenters are principally dependent on our ability to attract referrals fromphysicians and other healthcare providers representing a variety ofspecialties.  Our eligibility to provideservice in response to a referral is often dependent on the existence of acontractual arrangement with the referred patient’s managed careorganization.  Despite having a largenumber of contracts with managed care organizations, healthcare providers maybe inhibited from referring patients to us in cases where the patient is notassociated with one of the managed care organizations with which we havecontracted.  The loss of patientreferrals causes us to lose procedure volume which adversely impacts ourrevenues.  A significant decline inreferrals would have a material adverse effect on our financial condition andresults of operations.

***Technologicalchange in our industry could reduce the demand for our services and require usto incur significant costs to upgrade our equipment.***

We operate in acompetitive, capital intensive, high fixed-cost industry. The development ofnew technologies or refinements of existing ones might make our existingsystems technologically or economically obsolete, or reduce the need for oursystems.   MRI and other diagnosticimaging systems are currently manufactured by numerous companies.   Competition among manufacturers for a greatershare of the MRI and other diagnostic imaging systems market has resulted inand likely will continue to result in technological advances in the speed andimaging capacity of these new systems. Consequently, the obsolescence of our systems may be accelerated.  Other than ultra-high field MRI systems and256-slice CT systems, we are aware of no substantial technological changes;however, should such changes occur, we may not be able to acquire the new orimproved systems.   In thefuture, to the extent we are unable to generate sufficient cash from ouroperations or obtain additional funds through bank financing, the issuance ofequity or debt securities, and operating leases, we may be unable to maintain acompetitive equipment base.  In addition,advancing technology may enable hospitals, physicians or other diagnosticservice providers to perform procedures without the assistance of diagnosticservice providers such as ourselves.  Asa result, we may not be able to maintain our competitive position in our coremarkets or expand our business.

***Ourability to maximize the utilization of our diagnostic imaging equipment may beadversely impacted by harsh weather conditions.***

Harsh weatherconditions can adversely impact our operations and financial condition.  To the extent severe weather patterns affectthe regions in which we operate, potential patients may find it difficult totravel to our centers and we may have difficulty moving our mobile facilitiesalong their scheduled routes.   As aresult, we would experience a decrease in procedure volume during thatperiod.   Our equipment utilization,procedure volume or revenues could be adversely affected by similar conditionsin the future.

***Becausea high percentage of our operating expenses are fixed, a relatively smalldecrease in revenues could have a significant negative impact on our financialresults.***

A high percentageof our expenses are fixed, meaning they do not vary significantly with theincrease or decrease in revenues.  Suchexpenses include, but are not limited to, debt service and capital leasepayments, rent and operating lease payments, salaries, maintenance, insuranceand vehicle operation costs.  As aresult, a relatively small reduction in the prices we charge for our servicesor procedure volume could have a disproportionate negative effect on ourfinancial condition and results of operations.

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***Wemay be subject to professional liability risks which could be costly andnegatively impact our business and financial results.***

We have notexperienced any material losses due to claims for malpractice.  However, claims for malpractice have beenasserted against us in the past and any future claims, if successful, couldentail significant defense costs and could result in substantial damage awardsto the claimants, which may exceed the limits of any applicable insurance coverage.  Successful malpractice claims assertedagainst us, to the extent not covered by our liability insurance, could have amaterial adverse affect on our financial condition and results of operations.  In addition to claims for malpractice, thereare other professional liability risks to which we are exposed through ouroperation of diagnostic imaging systems, including liabilities associated withthe improper use or malfunction of our diagnostic imaging equipment.

To protect againstpossible professional liability from malpractice claims, we maintainprofessional liability insurance in amounts that we believe are appropriate inlight of the risks and industry practice. However, if we are unable to maintain insurance in the future at anacceptable cost or at all or if our insurance does not fully cover us in theevent a successful claim was made against us, we could incur substantiallosses.  Any successful malpractice orother professional liability claim made against us not fully covered byinsurance could be costly to defend against, result in a substantial damageaward against us and divert the attention of our management from ouroperations, which could have a material adverse effect on our financialcondition and results of operations.

***Ourfailure to effectively integrate acquisitions and establish joint venturearrangements through partnerships with hospitals and other healthcare providerscould impair our business.***

As part of ourcore market strategy, we have pursued, and may continue to pursue, selectiveacquisitions and arrangements through partnerships and joint ventures withhospitals and other healthcare providers. Our acquisition and joint venture strategies require substantial capitalwhich may exceed the funds available to us from internally generated funds andour available financing arrangements.  Wemay not be able to raise any necessary additional funds through bank financingor through the issuance of equity or debt securities on terms acceptable to us,if at all.

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

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

·                  the diversion ofour management’s attention from the management of daily operations to theintegration of operations;

·                  integration ofinformation systems;

·                  risks associatedwith unanticipated events or liabilities;

·                  difficulties inthe assimilation and retention of employees;

·                  potentialadverse effects on operating results;

·                  challenges inretaining customers and referral sources; and

·                  amortization orwrite-offs of acquired intangible assets.

Althoughwe believe we have successfully integrated acquisitions in the past, we may notbe able to successfully integrate the operations from any futureacquisitions.  If we do not successfullyintegrate our acquisitions, we may not realize anticipated operatingadvantages, economies of scale and cost savings.   Also, we may not be able to maintain thelevels of operating efficiency that the acquired companies would have achievedor might have achieved separately. Successful integration of each of their operations will depend upon ourability to manage those operations and to eliminate excess costs.

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***Loss of, and failure to attract, qualifiedemployees, particularly technologists, could limit our growth and negativelyimpact our operations.***

Ourfuture success depends on our continuing ability to identify, hire, develop,motivate and retain highly skilled personnel for all areas of ourorganization.  Competition in ourindustry for qualified employees is intense.  In particular, there is a very high demand for qualified technologistswho are necessary to operate our systems, particularly PET technologists.  We may not be able to hire and retain asufficient number of technologists, and we expect that our costs for thesalaries and benefits of technologists will continue to increase for theforeseeable future because of the industry’s competitive demand for their services.  Our continued ability to compete effectivelydepends on our ability to attract new employees and to retain and motivate ourexisting employees.

***Our PET and PET/CT service and some of ourother imaging services require the use of radioactive materials, which couldsubject us to regulation, related costs and delays and potential liabilitiesfor injuries or violations of environmental, health and safety laws.***

Our PETand PET/CT services and some of our other imaging and therapeutic servicesrequire the use of radioactive materials to produce the images.   While this radioactive material has a shorthalf-life, meaning it quickly breaks down into non-radioactive substances,storage, use and disposal of these materials present the risk of accidentalenvironmental contamination and physical injury.  We are subject to federal, state and localregulations governing storage, handling and disposal of these materials andwaste products.  Although we believe thatour safety procedures for storing, handling and disposing of these hazardousmaterials comply with the standards prescribed by law and regulation, we cannotcompletely eliminate the risk of accidental contamination or injury from thosehazardous materials.  In the event of anaccident, we would be held liable for any resulting damages, and any liabilitycould exceed the limits of or fall outside the coverage of our insurance.  In addition, we may not be able to maintaininsurance on acceptable terms, or at all.  We could incur significant costs in order to comply with current orfuture environmental, health and safety laws and regulations.

***We may be unable to generate revenue whenour equipment is not operational.***

Timely, effectiveservice is essential to maintaining our reputation and high utilization rateson our imaging equipment.  Our warrantiesand maintenance contracts do not compensate us for the loss of revenue when oursystems are not fully operational. Equipment manufacturers may not be able to perform repairs or supplyneeded parts in a timely manner.  Thus,if we experience more equipment malfunctions than anticipated or if we areunable to promptly obtain the service necessary to keep our equipmentfunctioning effectively, our revenue could decline and our ability to provideservices would be harmed.

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

Our corporateheadquarters and a material portion of our fixed-site centers are located inCalifornia, which has a high risk for earthquakes.  Depending upon its magnitude, an earthquakecould severely damage our facilities or prevent potential patients fromtraveling to our centers.  Damage to ourequipment or any interruption in our business would adversely affect ourfinancial condition and results of operations. While we presently carry earthquake insurance in amounts we believe areappropriate in light of the risks, the amount of our earthquake insurancecoverage may not be sufficient to cover losses from earthquakes.  In addition, we may discontinue earthquakeinsurance on some or all of our facilities in the future if the cost ofpremiums for earthquake insurance exceeds the value of the coverage discountedfor the risk of loss.  If we experience aloss which is uninsured or which exceeds policy limits, we could lose thecapital invested in the damaged facilities as well as the anticipated futurecash flows from those facilities.

***Continued high fuel costs would harm our operations.***

Fuel costsconstitute a significant portion of our mobile operating expenses. Historically,fuel costs have been subject to wide price fluctuations based on geopoliticalissues and supply and demand. Fuel availability is also affected by demand forhome heating oil, diesel, gasoline and other petroleum products. Because of theeffect of these events on the price and availability of fuel, the cost andfuture availability of fuel cannot be predicted with any degree of certainty.In the event of a fuel supply shortage or further increases in fuel prices, acurtailment of scheduled mobile service could result. There have beensignificant increases in fuel costs and continued high fuel costs or furtherincreases would harm our financial condition and results of operations.

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***If wefail to comply with various licensure, certification and accreditation standardswe may be subject to loss of licensure, certification or accreditation whichwould adversely affect our operations.***

All of the statesin which we operate require that technologists who operate our CT, PET/CT andPET systems be licensed or certified. Also, each of our fixed-site centers must continue to meet variousrequirements in order to receive payments from Medicare.  In addition, our mobile facilities and ourfixed-site center in Chattanooga, Tennessee are currently accredited by theJoint Commission on Accreditation of Healthcare Organizations, or JCAHO, anindependent, non-profit organization that accredits various types of healthcareproviders, such as hospitals, nursing homes, outpatient ambulatory care centersand diagnostic imaging providers.  If wewere to lose JCAHO accreditation for our mobile facilities, it could adverselyaffect our mobile operations because some of our mobile customer contractsrequire JCAHO accreditation and one of our primary competitors is JCAHOaccredited.

Managed careproviders prefer to contract with accredited organizations.  Any lapse in our licenses, certifications oraccreditations, or those of our technologists, or the failure of any of ourfixed-site centers to satisfy the necessary requirements under Medicare couldadversely affect our financial condition and results of operations.

RISKS RELATING TO GOVERNMENT REGULATION OF OURBUSINESS

***Complying with federal and stateregulations pertaining to our business is an expensive and time-consumingprocess, and any failure to comply could result in substantial penalties.***

We aredirectly or indirectly through our customers subject to extensive regulation byboth the federal government and the states in which we conduct our business,including:

·                  the federalFalse Claims Act;

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

·                  the federalCivil Money Penalty Law;

·                  the federalHealth Insurance Portability and Accountability Act of 1996, or HIPAA;

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

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

·                  United StatesFood and Drug Administration requirements;

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

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

If ouroperations are found to be in violation of any of the laws and regulations towhich we or our customers are subject, we may be subject to the applicablepenalty associated with the violation, including civil and criminal penalties,damages, fines and the curtailment of our operations.  Any penalties, damages, fines or curtailmentof our operations, individually or in the aggregate, could adversely affect ourability to operate our business and our financial results.  The risks of our being found in violation ofthese laws and regulations is increased by the fact that many of them have notbeen fully interpreted by the regulatory authorities or the courts, and theirprovisions are open to a variety of interpretations.  Any action brought against us for violationof these laws or regulations, even if we successfully defend against it, couldcause us to incur significant legal expenses and divert our management’sattention from the operation of our business.

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***The regulatory framework is uncertain andevolving.***

Healthcarelaws and regulations may change significantly in the future.  We continuously monitor these developmentsand modify our operations from time to time as the regulatory environmentchanges.  However, we may not be able toadapt our operations to address new regulations, which could adversely affectour business. In addition, although we believe that we are operating incompliance with applicable federal and state laws, neither our current oranticipated business operations nor the operations of our contracted radiologygroups have been the subject of judicial or regulatory interpretation.  A review of our business by courts orregulatory authorities may result in a determination that could adverselyaffect our operations or the healthcare regulatory environment may change in away that restricts our operations.

**ITEM 2. ****                       PROPERTIES**

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

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

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

On February 3,2004, Southwest Outpatient Radiology, P.C, or SWOR, filed a Summons andComplaint against InSight Health Corp., one of InSight’s subsidiaries, in theSuperior Court, Maricopa County, Arizona, for Declaratory Relief seeking adeclaration as to the meaning and effect of a certain provision of theprofessional services agreement, or PSA, pursuant to which SWOR providedprofessional services at InSight’s facilities in Phoenix, Arizona.  SWOR claimed the PSA provided a right offirst refusal to provide professional services at any center InSight acquiredin Maricopa County.  InSight believes andit was intended that the provision related only to “de novo” centers whichInSight developed.  In April 2004,InSight acquired the stock of Comprehensive Medical Imaging, Inc., which ownedand operated 21 fixed-site centers, six of which were located in MaricopaCounty, pursuant to a stock purchase agreement.

Prior to signingthe stock purchase agreement, InSight gave SWOR 180 days notice to terminate thePSA in accordance with the PSA.  SWORclaimed that the PSA had already terminated due to InSight’s breach of theright of first refusal provision. InSight answered the Summons and Complaint and was cooperating with SWORin expediting discovery and an early trial when SWOR decided to abandon theDeclaratory Relief action and on April 20, 2004, SWOR filed a First AmendedComplaint claiming breach of contract, anticipatory breach of contract,negligent misrepresentation, breach of covenant of good faith and fair dealing,intentional interference with contract, breach of fiduciary duty, declaratoryrelief and unspecified compensatory and punitive damages, prejudgment interest,and attorneys fees. We have answered the First Amended Complaint and discoveryhas commenced and is on-going.   We arevigorously defending this lawsuit and believe that SWOR’s claims are withoutmerit.  We are unable to predict theoutcome of this lawsuit.  

In August 2003,InSight entered into a series of agreements and acquired a joint ventureinterest through a limited liability company it formed called Kessler ImagingAssociates, LLC, or KIA, in a CT fixed-site center in Hammonton, NewJersey.  KIA is owned 55% by InSight and45% by Bernard Neff, M.D., or Dr. Neff. KIA manages Kessler CAT Scan Associates, LLC, which provides CT, andmobile MRI and PET (using InSight mobile facilities) services to inpatients ofWilliam B. Kessler Memorial Hospital, or Hospital, and communityoutpatients.  Dr. Neff provides radiologyservices at the Hospital and to the outpatients.  InSight does not control billing andcollections to the Hospital for inpatients or to third party payors foroutpatients.  Dr. Neff performs thatfunction.

Management at theHospital changed in 2005, and in late 2005 the Hospital notified the partiesthat it was “voiding” all the agreements because the prior management had noauthority to execute the agreements and stopped paying for the inpatientservices.  Immediately after theagreements were allegedly “voided,” Dr. Neff filed an arbitration claim againstthe Hospital, for among other things, collection of outstanding amounts owed bythe Hospital for services

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previouslyrendered.  The Hospital has challengedDr. Neff’s efforts to proceed with arbitration efforts in the New Jerseycourts.  The appellate division granted astay motion, so the arbitration has been stayed pending oral argument, whichhas not yet been held and no decision has yet been rendered.  Until the appellate court rules, matters inthe arbitration cannot go forward.

On March 8,2006, InSight filed suit in the United States District Court for the Districtof New Jersey against the Hospital.  Bythe Complaint, InSight has asserted claims for fraud and seeks in excess of $4million in compensatory damages plus additional amounts for punitivedamages.  The Hospital has denied thesubstantive allegations against it.

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

On September 13, 2006, the Hospital filed a voluntarybankruptcy petition under Chapter 11 of Title 11 of the U.S. Bankruptcy Code inthe U.S. Bankruptcy Court, District of New Jersey (Camden).  As a result, this case and the arbitrationhave been stayed by operation of law.

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

On May 23, 2006,stockholders holding approximately 99.9% of our outstanding common stock,acting pursuant to a written consent, elected Michael N. Cannizzaro, Kenneth M.Doyle, David W. Dupree, Bret W. Jorgensen, Steven G. Segal, Mark J. Tricolliand Edward D. Yun as our directors to serve until the next annual meeting ofstockholders and until each director’s successor is qualified and elected.

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**PART II**

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

Our common stockis not publicly traded on any exchange or in any market.  At August 31, 2006, we had six record holdersof our common stock.  We have never paida cash dividend on our common stock and do not expect to do so in the foreseeablefuture.  The agreements governing ourmaterial indebtedness obligations contain restrictions on our ability to paydividends on our common stock.

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

**ITEM 6.****                          SELECTED FINANCIAL DATA**

We were incorporated in June 2001.  On October 17, 2001, we acquired InSight andInSight became our wholly owned subsidiary. Our consolidated operationsafter the acquisition are substantially consistent with the operations ofInSight prior to the acquisition.  Inaddition, we have no operations other than our investment in InSight.  InSight is considered our predecessor inaccordance with Regulation S-X.

The selected consolidatedfinancial data presented as of and for the years ended June 30, 2006, 2005,2004, 2003 and 2002 has been derived from our audited consolidated financialstatements.  The selected consolidatedfinancial data presented for the period from July 1, 2001 toOctober 17, 2001 has been derived from the audited consolidated financialstatements of InSight.  The informationin the following table should be read together with our audited consolidatedfinancial statements and related notes, and Item 7.  “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,”included elsewhere in this Form 10-K.
| ** **                     | ** ** | **Company**                             | ** ** | **Predecessor**      | ** ** |
|--------------------------------|------------|-----------------------------------------|------------|----------------------|------------|
| ** **                     | ** ** | ** **                              | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Period from** | ** ** |
| ** **                     | ** ** | ** **                              | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **July 1 to** | ** ** |
| ** **                     | ** ** | **Years Ended June 30,** | ** ** | **October 17,** | ** ** |
| ** **                     | ** ** | **2006**                                | ** ** | **2005**             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002 (1)** | ** ** | **2001** | ** ** |
| ** **                     | ** ** | **(Amounts in thousands)**    | ** ** |
| STATEMENT OF OPERATIONS  DATA: |       |                                    |       |                 |       |   |   |   |   |   |   |   |   |
| Revenues                       |       | $                                       | 306,298    |                 | $          | 316,873 |   | $ | 290,884 |   | $ | 237,752 |   | $ | 155,407 |   | $ | 63,678 |   |
| Gross profit                   |       | 35,026                                  |       | 48,716               |       | 57,463 |   | 57,708 |   | 39,823 |   | 17,991 |   |
| Interest  expense, net         |       | 50,754                                  |       | 44,860               |       | 40,682 |   | 37,514 |   | 32,546 |   | 6,321 |   |
| Net (loss) income  (2)(3)(4)   |       | (210,218                                | )          | (27,217              | )          | 2,924 |   | 4,922 |   | 9 |   | (4,648 | ) |
|                                |            |                                         |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                       | ** ** | **June 30,** | ** ** |
|---------------------------------------|------------|-------------------|------------|
| ** **                            | ** ** | **2006**          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| BALANCE SHEET  DATA:                  |       |              |       |   |   |   |   |   |   |   |   |
| Working capital                       |       | $                 | 34,550     |   | $ | 36,068 |   | $ | 48,116 |   | $ | 32,580 |   | $ | 35,907 |   |
| Property and  equipment, net          |       | 181,026           |       | 209,461 |   | 242,336 |   | 219,121 |   | 172,056 |   |
| Goodwill and  other intangible assets |       | 125,936           |       | 314,989 |   | 319,463 |   | 260,292 |   | 234,644 |   |
| Total assets                          |       | 408,204           |       | 624,523 |   | 675,631 |   | 577,317 |   | 499,401 |   |
| Total long-term  liabilities          |       | 504,360           |       | 512,608 |   | 537,177 |   | 442,484 |   | 378,234 |   |
| Stockholders’ (deficit)  equity  |       | (141,893          | )          | 67,724 |   | 94,941 |   | 91,614 |   | 87,376 |   |
|                                       |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

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

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

(4)                                  Includesimpairment charges related to our goodwill and other intangible assets of $190.8million for the year ended June 30, 2006.

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

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

**Overview**

We are a nationwide provider of diagnostic imagingservices through our integrated network of fixed-site centers and mobilefacilities which are focused in core markets throughout the United States.  Our services include magnetic resonanceimaging, or MRI, positron emission tomography, or PET, computed tomography, orCT, and other technologies.  Theseservices are noninvasive techniques that generate representations of internalanatomy on film or digital media which are used by physicians for the diagnosisand assessment of diseases and disorders.

We serve a diverse portfolioof customers, including healthcare providers, such as hospitals and physicians,and payors, such as managed care organizations, Medicare, Medicaid andinsurance companies.  We operate in morethan 30 states and are primarily concentrated in California, Arizona, NewEngland, the Carolinas, Florida and the Mid-Atlantic states.   While we generated approximately 69% of ourtotal revenues from MRI services during the year ended June 30, 2006, weprovide a comprehensive offering of diagnostic imaging and treatment services,including PET, PET/CT, CT, mammography, bone densitometry, ultrasound,lithotripsy and x-ray.

As of June 30, 2006, our network consists of 116fixed-site centers and 108 mobile facilities. This combination allows us to provide a full continuum of imagingservices to better meet the needs of our customers, including healthcareproviders, such as hospitals and physicians, and payors such as managed careorganizations, Medicare, Medicaid and insurance companies.  Our operations consist of two reportablesegments, mobile operations and fixed operations.  Our mobile operations include 32 parkedmobile facilities, each of which serves a single customer.  Our fixed operations include four mobilefacilities as part of our fixed operations in Maine.  Certain financial information regarding ourreportable segments is included in Note 16 to the consolidated financialstatements, which are a part of this Form 10-K.

We are in theprocess of implementing a strategy based on core markets.  A core market strategy may allow us moreoperating efficiencies and synergies than are available in a nationwidestrategy.  A core market will be based onmany factors and not just the number of fixed-site centers or mobile facilitiesin an area.  Other factors would include,without limitation, the capabilities of our contracted radiologists, anyhospital affiliations, the strength of returns on capital investment, thepotential for growth and sustainability of our business in the area, thereimbursement environment for the area, the strength of competing providers inthe area, population growth trends, and any regulatory restrictions.  We expect that this strategy will result inus exiting some markets while increasing our presence in others, which may beaccomplished through business or asset sales, swaps, purchases, closures andthe development of new fixed-site centers.

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

**ExecutiveSummary**

As described ingreater detail elsewhere in this Form 10-K, our business faces manychallenges.  Some of these challenges areunique to our business, while other challenges are industry-wide.  Our revenues for the year ended June 30,2006, decreased by approximately 3.3%, as compared to the year ended June 30,2005.  Moreover, our costs of operations,corporate operating expenses and interest expense rose during the sameperiod.  For the year ended June 30,2006, our Adjusted EBITDA decreased approximately 19.3% as compared to the yearended

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June 30, 2005 (seeour reconciliation of net cash provided by operating activities to Adjusted EBITDAin “Financial Condition, Liquidity and Capital Resources” below).  This 19.3% decline in Adjusted EBITDA waspreceded by an approximate 5.7% decline in Adjusted EBITDA for the year endedJune 30, 2005 compared to the year ended June 30, 2004.  This decline in Adjusted EBITDA as comparedto prior year periods has become a historical trend based on our performanceduring the past eight fiscal quarters. We anticipate that this negative trend in Adjusted EBITDA will continueand will be exacerbated by the anticipated adverse effects of planned Medicarereimbursement reductions under the Deficit Reduction Act of 2005, or DRA, asdiscussed in “Reimbursement” below.   Tothe extent the regulations CMS proposed in August 2006 take effect, thisnegative trend will be further adversely affected.

Because we expectthe decline in Adjusted EBITDA to continue due to the negative trends discussedbelow and the planned Medicare reimbursement reductions under the DRA, wedetermined that an interim impairment analysis of the fair value of our tworeporting units (mobile and fixed) should be performed in accordance withgenerally accepted accounting principles. We completed our analysis of the fair value of our reporting units utilizingthe assistance of an independent valuation firm.  The audit committee of InSight’s board ofdirectors (1) concluded that impairments had occurred and (2) ratifiedmanagement’s determination that impairment charges were appropriate.  Accordingly, we recorded impairment chargesrelated to our goodwill and other intangible assets of approximately $190.8million.  This resulted in a net loss ofapproximately $210.2 million for the year ended June 30, 2006, compared to anet loss of approximately $27.2 million for the year ended June 30, 2005.  The impairment charges are a reduction in thecarrying value of goodwill and other intangible assets at our reporting units(approximately $126.8 million for our fixed reporting unit and approximately $64.0million for our mobile reporting unit). The impairment charges are non-cash charges and will not result infuture cash expenditures.  See “CriticalAccounting Policies and Estimates” below.

We have attemptedto implement, and will continue to develop and implement, various revenueenhancing and cost reduction initiatives; however, such initiatives haveproduced minimal improvements to date, and reversing the negative trend will bea significant challenge because of the continued overcapacity in the diagnosticimaging industry and reimbursement reductions by Medicare and other third partypayors.  Depending on the severity of theanticipated negative trend in Adjusted EBITDA, we may (1) have difficultyfunding our capital projects, and (2) need to take additional impairmentcharges against our goodwill and other intangible assets, which representedapproximately 30.9% of our consolidated assets as of June 30, 2006.

**Acquisitions**

On April 1, 2004, we acquired the stock ofComprehensive Medical Imaging, Inc., or CMI, a subsidiary of Cardinal Health,Inc., which owned and operated 21 fixed-site centers located in California,Arizona, Texas, Kansas, Pennsylvania and Virginia.  The aggregate purchase price for thesecenters was approximately $48.6 million. We refer to this acquisition as the CMI acquisition.  On August 1, 2003, we acquired 22 mobilefacilities primarily operating in the Mid-Atlantic states from CDL MedicalTechnologies, Inc.  The aggregate purchaseprice for these facilities was approximately $49.9 million.  We refer to this acquisition as the CDLacquisition.  These acquisitionssignificantly expanded our presence in the Phoenix and Northern Californiamarkets and the Mid-Atlantic states.  The aggregate cost of the CMI andCDL acquisitions totaled $98.5 million, none of which was assumed debt.  We funded the consideration through (1) ourformer credit facility and (2) $25 million in a private placement of 9 7/8%senior subordinated notes due November 2011.

In March 2006, we purchased a majority ownership interest in a jointventure that operates an MRI fixed-site center in San Ramon, California.  The purchase price was approximately $2.3million, net of cash acquired.  In August2004, through a joint venture we opened a fixed-site center in Columbus,Ohio.  In April 2004, we opened afixed-site center in Simi Valley, California. In February 2004, we acquired the remaining joint venture interest in afixed-site center in Henderson, Nevada. In August 2003, we acquired a joint venture interest in a fixed-sitecenter located in Hammonton, New Jersey. All of these acquisitions and new centers were financed with internallygenerated funds.

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**Dispositions**

In June 2006, weclosed a fixed-site center in Bala Cynwyd, Pennsylvania, resulting in a chargeof approximately $0.3 million.  In December 2005, we dissolved a mobilelithotripsy partnership in Connecticut, which resulted in a $1.0 million lossin associated goodwill.  Also in December2005, we closed two fixed-site centers in Chicago, Illinois and Coraopolis,Pennsylvania.  In August 2005, we closeda fixed-site center in Lemont, Illinois. In May 2005, we sold our joint venture interest in a fixed-site centerin Valparaiso, Indiana, which resulted in a net gain on sale of approximately$0.5 million.  In April 2005, we sold afixed-site center in Overland Park, Kansas, which resulted in a loss on sale ofapproximately $0.8 million.  In March2005, we sold our joint venture interest in a fixed-site center in Marina DelRey, California, which resulted in a gain on sale of approximately $0.1million.  In December 2003, we sold afixed-site center in Hobart, Indiana, which resulted in a gain on sale ofapproximately $2.1 million.

**Segments**

We have two reportablesegments, fixed operations and mobile operations:

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

·                  attract patientreferrals from physician groups and hospitals;

·                  maximize  procedure volume;

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

·                  acquire ordevelop new fixed-site centers.

*MobileOperations: *Our mobileoperations consist of mobile facilities, which provide services to hospitals,physician groups and other healthcare providers.  Revenues from our mobile operations areprimarily generated from fee-for-service arrangements and fixed fee contractsbilled directly to our customers, which we generally refer to as contractservices revenues.  Revenues from ourmobile operations have been and will continue to be driven by the growth in thediagnostic imaging industry and are dependent on our ability to:

·                  establish newmobile customers within our core markets;

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

·                  renew existingcontracts with our mobile customers.

**Negative Trends**

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

·                  overcapacityin the diagnostic imaging industry;

·                  reductionsin reimbursement from certain third-party payors including planned reductionsfrom Medicare;

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·                  reductionsin compensation paid by our mobile customers;

·                  competitionfrom other mobile providers;

·                  competitionfrom equipment manufacturers which have caused some of our referral sources,some of our mobile customers, and our mobile customers’ referral sources toinvest in their own diagnostic imaging equipment; and

·                  industry-wideincreases in salaries and benefits for technologists.

**Reimbursement**

*Medicare.*TheMedicare program provides reimbursement for hospitalization, physician,diagnostic and certain other services to eligible persons 65 years of age andover and certain others. Providers are paid by the federal government inaccordance with regulations promulgated by the HHS and generally accept thepayment with nominal deductible and co-insurance amounts required to be paid bythe service recipient, as payment in full. Since 1983, hospital inpatientservices have been reimbursed under a prospective payment system. Hospitalsreceive a specific prospective payment for inpatient treatment services basedupon the diagnosis of the patient.

Under Medicare’s OPPS a hospital is paid foroutpatient services on a rate per service basis that varies according to theAPC, to which the service is assigned rather than on a hospital’s costs. OPPSwas implemented on August 1, 2000 and due to the anticipated adverse economiceffect on hospitals, Congress provided for outlier payments for especiallycostly cases, as well as transitional payments for new technologies andinnovative medical devices, drugs and biologics. While most of the transitionalpayments expired in 2003, CMS continues to make payments for new technologyuntil sufficient data is collected to assign the new technology to an APC. Eachyear CMS publishes new APC rates that are determined in accordance with thepromulgated methodology. The overall effect of OPPS has been to decreasereimbursement rates from those paid under the prior cost-based system.Multi-modality and certain fixed-site centers which are freestanding and nothospital-based facilities are not directly affected by OPPS.

In November 2004, CMS announced a 21% reduction inhospital reimbursement rates for PET, effective January 1, 2005. On a long-termbasis this rate reduction will have a negative impact on our PET and PET/CTrevenues as more hospital customers (both existing and future) negotiate lowerrates with us. Furthermore, under an August 2006 proposed rule for OPPS,expected to take effect January 1, 2007, technical fees for PET will be reducedfurther and PET/CT will be paid at the same rate as PET, resulting in asignificant reduction in reimbursement for PET/CT.  Because unfavorable reimbursement policiesconstrict the profit margins of the mobile customers we bill directly, we haveand may continue to lower our fees to retain existing PET and PET/CT customersand attract new ones; however, CMS has announced that it will reimburse foradditional PET procedures, including for Alzheimer’s disease and cervicalcancer.  Although CMS continues to expandreimbursement for new applications of PET, such expanded application isunlikely to significantly offset the anticipated overall reductions in PETreimbursement.  Any modifications underOPPS further reducing reimbursement to hospitals may adversely impact ourfinancial condition and results of operations since hospitals will seek tooffset such modifications.

Furthermore, in August 2005, CMS published proposedregulations that apply to hospital outpatient services that significantlydecrease the reimbursement for diagnostic procedures performed together on thesame day. Under the new methodology, CMS has identified families of imagingprocedures by imaging modality and contiguous body area. Medicare will pay 100%of the technical component of the higher priced procedure and 50% for thetechnical component of each additional procedure for procedures involvingcontiguous body parts within a family of codes when performed in the samesession. Under the current methodology, Medicare pays 100% of the technicalcomponent of each procedure. In November 2005, CMS announced that theseproposed regulations would not be finalized for 2006, but CMS will study themfurther.  The implementation of theseregulations would adversely impact our financial condition and results ofoperations since our hospital customers will seek to offset their reducedreimbursement through lower rates.

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Services provided in non-hospital based freestandingfacilities, such as IDTFs, are paid under the Medicare Part B fee schedule. InNovember 2005, CMS published final regulations, which would implement the samemulti-procedure methodology rate reduction proposed for hospital outpatientservices, for procedures reimbursed under the Part B fee schedule.  CMS proposed phasing in this rate reductionin over two years, 25% in 2006, and another 25% in 2007.  The first phase of the rate reduction waseffective January 1, 2006; however, under proposed regulations published inAugust 2006, CMS is proposing not to implement the second phase of the ratereduction in 2007.

The DeficitReduction Act of 2005, or DRA, was signed into law by President Bush inFebruary 2006.  The DRA will result insignificant reductions in reimbursement for radiology services for Medicarebeneficiaries, with anticipated savings to the federal government.  The DRA provides, among other things, thatreimbursement for the technical component for imaging services (excludingdiagnostic and screening mammography) in non-hospital based freestandingfacilities will be the lesser of OPPS or the Medicare Part B fee schedule.  These reductions will become effective onJanuary 1, 2007.  There are active andongoing efforts to modify, delay or otherwise mitigate the financial impact ofthe DRA on radiology services; however, we currently do not anticipate thatthese efforts will have a material effect on the DRA.

We believe thatthe implementation of the reimbursement reductions in the DRA will have amaterial adverse effect on our financial condition and results ofoperations.  For our fiscal year endedJune 30, 2006, Medicare revenues represented approximately $34 million, orapproximately 11% of our total revenues for such period.  If both reimbursement reductions had been ineffect during that period, we estimate that our total revenues would have beenreduced by approximately $9.0 million, or 2.9% (the relative impact of thecontiguous body parts reimbursement reduction and the lower of OPPS or theMedicare Part B fee schedule reimbursement reduction would have beenapproximately $1.0 million and $8.0 million, respectively).  We would expect to experience comparablereductions in our Medicare revenues in the future when the DRA is implemented,however; because our fiscal year ends June 30, our financial statements willnot reflect the full effect of these reductions until our fiscal year endingJune 30, 2008.  Our assumptions inreaching the foregoing estimate include the following:

·                  we did notconsider our mobile operations (for the fiscal year ended June 30, 2006,approximately 1% of our patient services revenues were from our mobileoperations);

·                  we sampled datafrom prior periods, but not for the quarter ended June 30, 2006 because webelieve the actual payor mix and imaging procedures performed had not changedmaterially;

·                  we analyzed onlyour consolidated partnerships; and

·                  we assumed thatthe full 25% contiguous body parts reimbursement reduction was in effect.

Our actual payormix and imaging procedures performed during future periods may be differentfrom the sample periods.  The foregoingestimates do not include any reductions that would result if third-party payorsother than Medicare implement comparable reductions.

Finally, in August 2006, CMS proposed an overalldecrease of 5.1% in the Medicare Part B fee schedule beginning January 1,2007.  The implementation of thisdecrease would further adversely impact our financial condition and results ofoperations.

All of the congressional and regulatory actionsdescribed above reflect industry-wide cost-containment pressures that webelieve will continue to affect healthcare providers for the foreseeablefuture.

*Medicaid.*TheMedicaid program is a jointly-funded federal and state program providingcoverage for low-income persons. In addition to federally-mandated basicservices, the services offered and reimbursement methods vary from state tostate.  In many states, Medicaidreimbursement is patterned after the Medicare program; however, an increasingnumber of states have established or are establishing payment methodologiesintended to provide healthcare services to Medicaid patients through managedcare arrangements.

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*Managed Care.*HealthMaintenance Organizations, or HMOs, Preferred Provider Organizations, or PPOs,and other managed care organizations attempt to control the cost of healthcareservices by a variety of measures, including imposing lower payment rates,preauthorization requirements, limiting services and mandating less costlytreatment alternatives. Managed care contracting is competitive andreimbursement schedules are at or below Medicare reimbursement levels. However,if Medicare reimbursement is reduced, we believe that managed careorganizations may also reduce or otherwise limit reimbursement in response toreductions in government reimbursement, which could have an adverse impact onour financial condition and results of operations.  The development and expansion of HMOs, PPOs andother managed care organizations within our core markets could have a negativeimpact on utilization of our services in certain markets and/or affect therevenues per procedure which we can collect, since such organizations willexert greater control over patients’ access to diagnostic imaging services, theselection of the provider of such services and the reimbursement thereof.

Some states have adopted or expanded laws orregulations restricting the assumption of financial risk by healthcareproviders which contract with health plans. While we are not currently subjectto such regulation, we or our customers may in the future be restricted in ourability to assume financial risk, or may be subjected to reporting requirementsif we do so. Any such restrictions or reporting requirements could negativelyaffect our contracting relationships with health plans.

*PrivateInsurance.*Privatehealth insurance programs generally have authorized payment for our services onsatisfactory terms. However, if Medicare reimbursement is reduced, we believethat private health insurance programs may also reduce or otherwise limitreimbursement in response to reductions in government reimbursement, whichcould have an adverse impact on our financial condition and results of operations.These reductions may be similar to the reimbursement reductions set forth inthe DRA.  We have received notice orindications from a few third-party payors that they intend to implement thereduction for multiple images on contiguous body parts and additional payorsmay propose to implement this reduction as well.  If additional third-party payors were topropose such reductions, and such proposals were implemented, it would furthernegatively affect our financial condition and results of operations.

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

**Revenues**

We earn revenuesby providing services to patients, hospitals and other healthcareproviders.  Our patient services revenuesare billed, on a fee-for-service basis, directly to patients or third-partypayors such as managed care organizations, Medicare, Medicaid, commercialinsurance carriers and worker’s compensation funds, collectively payors.  Patient services revenues also includebalances due from patients, which are primarily collected at the time theprocedure is performed.  Our charge for aprocedure is comprised of charges for both the technical and professionalcomponents of the service.  Patientservices revenues are presented net of (1) related contractual adjustments,which represent the difference between our charge for a procedure and what wewill ultimately receive from the payors, and (2) payments due to radiologistsfor interpreting the results of the diagnostic imaging procedures.  Our billing system does not generatecontractual adjustments.  Contractualadjustments are manual estimates based upon an analysis of historicalexperience of contractual payments from payors and the outstanding accountsreceivables from payors.  Contractualadjustments are written off against their corresponding asset account at thetime payment is received from a payor, with a reduction to the allowance forcontractual adjustments to the extent such an allowance was previouslyrecorded.  We report payments toradiologists on a net basis because (1) we are not the primary obligor for theprovision of professional services, (2) the radiologists receive contractuallyagreed upon amounts from collections and (3) the radiologists bear the risk ofnon-collection; however, we have recently entered into arrangements withseveral radiologists pursuant to which we pay the radiologists directly fortheir professional services on an agreed upon contractual rate. With respect tothese arrangements, the professional component is included in our revenues, andour payments to the radiologists are included in costs of services.  Our collection policy is to obtain allrequired insurance information at the time a procedure is scheduled, and tosubmit

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an invoice to thepayor immediately after a procedure is completed.  Most third-party payors requirepreauthorization before an MRI, PET, or PET/CT procedure is performed on apatient.

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

The provision for doubtful accounts related torevenues is reflected as an operating expense rather than a reduction ofrevenues and represents our estimate of amounts that will be uncollectible frompatients, payors, hospitals and other healthcare providers.  The provision for doubtful accounts includesamounts to be written off with respect to specific accounts involving customerswhich are financially unstable or materially fail to comply with the paymentterms of their contract and other accounts based on our historical collectionexperience, including payor mix and the aging of patient accounts receivablesbalances.  Estimates of uncollectibleamounts are revised each period, and changes are recorded in the period theybecome known. Receivables deemed to be uncollectible, either through a customerdefault on payment terms or after reasonable collection efforts have beenexhausted, are fully written off against their corresponding asset account,with a reduction to the allowance for doubtful accounts to the extent such anallowance was previously recorded.  Ourhistorical write-offs for uncollectible accounts are not concentrated in aspecific payor class.

The following illustrates our payor mix based onrevenues for the year ended June 30, 2006:
| Percent of Total Revenues                         | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|
| Hospitals,  physician groups, and other healthcare providers (1) |       | 45         | %          |
| Managed care and  insurance                                      |       | 38         | %          |
| Medicare                                                         |       | 11         | %          |
| Medicaid                                                         |       | 3          | %          |
| Workers’  compensation                                      |       | 2          | %          |
| Other, including  self-pay patients                              |       | 1          | %          |

 

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(1)                            Nosingle hospital, physician group or other healthcare provider accounted formore than 5% of our total revenues.

Asof June 30, 2006, our days sales outstanding for trade accounts receivables ona net basis was 52 days.  We calculatedays sales outstanding by dividing accounts receivables, net of allowances, bythe three-month average revenue per day.

Theaging of our gross and net trade accounts receivables as of June 30, 2006 is asfollows (amounts in thousands):
| ** **                                                                                                                                                | ** ** | ** **  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | **120 days**  | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|--------------------|------------|------------|------------|
| ** **                                                                                                                                                | ** ** | **Current** | ** ** | **30 days** | ** ** | **60 days** | ** ** | **90 days** | ** ** | **and older** | ** ** | **Total**  | ** ** |
|                                                                                                                                                      |       |        |       |             |       |             |       |             |       |               |       |       |       |
| Hospitals,  physicians groups and other healthcare providers                                                                                              |       | $           | 11,721     |             | $          | 6,409            |       | $                | 1,229      |               | $          | 447        |       | $ | 407 |   | $ | 20,213 |   |
| Managed care and  insurance                                                                                                                               |       | 20,922      |       | 8,341            |       | 4,414            |       | 2,660            |       | 9,844              |       | 46,181     |       |
| Medicare/Medicaid                                                                                                                                         |       | 6,545       |       | 1,846            |       | 993              |       | 807              |       | 3,419              |       | 13,610     |       |
| Workers’  compensation                                                                                                                               |       | 1,121       |       | 754              |       | 489              |       | 372              |       | 2,424              |       | 5,160      |       |
| Other, including  self-pay patients                                                                                                                       |       | 310         |       | 168              |       | 152              |       | 178              |       | —             |       | 808        |       |
| Trade accounts  receivables                                                                                                                               |       | 40,619      |       | 17,518           |       | 7,277            |       | 4,464            |       | 16,094             |       | 85,972     |       |
|                                                                                                                                                      |       |        |       |             |       |             |       |             |       |               |       |       |       |
| Less:                    Allowances  for professional fees |       | (4,247      | )          | (1,631           | )          | (840             | )          | (564             | )          | (2,500             | )          | (9,782     | )          |
| Allowances for contractual adjustments                                                                                                                    |       | (13,470     | )          | (4,859           | )          | (2,637           | )          | (231             | )          | (1,515             | )          | (22,712    | )          |
| Allowances for doubtful accounts                                                                                                                          |       | (381        | )          | (204             | )          | (45              | )          | (1,916           | )          | (7,242             | )          | (9,788     | )          |
| Trade accounts  receivables, net                                                                                                                          |       | $           | 22,521     |             | $          | 10,824           |       | $                | 3,755      |               | $          | 1,753      |       | $ | 4,837 |   | $ | 43,690 |   |

 

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**Operating Expenses**

We operate in a capitalintensive industry that requires significant amounts of capital to fundoperations.  As a result, a highpercentage of our total operating expenses are fixed.  Our fixed costs include depreciation andamortization, debt service and capital lease payments, rent and operating leasepayments, salaries and benefit obligations, equipment maintenance expenses, andinsurance and vehicle operation costs. We expect that our costs for the salaries and benefits of technologistswill continue to increase for the foreseeable future because of the industry’scompetitive demand for their services. Due to the increase in our mobile PET and PET/CT facilities, which aremoved more frequently, our vehicle operation costs will continue to increaseuntil we can maximize geographic operating efficiencies.  Because a large portion of our operatingexpenses are fixed, any increase in our procedure volume disproportionatelyincreases our operating cash flow. Conversely, any decrease in our procedure volume disproportionatelydecreases our operating cash flow.  Ourvariable costs, which comprise only a small portion of our total operatingexpenses, include the cost of service supplies such as film, contrast media andradiopharmaceuticals used in PET and PET/CT procedures.

**Results of Operations**

Thefollowing table sets forth certain condensed historical financial dataexpressed as a percentage of revenues for each of the periods indicated:
| ** **                                          | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                |       |                                    |       |   |   |   |   |
| REVENUES                                            |       | 100.0                                   | %          | 100.0 | % | 100.0 | % |
|                                                |       |                                    |       |   |   |   |   |
| COSTS OF OPERATIONS:                                |       |                                    |       |   |   |   |   |
| Costs of  services                                  |       | 64.6                                    |       | 61.4 |   | 58.0 |   |
| Provision for  doubtful accounts                    |       | 1.7                                     |       | 1.8 |   | 1.7 |   |
| Equipment leases                                    |       | 1.1                                     |       | 0.7 |   | 0.3 |   |
| Depreciation and  amortization                      |       | 21.2                                    |       | 20.7 |   | 20.2 |   |
| Total costs of  operations                          |       | 88.6                                    |       | 84.6 |   | 80.2 |   |
|                                                |       |                                    |       |   |   |   |   |
| Gross profit                                        |       | 11.4                                    |       | 15.4 |   | 19.8 |   |
|                                                |       |                                    |       |   |   |   |   |
| CORPORATE OPERATING  EXPENSES                       |       | (7.7                                    | )          | (5.8 | ) | (5.6 | ) |
| (LOSS) GAIN ON SALES OF  CENTERS                    |       | —                                  |       | — |   | 0.7 |   |
| EQUITY IN EARNINGS OF  UNCONSOLIDATED PARTNERSHIPS  |       | 1.0                                     |       | 0.8 |   | 0.8 |   |
| INTEREST EXPENSE, net                               |       | (16.6                                   | )          | (14.2 | ) | (14.0 | ) |
| GAIN ON REPURCHASE OF  NOTES PAYABLE                |       | 1.0                                     |       | — |   | — |   |
| LOSS ON DISSOLUTION OF  PARTNERSHIP                 |       | (0.3                                    | )          | — |   | — |   |
| IMPAIRMENT OF GOODWILL  AND OTHER INTANGIBLE ASSETS |       | (62.3                                   | )          | — |   | — |   |
|                                                |       |                                    |       |   |   |   |   |
| (Loss) income  before income taxes                  |       | (73.5                                   | )          | (3.8 | ) | 1.7 |   |
|                                                |       |                                    |       |   |   |   |   |
| (BENEFIT) PROVISION FOR  INCOME TAXES               |       | (4.8                                    | )          | 4.8 |   | 0.7 |   |
|                                                |       |                                    |       |   |   |   |   |
| Net (loss)  income                                  |       | (68.6                                   | )%         | (8.6 | )% | 1.0 | % |

 

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The following table sets forth historical revenues bysegment for the periods indicated (amounts in thousands):
|                    | ** ** | **Years Ended June 30,** | ** ** |
|--------------------|------------|-----------------------------------------|------------|
| ** **         | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|               |       |                                    |       |   |   |   |   |
| Fixed operations   |       | $                                       | 191,637    |   | $ | 196,482 |   | $ | 176,763 |   |
| Mobile  operations |       | 114,661                                 |       | 120,391 |   | 114,121 |   |
| Total              |       | $                                       | 306,298    |   | $ | 316,873 |   | $ | 290,884 |   |

 

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

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

Revenues from ourfixed operations decreased approximately 2.5% from approximately$196.5 million for the year ended June 30, 2005, to approximately$191.6 million for the year ended June 30, 2006.  This decrease was due primarily to (1) a lossof revenues from the centers we sold, deconsolidated or closed during fiscal2006 and 2005 (approximately $5.9 million) and (2) lower revenues from ourexisting fixed-site centers (approximately $1.5 million), partially offset by(1) higher revenues from changes in payment arrangements with certainradiologists (approximately $2.1 million) and (2) increased revenues from theacquisition of a fixed-site center in San Ramon, California in March 2006(approximately $0.4 million).  Revenueshave been and will continue to be adversely affected by the negative trendsdescribed above.

Revenues from ourmobile operations decreased approximately 4.7% from approximately$120.4 million for the year ended June 30, 2005, to approximately $114.7million for the year ended June 30, 2006. This decrease was partially due to the dissolution of a mobilelithotripsy partnership during the second quarter of fiscal 2006 (approximately$1.4 million) and lower revenues from our existing mobile facilities (approximately$4.4 million).  This decrease was due tolower MRI and lithotripsy revenues, partially offset by an increase in PET/CTrevenues.  Our mobile operations revenueswere also adversely affected by Hurricanes Katrina, Rita and Wilma(approximately $0.2 million).  Revenueshave been and will continue to be adversely affected by the negative trendsdescribed above.

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

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

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

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higher payments toradiologists (approximately $2.0 million) discussed above; (3) higher equipmentmaintenance costs (approximately $1.3 million); (4) charges related to theclosure of centers (approximately $0.4 million); and (5) higher occupancy costs(approximately $0.4 million).

Costs ofoperations at our mobile operations decreased approximately 0.5% fromapproximately $98.1 million for the year ended June 30, 2005, to approximately$97.6 million for the year ended June 30, 2006. The decrease was due primarily to a reduction in costs associated withthe dissolution of a mobile lithotripsy partnership during the second quarterof fiscal 2006 (approximately $1.1 million), partially offset by higher costsat our existing mobile facilities (approximately $0.6 million).  The increase in costs at our existing mobilefacilities was primarily caused by higher travel and vehicle operations costs (approximately$1.4 million), partially offset by reduced bad debt expense related to certainmobile customers (approximately $0.6 million).

*CorporateOperating Expenses*: Corporate operating expenses increased approximately 28.8% fromapproximately $18.4 million for the year ended June 30, 2005, to approximately$23.7 million for the year ended June 30, 2006. The increase was due primarily to (1) higher salaries and benefitsprimarily relating to the transfer of certain field responsibilities tocorporate (approximately $2.1 million); (2) increased legal expense relating tocertain legal proceedings described in Item 3. “Legal Proceedings”(approximately $0.9 million); (3) severance charges related to organizationalrealignments during the third and fourth quarters of fiscal 2006 (approximately$0.7 million); (4) costs incurred as a result of a national sales meeting inSeptember 2005 (approximately $0.7 million); and (5) higher consulting costsrelated to revenue enhancement initiatives (approximately $0.3 million),partially offset by a charge for severance payments for a terminated employeeduring the first quarter of fiscal 2005 (approximately $0.8 million).

*InterestExpense, net:*  Interestexpense, net increased approximately 13.1% from approximately $44.9 millionfor the year ended June 30, 2005, to approximately $50.8 million for theyear ended June 30, 2006.  The increasewas due primarily to higher interest rates on our variable rate indebtedness,partially offset by lower outstanding debt due to principal payments on capitallease obligations.

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

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

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

*(Benefit)Provision for Income Taxes: *(Benefit)provision for income taxes changed from a provision of approximately $15.1million for the year ended June 30, 2005 to a benefit of approximately $14.8million for the year ended June 30, 2006. As a result of our pre-tax loss for the year ended June 30, 2006 andanticipated future losses, we determined that a valuation allowance continuedto be necessary due to the uncertainty of the future realization of netoperating loss carryforwards and other assets.  This valuation allowancedoes not affect our cash flows or the timing of income taxes payable in thefuture.  The net deferred tax liability of approximately $15.2 million atthe year ended June 30, 2005 was the result of financial statement and taxbasis differences for goodwill.  These differences were not expected to reversein the foreseeable future.  In the year ended June 30, 2006 this deferredtax liability was reduced to $3.5 million as a result of the impairmentcharges, net of recording a deferred tax liability related to financial and taxbasis differences on our indefinite-lived other intangible assets.

***Years Ended June 30, 2005 and 2004***

*Revenues:* Revenues increased approximately 8.9% from approximately $290.9 millionfor the year ended June 30, 2004, to approximately $316.9 million forthe year ended June 30, 2005.  This increase was due to higherrevenues from our fixed operations (approximately $19.7 million) and our mobileoperations (approximately $6.3 million).

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Revenues from ourfixed operations and mobile operations represented approximately 62% and 38%,respectively, of our total revenues for the year ended June 30, 2005.

Revenues from ourfixed operations increased approximately 11.1% from approximately$176.8 million for the year ended June 30, 2004, to approximately$196.5 million for the year ended June 30, 2005.  The increasewas due primarily to (1) the CMI acquisition (approximately$29.7 million); and (2) revenues from the fixed-site centers weopened in fiscal 2005 and 2004 (approximately $1.5 million), partiallyoffset by a reduction in (1) revenues from our existing fixed-sitecenters; and (2) revenues from the fixed-site centers we sold in fiscal2005 and 2004 (approximately $1.3 million).  Revenues at our existingconsolidated fixed-site centers decreased approximately 3.1% because of(1) a decrease in procedure volume at the fixed-site centers as a resultof the adverse factors affecting our fixed operations discussed above; and(2) a decrease in our average reimbursement from payors.

Revenues from ourmobile operations increased approximately 5.5% from approximately$114.1 million for the year ended June 30, 2004, to approximately$120.4 million for the year ended June 30, 2005.  The increase wasdue to (1) revenues from our existing mobile facilities (approximately$4.4 million); and (2) the CDL acquisition (approximately$1.9 million).  The increase in revenues from our existing mobilefacilities was the result of higher PET and PET/CT revenues (approximately $5.8million), partially offset by lower MRI and other revenues (approximately $1.4million).  The increase in PET and PET/CT revenues was primarily due to anincrease in the number of PET and PET/CT facilities in service.  Thedecrease in MRI revenues was due to fewer MRI facilities in service and theloss of some high volume customer contracts.  The loss of high volumecustomers is primarily the result of customers reaching sufficient patientvolumes to finance the cost of acquiring their own system.  This hasincreased in recent years as equipment manufacturers have offered attractivefinancing to high volume customers.  We experienced losses of high volumecustomers across our network and not just in any one region.

Approximately 57%of our total revenues for the year ended June 30, 2005 were generated frompatient services revenues.  Patient services revenues from fixedoperations and mobile operations represented approximately 99% and 1%,respectively, of total patient services revenues for the year endedJune 30, 2005.  Approximately 43% of our total revenues for the yearended June 30, 2005, were generated from contract services revenues. Contract services revenues from fixed operations and mobile operationsrepresented approximately 13% and 87%, respectively, of total contract servicesrevenues for the year ended June 30, 2005.

*Costsof Operations: *Costs of operations increasedapproximately 14.9% from approximately $233.4 million for the year endedJune 30, 2004, to approximately $268.2 million for the year endedJune 30, 2005.  This increase was due primarily to (1) the CDLand CMI acquisitions (approximately $1.2 million and $22.4 million,respectively); (2) increased costs at our mobile operations (approximately$9.8 million); (3) an increase in salaries and benefits at our billingoperations, primarily related to the CMI acquisition (approximately $0.9million); and (4) a charge related to the consolidation of certain billingoffices (approximately $0.3 million).

Costs ofoperations at our fixed operations increased approximately 16.5% fromapproximately $128.8 million for the year ended June 30, 2004, toapproximately $150.1 million for the year ended June 30, 2005.  Theincrease was due to (1) the CMI acquisition (approximately $22.4 million);(2) increased costs at the fixed-site centers we opened in fiscal 2005 and2004 (approximately $1.4 million); (3) a charge for the closure of afixed-site center (approximately $0.5 million); (4) a charge for severancepayments for a terminated employee (approximately $0.3 million); and(5) an increase in costs at our existing fixed-site centers, partiallyoffset by reduced costs from the fixed-site centers we sold in fiscal 2005 and2004 (approximately $1.3 million).

Costs ofoperations at our mobile operations increased approximately 12.6% fromapproximately $87.1 million for the year ended June 30, 2004, toapproximately $98.1 million for the year ended June 30, 2005.  Theincrease was due to (1) the CDL acquisition (approximately $1.2 million);and (2) increased costs at our existing mobile facilities (approximately$9.8 million).  The increase in costs at our existing mobile facilitieswas due primarily to (1) higher salaries and benefits, particularlytechnologists (approximately $4.5 million); (2) an increase in equipmentlease costs (approximately $2.1 million); (3) an increase in vehicle costs(approximately $0.2 million); and (4) an increase in medical supply costs(approximately $0.8 million).  Our PET and PET/CT facilities, which havehigher (1) medical supply costs relating to the use ofradiopharmaceuticals; (2) technologist salaries relating to the shortageof PET technologists and the number of technologists needed to operate PET/CTfacilities; and (3) vehicle operation costs because PET and PET/CTfacilities are moved more frequently, accounted for approximately $6.9 millionof

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the increase incosts for our mobile operations.  We believe that these higher costs willcontinue as we add additional PET/CT facilities.

*CorporateOperating Expenses*:  Corporate operating expensesincreased approximately 13.6% from approximately $16.2 million for the yearended June 30, 2004, to approximately $18.4 million for the year endedJune 30, 2005.  The increase was due primarily to (1) additionallegal and accounting costs primarily related to Sarbanes-Oxley implementation(approximately $0.9 million);  (2) consulting costs (approximately$0.5 million); (3) higher salaries and benefits (approximately $0.5million); and (4) a charge for severance payments for a terminatedemployee (approximately $0.8 million).  In 2005, we did not have any costsand expenses related to a withdrawn public offering, which totaledapproximately $1.7 million in 2004.

*InterestExpense, net:*  Interest expense, net increasedapproximately 10.3% from approximately $40.7 million for the year endedJune 30, 2004, to approximately $44.9 million for the year endedJune 30, 2005.  The increase was due primarily to additionalindebtedness related to the CDL and CMI acquisitions and an increase in theinterest rate on our variable rate indebtedness, partially offset by areduction due to principal payments on notes payable and capital leaseobligations.

*Provisionfor Income Taxes:*  Provision for income taxes increasedfrom approximately $2.0 million for the year ended June 30, 2004, toapproximately $15.1 million for the year ended June 30, 2005. As a result of our pre-tax loss for the year ended June 30, 2005 andanticipated future tax losses, we determined in the fourth quarter that avaluation allowance was necessary due to the uncertainty of future realizationof net operating loss carryforwards and other assets.  This decision wasbased on our anticipated future cumulative pre-tax losses, the maindetermination for recording such an allowance.  In determining the netasset subject to a valuation allowance, we excluded a deferred tax liabilityrelated to an asset with an indefinite useful life that is not expected toreverse in the foreseeable future.  This resulted in a net deferred taxliability of approximately $15.2 million after application of the valuationallowance.  This valuation allowance does not affect our cash flows or thetiming of income taxes payable in the future.

**Financial Condition, Liquidity and Capital Resources**

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

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

·                  difficultyfunding our capital projects; and

·                  more stringentfinancing and leasing terms from equipment manufacturers and other financingresources.

*Liquidity: *Webelieve, based on currently available information, that future net cashprovided by operating activities and our amended revolving credit facility willbe adequate to meet our operating cash and debt service requirements for atleast the next twelve months.  Moreover,if our net cash provided by operating activities declines further than we have anticipated,we are prepared to take steps to conserve our cash, including delaying or furtherrestructuring our capital projects (entering into capital and operating leasesrather than using cash). We believe that steps such as these would still enableto us meet our liquidity needs even if net cash provided by operatingactivities falls below what we have anticipated. However, if our net cashprovided by operating activities severely declines, we may be unable to serviceour indebtedness or our liquidity needs. If we are unable to service our indebtednessor fund our other liquidity needs, we may need to restructure or refinance allor a portion of our indebtedness on or before maturity or sell certain of ourassets. We cannot assure you that we will be able to restructure or refinanceany of our indebtedness on commercially reasonable terms, if at all, whichcould cause us to default on our indebtedness and impair our liquidity. Anyrefinancing of our indebtedness could be at higher interest rates and mayrequire us to comply with more onerous covenants, which could further restrictour business operations. Although we are prepared to take these additionalsteps if necessary we cannot be certain such steps would be effective. However,we continue to believe that we will be able to meet our liquidity needs toallow us to continue normal operations.

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

·                  interestpayments relating to our senior secured floating rate notes and unsecuredsenior subordinated notes;

·                  capitalprojects;

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·                  working capitalrequirements to support business growth;

·                  potentialacquisitions; and

·                  potentialrepurchases of a portion of our unsecured senior subordinated notes.

There are noscheduled principal repayments on our senior secured floating rate notes andunsecured senior subordinated notes until 2011. Notwithstanding the foregoing, we may from time to time, in one or moreopen market or privately negotiated transactions, repurchase a portion of ouroutstanding unsecured senior subordinated notes due 2011.  Any such repurchases shall be in accordancewith the terms of agreements governing our material indebtedness.

Cash and cashequivalents as of June 30, 2006 were approximately $28.2 million.  Our primary source of liquidity is cashprovided by operating activities.  Ourability to generate cash flows from operating activities is based upon severalfactors including the following:

·                  the volume ofpatients at our fixed-site centers;

·                  thereimbursement we receive for our services;

·                  the demand forour mobile services;

·                  our ability tocontrol expenses; and

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

A summary of cash flowsis as follows (amounts in thousands):
|                                                      | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net cash  provided by operating activities           |       | $                                       | 37,628     |   | $ | 64,045 |   | $ | 62,904 |   |
| Net cash used in  investing activities               |       | (28,507                                 | )          | (35,759 | ) | (145,034 | ) |
| Net cash (used  in) provided by financing activities |       | (1,752                                  | )          | (37,859 | ) | 92,988 |   |
|                                                 |       |                                    |       |   |   |   |   |
| Increase (decrease) in  cash and cash equivalents    |       | $                                       | 7,369      |   | $ | (9,573 | ) | $ | 10,858 |   |

 

Net cash providedby operating activities was approximately $37.6 million for the year ended June30, 2006 and resulted primarily from (1) the net loss before depreciation,amortization, deferred taxes and impairment of goodwill and other intangibleassets; (2) an increase in accounts payable and accrued expenses (approximately$3.5 million); and (3) a decrease in trade accounts receivables, net(approximately $3.0 million).  Theincrease in accounts payable and accrued expenses is primarily due to accruedinterest costs related to the timing of interest payments on our senior securedfloating rate notes.  The decrease intrade accounts receivables, net is primarily due to reduced revenues.

Net cash used ininvesting activities was approximately $28.5 million for the year endedJune 30, 2006.  Cash used in investingactivities resulted primarily from (1) our purchase or upgrade of diagnosticimaging equipment at our existing fixed-site centers and mobile facilities(approximately $30.9 million) and (2) our purchase of a majority ownershipinterest in a joint venture discussed above (approximately $2.3 million, net ofcash acquired), partially offset by cash proceeds from our net sale ofshort-term investments (approximately $5.0 million).

Net cash used infinancing activities was approximately $1.8 million for the year ended June 30,2006. Cash used in financing activities resulted primarily from capital leasepayments (approximately $5.4 million), offset by the net proceeds received fromthe issuance of $300 million aggregate principal amount of senior securedfloating rate notes (approximately $4.1 million).

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The followingtable sets forth our Adjusted EBITDA for the years ended June 30, 2006, 2005and 2004.  We define Adjusted EBITDA asour earnings before interest, taxes, depreciation and amortization excludingthe gain on repurchase of notes payable, the loss on dissolution of partnershipand impairment of goodwill and other intangible assets.  Adjusted EBITDA has been included because webelieve that it is a useful tool for us and our investors to measure ourability to provide cash flows to meet debt service, capital expenditure andworking capital requirements.  AdjustedEBITDA should not be considered an alternative to, or more meaningful than,income from company operations or other traditional indicators of operating performanceand cash flow from operating activities or other traditional indicators ofliquidity, in each case determined in accordance with accounting principlesgenerally accepted in the United States.  We present the discussion ofAdjusted EBITDA because covenants in the agreements governing our materialindebtedness contain ratios based on this measure.   While Adjusted EBITDA is used as a measureof operations and the ability to meet debt service requirements, it is notnecessarily comparable to other similarly titled captions of other companiesdue to differences in methods of calculations. Our reconciliation of net cash provided by operating activities toAdjusted EBITDA is as follows (amounts in thousands):
| ** **                                        | ** ** | **Years Ended June 30,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                              |       |                                    |       |   |   |   |   |
| Net cash  provided by operating activities        |       | $                                       | 37,628     |   | $ | 64,045 |   | $ | 62,904 |   |
| (Benefit) Provision for income taxes              |       | (14,824                                 | )          | 15,069 |   | 1,950 |   |
| Interest expense, net                             |       | 50,754                                  |       | 44,860 |   | 40,682 |   |
| (Loss) gain on sales of centers                   |       | —                                  |       | (170 | ) | 2,129 |   |
| Amortization of debt issuance costs               |       | (3,051                                  | )          | (3,173 | ) | (2,911 | ) |
| Equity in earnings of unconsolidated partnerships |       | 3,072                                   |       | 2,613 |   | 2,181 |   |
| Distributions from unconsolidated partnerships    |       | (3,387                                  | )          | (2,621 | ) | (2,054 | ) |
| Net change in operating assets and liabilities    |       | (6,121                                  | )          | (7,086 | ) | (592 | ) |
| Net change in deferred income taxes               |       | 15,224                                  |       | (15,224 | ) | — |   |
|                                              |       |                                    |       |   |   |   |   |
| Adjusted EBITDA                                   |       | $                                       | 79,295     |   | $ | 98,313 |   | $ | 104,289 |   |

 

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

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

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

Adjusted EBITDAdecreased approximately 5.8% from approximately $104.3 million for the yearended June 30, 2004, to approximately $98.3 million for the year endedJune 30, 2005.  This decrease was due primarily to (1) anincrease in corporate operating expenses (approximately $2.2 million),(2) an increase in salaries and benefits at our billing operationsprimarily related to the CMI acquisition (approximately $0.9 million) and(3) a decrease in Adjusted EBITDA from our mobile operations (approximately$2.9 million), partially offset by an increase in Adjusted EBITDA from ourfixed operations (approximately $0.7 million).

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Adjusted EBITDAfrom our fixed operations increased 1.0% from approximately $73.4 million forthe year ended June 30, 2004, to approximately $74.1 million for the yearended June 30, 2005.  This increase was due primarily to (1) theCMI acquisition (approximately $11.1 million) and (2) the fixed-sitecenters we opened in fiscal 2005 (approximately $0.6 million), partially offsetby (1) a decrease at our existing fixed-site centers (approximately $7.5million), primarily related to decreased procedure volume and reimbursementdiscussed above, (2) the elimination of the gain on sale of the fixed-sitecenter we sold in fiscal 2004 (approximately $2.1 million), (3) theelimination of EBITDA at the fixed-site centers we sold in fiscal 2005 and 2004(approximately $0.4 million) and (4) a charge for severance payments for aterminated employee (approximately $0.3 million).

Adjusted EBITDAfrom our mobile operations decreased approximately 5.2% from approximately$56.3 million for the year ended June 30, 2004, to approximately $53.4million for the year ended June 30, 2005.  This decrease was due to areduction at our existing mobile facilities (approximately $4.0 million),primarily related to the increase in costs discussed above, partially offset bythe CDL acquisition (approximately $1.1 million).

*Capital Projects: *In fiscal 2006, wepurchased or leased six MRI systems, four PET/CT systems and three CT systems.   As of June 30, 2006, we have committed topurchase or lease at an approximate aggregate cost of $10.5 million, 11diagnostic imaging systems and other ancillary system equipment through April2007.  We expect to use either internallygenerated funds or leases to finance the purchase of such equipment.  We may purchase, lease or upgrade otherdiagnostic imaging systems as opportunities arise to place new equipment intoservice when new contract services agreements are signed, existing agreements arerenewed, acquisitions are completed, or new fixed-site centers and mobilefacilities are developed in accordance with our core market strategy.

*SeniorSecured Notes, Credit Facility and Unsecured Senior Subordinated Notes: *In September 2005, throughInSight, we issued $300 million aggregate principal amount of senior securedfloating rate notes due 2011, or Floating Rate Notes.  We used the proceeds from this issuance torepay all borrowings under our credit facility with Bank of America, N.A. and asyndicate of other lenders, discussed below, repurchase approximately $55.5million aggregate principal amount of our unsecured senior subordinated notes,discussed below, and pay certain related fees and expenses.  The Floating Rate Notes mature in November2011 and bear interest at LIBOR plus 5.25% per annum, payable quarterly.  The Floating Rates Notes are secured by afirst priority lien on substantially all of InSight’s and the guarantors’existing and future tangible and intangible personal property including,without limitation, equipment, certain contracts and intellectual property, butare not secured by a lien on their real property, accounts receivables andrelated assets, cash accounts related to receivables and certain other assets.In addition, the Floating Rate Notes are secured by a portion of InSight’sstock and the stock or other equity interests of InSight’s subsidiaries.  The Floating Rate Notes are redeemable at ouroption, in whole or in part, on or after November 1, 2006.  In January 2006, we exchanged the FloatingRates Notes that were originally issued in September 2005, for a like principalamount of Floating Rate Notes that had been registered with the SEC.

Concurrently withthe issuance of the Floating Rate Notes and repayment of all outstandingborrowings under the credit facility, we amended and restated our creditfacility to reduce and modify the $50.0 million revolving credit facility to anasset-based revolving credit facility of up to $30.0 million.  As of June 30, 2006, we had approximately$27.0 million of availability under the amended revolving credit facility,based on our eligible borrowing base.  Asof June 30, 2006, there were no borrowings under the amended revolving creditfacility.  As of June 30, 2006, there were letters of credit of approximately $2.6million outstanding under the amended revolving credit facility.  Borrowings under the amended revolvingcredit facility bear interest at LIBOR plus 2.5% per annum or, at our option,the base rate (which is the Bank of America, N.A. prime rate).  Weare required to pay an unused facility fee of 0.50% per annum, payablequarterly, on unborrowed amounts on the amended revolving credit facility.  The amended revolving credit facilitycontains a fixed charge coverage covenant that we would be required to meet ifour eligible borrowing base (net of outstanding borrowings) plus eligible cashfalls below $15 million.  If we are unable to meet this covenant ouravailability under the amended revolving credit facility would be restricted tokeep our eligible borrowing base (net of outstanding borrowings) plus eligiblecash above $15 million.  All obligationsunder the amended revolving credit facility are secured, subject to certainexceptions, by a first priority security interest in all of InSight’s, theco-borrowers’ and the guarantors’: (i) accounts; (ii) instruments, chattelpaper (including, without limitation, electronic chattel paper), documents,letter-of-credit rights and supporting obligations relating to any account;(iii) general intangibles that relate to any account; (iv) monies inthe possession or under the control of the lenders under the amended revolvingcredit facility; (v) products and cash and non-cash proceeds of theforegoing; (vi) certain deposit accounts and any deposit accountsestablished for the collection of proceeds from the assets described above; and(vii) books and records pertaining to any of the foregoing. The securityinterest purported to be created in respect of deposit accounts, as describedabove, is subject to any restrictions imposed by applicable law.

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In addition to theindebtedness under the Floating Rate Notes, through InSight, we haveoutstanding $194.5 million of unsecured senior subordinated notes, or FixedRate Notes.  The Fixed Rate Notes maturein November 2011, bear interest at 9.875% per annum, payable semi-annually andare redeemable at our option, in whole or in part, on or after November 1,2006.

In January 2006,through InSight, we purchased an interest rate cap contract.  The contract is for a term of two years, witha notional amount of $100 million and a LIBOR cap of 5.0%.   As of June 30, 2006, the fair value of theinterest rate cap contract was approximately $0.9 million.

The agreementsgoverning our amended revolving credit facility, Floating Rate Notes and FixedRate Notes contain restrictions on additional borrowing, capital projects,asset sales, dividend payments and certain other covenants.  As of June 30, 2006, we were in compliancewith these agreements.  The agreementsgoverning our amended revolving credit facility and Floating Rate Notesrestrict our ability to prepay other indebtedness, including the Fixed RateNotes.

*ContractualCommitments: * Asdefined by SEC reporting regulations, our contractual obligations as of June30, 2006 are as follows (amounts in thousands): 
| ** **                    | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------|------------|------------|------------|----------------------------|------------|
| ** **                    | ** ** | ** ** | ** ** | **Less than**              | ** ** | **1-3** | ** ** | **3-5** | ** ** | **After** | ** ** |
| ** **                    | ** ** | **Total**  | ** ** | **1 Year**                 | ** ** | **Years** | ** ** | **Years** | ** ** | **5 Years** | ** ** |
| Long-term debt obligations    |       | $          | 773,216    |                       | $          | 50,887 |   | $ | 101,821 |   | $ | 100,806 |   | $ | 519,702 |   |
| Capital lease obligations     |       | 9,288      |       | 5,602                      |       | 3,488 |   | 198 |   | — |   |
| Operating lease obligations   |       | 40,525     |       | 10,381                     |       | 15,729 |   | 8,555 |   | 5,860 |   |
| Purchase commitments          |       | 10,542     |       | 10,542                     |       | — |   | — |   | — |   |
|                          |       |       |       |                       |       |   |   |   |   |   |   |
| Total contractual obligations |       | $          | 833,571    |                       | $          | 77,412 |   | $ | 121,038 |   | $ | 109,559 |   | $ | 525,562 |   |

 

The long-term debtobligations and capital lease obligations include both principal and interestcommitments for the periods presented. The interest commitment on our Floating Rate Notes is based on the fixedinterest rate at June 30, 2006 (10.40%), after giving effect to our interestrate cap contract.

**Off-BalanceSheet Arrangements**

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

**CriticalAccounting Policies and Estimates**

Management’s discussionand analysis of financial condition and results of operations, as well asdisclosures included elsewhere in this Form 10-K are based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these consolidated financial statements requires management to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues, expenses and related disclosure of contingencies. We believethe critical accounting policies that most impact the consolidated financialstatements are described below. A summary of our significant accountingpolicies can be found in the notes to our consolidated financial statementswhich are included elsewhere in this Form 10-K.

*RevenueRecognition: *Revenuesfrom patient services and from contract services are recognized when servicesare provided. Patient services revenues are presented net of (1) relatedcontractual adjustments, which represent the difference between our charge fora procedure and what we will ultimately receive from private health insuranceprograms, Medicare, Medicaid and other federal healthcare programs, and(2) payments due to radiologists. We report payments made to radiologistson a net basis because (1) we are not the primary obligor for the provision ofprofessional services, (2) the radiologists receive contractually agreed uponamounts from collections and (3) the radiologists bear the risk ofnon-collection; however, we have recently entered into arrangements withseveral

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radiologists pursuant towhich we pay the radiologists directly for their professional services on anagreed upon contractual rate.  Withrespect to these arrangements, the professional component is included in ourrevenues, and our payments to the radiologists are included in costs ofservices.  Contract services revenues arerecognized over the applicable contract period. Revenues collected in advance are recorded as unearned revenue.

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

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

We evaluate thecarrying value of goodwill and other intangible assets, including the relatedamortization period, in the second quarter of each fiscal year.  Additionally, we review the carrying amountof goodwill and other intangible assets whenever events and circumstancesindicate that their respective carrying amounts may not be recoverable.Impairment indicators include, among other conditions, cash flow deficits,historic or anticipated declines in revenue or operating profit and adverselegal or regulatory developments.  In abusiness combination, goodwill is allocated to our two reporting units (mobileand fixed), which are the same as our reportable operating segments, based onrelative fair value of the assets acquired and liabilities assumed.  In evaluating goodwill and other intangibleassets not subject to amortization, we complete the two-step impairment test asrequired by SFAS 142.  In the first of atwo-step impairment test, we determine the fair value of these reporting unitsusing a discounted cash flow valuation model, market multiple model orappraised values, as appropriate.  SFAS142 requires us to compare the fair value for the reporting unit to itscarrying value on an annual basis to determine if there is potentialimpairment.  If the fair value of areporting unit exceeds its carrying value, goodwill of the reporting unit isconsidered not impaired and no further testing is required.  If the fair value does not exceed thecarrying value, the second step of the goodwill impairment test is performed tomeasure the amount of impairment loss, if any. The second step compares the implied fair value of the reporting unitwith the carrying amount of that goodwill.

For the year endedJune 30, 2006, based on the factors described above and in Note 7 to theconsolidated financial statements, which are a part of this Form 10-K, weperformed an interim valuation analysis in accordance with SFAS 142 using adiscounted cash flow valuation model and a market multiple model, and werecorded a non-cash goodwill impairment charge of approximately $189.4 millionrelated to our reporting units (approximately $126.8 million for our fixedreporting unit and approximately $62.6 for our mobile reporting unit).

We assess theongoing recoverability of our intangible assets subject to amortization bydetermining whether the intangible asset balance can be recovered over theremaining amortization period through projected undiscounted future cashflows.  If projected future cash flowsindicate that the unamortized intangible asset balances will not be

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recovered, anadjustment is made to reduce the net intangible asset to an amount consistentwith projected future cash flows discounted at our incremental borrowingrate.  Cash flow projections, althoughsubject to a degree of uncertainty, are based on trends of historicalperformance and management’s estimate of future performance, givingconsideration to existing and anticipated competitive and economicconditions.  In accordance with SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, werecorded a non-cash impairment charge related to our other intangible assets ofapproximately $1.4 million related to wholesale contracts in our mobilereporting unit.

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

**NewPronouncements**

In July 2006,the Financial Accounting Standards Board, or FASB, issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes - an interpretation ofFASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting foruncertainty in income taxes recognized in a company’s financialstatements.  FIN 48 prescribes a recognition threshold and measurementattribute for financial statement recognition and measurement of a tax positiontaken or expected to be taken in the tax return. We are required to adopt theprovisions of FIN 48 beginning in fiscal 2008.  We are currentlyevaluating the effect FIN 48 will have on our financial condition and resultsof operations.

In June 2005, the EmergingIssues Task Force, or EITF, reached a consensus on EITF 04-05, “Investor’sAccounting for an Investment in a Limited Partnership When the Investor Is theSole General Partner and the Limited Partners Have Certain Rights” (EITF04-05), which provides guidance on when a sole general partner shouldconsolidate a limited partnership.  A sole general partner in a limitedpartnership is presumed to control that limited partnership and thereforeshould include the limited partnership in its consolidated financialstatements, regardless of the sole general partner’s ownership interest in thelimited partnership.  The control presumption may be overcome if thelimited partners have the ability to remove the sole general partner orotherwise dissolve the limited partnership.  Other substantiveparticipating rights by the limited partners may also overcome the controlpresumption.  We were required to adopt the provisions of EITF 04-05 forall existing limited partnerships at the beginning of fiscal 2007.  The adoption of EITF 04-05 did not have amaterial impact on our financial condition and results of operations.

In May 2005, the FASB issued SFAS No.154, “Accounting Changes and Error Corrections —a replacement of APB Opinion No. 20 and FASB Statement No. 3”(SFAS 154).  SFAS 154 changes therequirements for the accounting for and reporting of a change in accountingprinciple.  These requirements apply toall voluntary changes and changes required by an accounting pronouncement inthe unusual instance that a pronouncement does not include specific transitionprovisions.  SFAS 154 is effective forfiscal years beginning after December 15, 2005. As such, we were required to adopt these provisions at the beginning offiscal 2007.  The adoption of SFAS 154did not have a material impact on our financial condition and results ofoperations.

In December 2004, the FASB issued SFASNo. 123R, “Share-Based Payment” (SFAS 123R). SFAS 123R requires expensing of stock options and other share-basedpayments and supersedes FASB’s earlierrule (SFAS 123) that had allowed companies to choose between expensing stockoptions or showing pro-forma disclosure only. We are required to implement SFAS 123R at the beginning of fiscal 2007.  The impact of adopting SFAS 123R is not expectedto be materially different than the pro-forma disclosures under SFAS 123included in Note 2 to the consolidated financial statements, which are a partof this Form 10-K.

42

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

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

Ourmarket risk exposure relates primarily to interest rates, where we willperiodically use interest rate swaps to hedge variable interest rates onlong-term debt under our credit facility. We do not engage in activities usingcomplex or highly leveraged instruments.

**Interest Rate Risk**

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

In January 2006, throughInSight, we purchased an interest rate cap contract.  The contract is for a term of two years, witha notional amount of $100 million and a LIBOR cap of 5.0%.  As of June 30, 2006, the fair value of theinterest rate cap contract was approximately $0.9 million.  The contract exposes us to credit risk in theevent that the counterparty to the contract does not or cannot meet itsobligations.  The counterparty to thecontract is a major financial institution and we expect the counterparty to beable to perform its obligations under the contract.

Our future earnings andcash flows and some of our fair values relating to financial instruments aredependent upon prevailing market rates of interest, such as LIBOR. Based oninterest rates and outstanding balances as of June 30, 2006, and after givingeffect to our interest rate cap contract discussed above, a 1% increase ordecrease in interest rates on our $299.1 million of floating rate debt wouldaffect annual future earnings and cash flows by approximately $2.0 and $3.0million, respectively.  The weightedaverage interest rate on our floating indebtedness as of June 30, 2006 was10.40%.  The fair value of our FloatingRate Notes as of June 30, 2006 was approximately $272 million.

We also have outstanding$194.5 million of Fixed Rate Notes, which mature in November 2011 and bearinterest at 9.875%, payable semi-annually. The fair value of our Fixed Rate Notes as of June 30, 2006 wasapproximately $86 million.

These amounts aredetermined by considering the impact of hypothetical interest rates on ourborrowing cost. These analyses do not consider the effects of the reduced levelof overall economic activity that could exist in that environment. Further, inthe event of a change of this magnitude, we would consider taking actions tofurther mitigate our exposure to any such change. Due to the uncertainty of thespecific actions that would be taken and their possible effects, however, thissensitivity analysis assumes no changes in our capital structure.

**Inflation****Risk**

We do not believe thatinflation has had a material adverse impact on our business or operatingresults during the periods presented. We cannot assure you, however, that ourbusiness will not be affected by inflation in the future.

43

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**PART II**

**ITEM 8.****                          FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

**INSIGHT HEALTH SERVICES HOLDINGS CORP. ANDSUBSIDIARIES**

Index toConsolidated Financial Statements

for the YearsEnded June 30, 2006, 2005 and 2004
|                                                          |   |   |   |
|----------------------------------------------------------|--------|--------|--------|
| REPORT OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM |   |   |   |
|                                                     |   |   |   |
| CONSOLIDATED BALANCE SHEETS                              |   |   |   |
|                                                     |   |   |   |
| CONSOLIDATED STATEMENTS OF  OPERATIONS                   |   |   |   |
|                                                     |   |   |   |
| CONSOLIDATED STATEMENTS OF  STOCKHOLDERS’ EQUITY    |   |   |   |
|                                                     |   |   |   |
| CONSOLIDATED STATEMENTS OF  CASH FLOWS                   |   |   |   |
|                                                     |   |   |   |
| NOTES TO CONSOLIDATED  FINANCIAL STATEMENTS              |   |   |   |
|                                                     |   |   |   |
| SCHEDULE II - VALUATION AND  QUALIFYING ACCOUNTS         |   |   |   |

 

In accordance with****SEC Rule 3-10 of Regulation S-X, theconsolidated financial statements of InSight Health Services Holdings Corp.(Company) are included herein and separate financial statements ofInSight Health Services Corp. (InSight), the Company’s wholly owned subsidiary,and InSight’s subsidiary guarantors are not included.  Condensed financial data for InSight and itssubsidiary guarantors is included in Note 19 to the consolidated financialstatements.

44

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**Reportof Independent Registered Public Accounting Firm**

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

In ouropinion, the consolidated financial statements listed in the accompanying indexpresent fairly, in all material respects, the financial position of InSightHealth Services Holdings Corp. and its subsidiaries (the “Company”) atJune 30, 2006 and 2005 and the results of their operations and their cashflows for each of the three years in the period ended June 30, 2006 inconformity with accounting principles generally accepted in the United Statesof America.  In addition, in our opinion,the financial statement schedule listed in the accompanying index presentsfairly, in all material respects, the information set forth therein when readin conjunction with the related consolidated financial statements.  These financial statements and the financialstatement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements and financial statement schedule based on ouraudits. We conducted our audits of these statements in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.
| /s/ PRICEWATERHOUSECOOPERS  LLP |   |
|---------------------------------|--------|
|                            |   |
| Orange County,  California      |
|                            |
| September 27,  2006        |

 

45

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

**CONSOLIDATED BALANCE SHEETS**

**AS OF JUNE30, 2006 AND 2005**

(Amounts in thousands, exceptshare data)

 
| ** **                                                                                                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                                                                                          |       |     |       |     |       |
| CURRENT ASSETS:                                                                                                                 |       |     |       |     |       |
| Cash and cash equivalents                                                                                                       |       | $        | 28,208     |     | $          | 20,839 |   |
| Trade accounts receivables, net                                                                                                 |       | 43,690   |       | 46,450   |       |
| Short-term investments                                                                                                          |       | —   |       | 5,000    |       |
| Other current assets                                                                                                            |       | 8,389    |       | 7,970    |       |
| Total current assets                                                                                                            |       | 80,287   |       | 80,259   |       |
|                                                                                                                            |       |     |       |     |       |
| PROPERTY AND  EQUIPMENT, net                                                                                                    |       | 181,026  |       | 209,461  |       |
| INVESTMENTS IN  PARTNERSHIPS                                                                                                    |       | 3,051    |       | 3,513    |       |
| OTHER ASSETS                                                                                                                    |       | 17,904   |       | 16,301   |       |
| OTHER INTANGIBLE  ASSETS, net                                                                                                   |       | 31,473   |       | 36,459   |       |
| GOODWILL                                                                                                                        |       | 94,463   |       | 278,530  |       |
|                                                                                                                            |       | $        | 408,204    |     | $          | 624,523 |   |
|                                                                                                                            |       |     |       |     |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                       |       |     |       |     |       |
| CURRENT  LIABILITIES:                                                                                                           |       |     |       |     |       |
| Current portion of notes payable                                                                                                |       | $        | 555        |     | $          | 2,795 |   |
| Current portion of capital lease obligations                                                                                    |       | 5,105    |       | 4,927    |       |
| Accounts payable and other accrued expenses                                                                                     |       | 40,077   |       | 36,469   |       |
| Total current liabilities                                                                                                       |       | 45,737   |       | 44,191   |       |
|                                                                                                                            |       |     |       |     |       |
| LONG-TERM  LIABILITIES:                                                                                                         |       |     |       |     |       |
| Notes payable, less current portion                                                                                             |       | 494,203  |       | 485,531  |       |
| Capital lease obligations, less current portion                                                                                 |       | 3,519    |       | 8,315    |       |
| Other long-term liabilities                                                                                                     |       | 3,166    |       | 3,538    |       |
| Deferred income taxes                                                                                                           |       | 3,472    |       | 15,224   |       |
| Total long-term liabilities                                                                                                     |       | 504,360  |       | 512,608  |       |
|                                                                                                                            |       |     |       |     |       |
| COMMITMENTS AND  CONTINGENCIES (Note 10)                                                                                        |       |     |       |     |       |
|                                                                                                                            |       |     |       |     |       |
| STOCKHOLDERS’  EQUITY:                                                                                                     |       |     |       |     |       |
| Common stock, $.001 par value, 10,000,000 shares  authorized, 5,468,814 shares issued and outstanding at June 30, 2006 and 2005 |       | 5        |       | 5        |       |
| Additional paid-in capital                                                                                                      |       | 87,081   |       | 87,081   |       |
| Accumulated other comprehensive income                                                                                          |       | 601      |       | —   |       |
| Accumulated deficit                                                                                                             |       | (229,580 | )          | (19,362  | )          |
| Total stockholders’ (deficit) equity                                                                                       |       | (141,893 | )          | 67,724   |       |
|                                                                                                                            |       | $        | 408,204    |     | $          | 624,523 |   |

 

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

46

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THEYEARS ENDED JUNE 30, 2006, 2005 AND 2004**

(Amounts in thousands)

 
| ** **                                          | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| REVENUES:                                           |       |                                    |       |   |   |   |   |
| Contract services                                   |       | $                                       | 134,406    |   | $ | 136,537 |   | $ | 129,193 |   |
| Patient services                                    |       | 171,892                                 |       | 180,336 |   | 161,691 |   |
| Total revenues                                      |       | 306,298                                 |       | 316,873 |   | 290,884 |   |
|                                                |       |                                    |       |   |   |   |   |
| COSTS OF  OPERATIONS:                               |       |                                    |       |   |   |   |   |
| Costs of services                                   |       | 197,812                                 |       | 194,507 |   | 168,700 |   |
| Provision for doubtful accounts                     |       | 5,351                                   |       | 5,723 |   | 4,998 |   |
| Equipment leases                                    |       | 3,257                                   |       | 2,326 |   | 990 |   |
| Depreciation and amortization                       |       | 64,852                                  |       | 65,601 |   | 58,733 |   |
| Total costs of operations                           |       | 271,272                                 |       | 268,157 |   | 233,421 |   |
|                                                |       |                                    |       |   |   |   |   |
| Gross profit                                        |       | 35,026                                  |       | 48,716 |   | 57,463 |   |
|                                                |       |                                    |       |   |   |   |   |
| CORPORATE  OPERATING EXPENSES                       |       | (23,655                                 | )          | (18,447 | ) | (16,217 | ) |
|                                                |       |                                    |       |   |   |   |   |
| (LOSS) GAIN ON  SALES OF CENTERS                    |       | —                                  |       | (170 | ) | 2,129 |   |
|                                                |       |                                    |       |   |   |   |   |
| EQUITY IN  EARNINGS OF UNCONSOLIDATED PARTNERSHIPS  |       | 3,072                                   |       | 2,613 |   | 2,181 |   |
|                                                |       |                                    |       |   |   |   |   |
| INTEREST  EXPENSE, net                              |       | (50,754                                 | )          | (44,860 | ) | (40,682 | ) |
|                                                |       |                                    |       |   |   |   |   |
| GAIN ON  REPURCHASE OF NOTES PAYABLE                |       | 3,076                                   |       | — |   | — |   |
|                                                |       |                                    |       |   |   |   |   |
| LOSS ON  DISSOLUTION OF PARTNERSHIP                 |       | (1,000                                  | )          | — |   | — |   |
|                                                |       |                                    |       |   |   |   |   |
| IMPAIRMENT OF  GOODWILL AND OTHER INTANGIBLE ASSETS |       | (190,807                                | )          | — |   | — |   |
|                                                |       |                                    |       |   |   |   |   |
| (Loss) income before income taxes                   |       | (225,042                                | )          | (12,148 | ) | 4,874 |   |
|                                                |       |                                    |       |   |   |   |   |
| (BENEFIT)  PROVISION FOR INCOME TAXES               |       | (14,824                                 | )          | 15,069 |   | 1,950 |   |
|                                                |       |                                    |       |   |   |   |   |
| Net (loss)  income                                  |       | $                                       | (210,218   | ) | $ | (27,217 | ) | $ | 2,924 |   |

 

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

47

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**FOR THEYEARS ENDED JUNE 30, 2006, 2005 AND 2004**

(Amounts in thousands, exceptshare data)

 
| ** **                                                          | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**      | ** ** | ** **    | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-------------------|------------|----------------------|------------|---------------|------------|------------|------------|
| ** **                                                          | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**    | ** ** | **Other**            | ** ** | **Retained**  | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Comprehensive** | ** ** | **Earnings**         | ** ** | ** **    | ** ** |
| ** **                                                          | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Gain (Loss)** | ** ** | **(Deficit)** | ** ** | **Total**  | ** ** |
|                                                                |       |                  |       |        |       |              |       |                 |       |          |       |       |       |
| BALANCE AT JUNE  30, 2003                                           |       | 5,468,814             |       | $           | 5          |              | $          | 87,081               |       | $             | (403       | )          | $          | 4,931 |   | $ | 91,614 |   |
|                                                                |       |                  |       |        |       |              |       |                 |       |          |       |       |       |
| Net income                                                          |       | —                |       | —      |       | —            |       | —               |       | 2,924         |       | 2,924      |       |
|                                                                |       |                  |       |        |       |              |       |                 |       |          |       |       |       |
| Other  comprehensive income:                                        |       |                  |       |        |       |              |       |                 |       |          |       |       |       |
| Unrealized gain attributable to change in fair value  of derivative |       | —                |       | —      |       | —            |       | 403                  |       | —        |       | 403        |       |
| Comprehensive  income                                               |       |                  |       |        |       |              |       |                 |       |          |       | 3,327      |       |
| BALANCE AT JUNE  30, 2004                                           |       | 5,468,814             |       | 5           |       | 87,081            |       | —               |       | 7,855         |       | 94,941     |       |
|                                                                |       |                  |       |        |       |              |       |                 |       |          |       |       |       |
| Net loss                                                            |       | —                |       | —      |       | —            |       | —               |       | (27,217       | )          | (27,217    | )          |
| BALANCE AT JUNE  30, 2005                                           |       | 5,468,814             |       | 5           |       | 87,081            |       | —               |       | (19,362       | )          | 67,724     |       |
|                                                                |       |                  |       |        |       |              |       |                 |       |          |       |       |       |
| Net loss                                                            |       | —                |       | —      |       | —            |       | —               |       | (210,218      | )          | (210,218   | )          |
|                                                                |       |                  |       |        |       |              |       |                 |       |          |       |       |       |
| Other  comprehensive income:                                        |       |                  |       |        |       |              |       |                 |       |          |       |       |       |
| Unrealized gain attributable to change in fair value  of derivative |       | —                |       | —      |       | —            |       | 601                  |       | —        |       | 601        |       |
| Comprehensive  loss                                                 |       |                  |       |        |       |              |       |                 |       |          |       | (209,617   | )          |
| BALANCE AT JUNE 30, 2006                                            |       | 5,468,814             |       | $           | 5          |              | $          | 87,081               |       | $             | 601        |       | $          | (229,580 | ) | $ | (141,893 | ) |

 

The accompanying notes are anintegral part of these consolidated financial statements.

48

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THEYEARS ENDED JUNE 30, 2006, 2005 AND 2004**

(Amounts in thousands)

 
| ** **                                                                                | ** ** | **Years Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| OPERATING  ACTIVITIES:                                                                    |       |                                    |       |   |   |   |   |
| Net (loss) income                                                                         |       | $                                       | (210,218   | ) | $ | (27,217 | ) | $ | 2,924 |   |
| Adjustments to reconcile net (loss) income to net  cash provided by operating activities: |       |                                    |       |   |   |   |   |
| Loss (gain) on sales of centers                                                           |       | —                                  |       | 170 |   | (2,129 | ) |
| Depreciation and amortization                                                             |       | 64,852                                  |       | 65,601 |   | 58,733 |   |
| Amortization of debt issuance costs                                                       |       | 3,051                                   |       | 3,173 |   | 2,911 |   |
| Equity in earnings of unconsolidated partnerships                                         |       | (3,072                                  | )          | (2,613 | ) | (2,181 | ) |
| Distributions from unconsolidated partnerships                                            |       | 3,387                                   |       | 2,621 |   | 2,054 |   |
| Gain on repurchase of notes payable                                                       |       | (3,076                                  | )          | — |   | — |   |
| Loss on dissolution of partnership                                                        |       | 1,000                                   |       | — |   | — |   |
| Impairment of goodwill and other intangible assets                                        |       | 190,807                                 |       | — |   | — |   |
| Deferred income taxes                                                                     |       | (15,224                                 | )          | 15,224 |   | — |   |
| Changes in operating assets and liabilites:                                               |       |                                    |       |   |   |   |   |
| Trade accounts receivables, net                                                           |       | 3,016                                   |       | 8,096 |   | (8,455 | ) |
| Other current assets                                                                      |       | (407                                    | )          | (1,736 | ) | 3,084 |   |
| Accounts payable and other accrued expenses                                               |       | 3,512                                   |       | 726 |   | 5,963 |   |
| Net cash provided by operating activities                                                 |       | 37,628                                  |       | 64,045 |   | 62,904 |   |
|                                                                                      |       |                                    |       |   |   |   |   |
| INVESTING  ACTIVITIES:                                                                    |       |                                    |       |   |   |   |   |
| Acquisition of fixed-site centers and mobile  facilities, net of cash acquired            |       | (2,345                                  | )          | — |   | (101,334 | ) |
| Proceeds from sales of centers                                                            |       | —                                  |       | 2,810 |   | 5,413 |   |
| Additions to property and equipment                                                       |       | (30,927                                 | )          | (30,459 | ) | (46,734 | ) |
| Sale (purchase) of short-term investments                                                 |       | 5,000                                   |       | (5,000 | ) | — |   |
| Other                                                                                     |       | (235                                    | )          | (3,110 | ) | (2,379 | ) |
| Net cash used in investing activities                                                     |       | (28,507                                 | )          | (35,759 | ) | (145,034 | ) |
|                                                                                      |       |                                    |       |   |   |   |   |
| FINANCING  ACTIVITIES:                                                                    |       |                                    |       |   |   |   |   |
| Principal payments of notes payable and capital  lease obligations                        |       | (293,109                                | )          | (37,781 | ) | (8,209 | ) |
| Proceeds from issuance of notes payable                                                   |       | 298,500                                 |       | — |   | 101,125 |   |
| Payments made in connection with refinancing notes  payable                               |       | (6,836                                  | )          | — |   | — |   |
| Payment for interest rate cap contract                                                    |       | (307                                    | )          | — |   | — |   |
| Other                                                                                     |       | —                                  |       | (78 | ) | 72 |   |
| Net cash (used in) provided by financing activities                                       |       | (1,752                                  | )          | (37,859 | ) | 92,988 |   |
|                                                                                      |       |                                    |       |   |   |   |   |
| INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS:                                        |       | 7,369                                   |       | (9,573 | ) | 10,858 |   |
| Cash, beginning of period                                                                 |       | 20,839                                  |       | 30,412 |   | 19,554 |   |
| Cash, end of period                                                                       |       | $                                       | 28,208     |   | $ | 20,839 |   | $ | 30,412 |   |
|                                                                                      |       |                                    |       |   |   |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                        |       |                                    |       |   |   |   |   |
| Interest paid                                                                             |       | $                                       | 42,852     |   | $ | 42,461 |   | $ | 38,939 |   |
| Income taxes paid                                                                         |       | 422                                     |       | 202 |   | 377 |   |
| Equipment additions under capital leases                                                  |       | 737                                     |       | — |   | — |   |

 

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

49

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30,2006**

**1.****                    NATUREOF BUSINESS**

All references to “we,” “us,” “our,” “our company,” “theCompany” or “InSight Holdings” mean InSight Health Services Holdings Corp., aDelaware corporation and all entities and subsidiaries owned or controlled byInSight Health Services Holdings Corp.  All references to “InSight” mean InSight Health Services Corp., aDelaware corporation and wholly owned subsidiary of InSight Health ServicesHoldings Corp. and all entities and subsidiaries controlled by InSight.  Through InSight and its subsidiaries, weprovide diagnostic imaging, and related management services in more than 30states throughout the United States.  Our operations are primarily concentrated in California, Arizona, NewEngland, the Carolinas, Florida and the Mid-Atlantic states.  We have two reportable segments:  fixed operations and mobile operations.  Our services are provided through a networkof 82 mobile magnetic resonance imaging, or MRI, facilities, 11 mobile positronemission tomography, or PET, facilities, nine mobile PET/CT facilities, twomobile lithotripsy facilities, three mobile computed tomography, or CT,facilities, one mobile catheterization lab (collectively, mobile facilities),73 MRI fixed-site centers, 40 multi-modality fixed-site centers,two PET fixed-site centers and one CT fixed-site center (collectively,fixed-site centers).

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

**2.****                    SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

a.               CONSOLIDATEDFINANCIAL STATEMENTS

Our consolidated financial statements include ouraccounts and those of our wholly owned subsidiaries.  Our investment interests in partnerships orlimited liability companies, or Partnerships, are accounted for under theequity method of accounting when our ownership is 50% or less (Note 14).  Our investment interests in Partnerships areconsolidated when we own more than 50%.

Significant intercompany balances have been eliminatedin consolidation.

b.              USEOF ESTIMATES

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

c.               REVENUERECOGNITION

Revenues fromcontract services and from patient services are recognized when services areprovided.  Patient services revenues arepresented net of (1) related contractual adjustments, which represent thedifference between our charge for a procedure and what we will ultimatelyreceive from private health insurance programs, Medicare, Medicaid and otherfederal healthcare programs, and (2) payments due to radiologists.   We report payments made to radiologists on anet basis because (i) we are not the primary obligor for the provision ofprofessional services, (ii) the radiologists receive contractually agreed uponamounts from collections and (iii) the radiologists bear the risk ofnon-collection; however, we have recently entered into arrangements withseveral radiologists pursuant to which we pay the radiologists directly fortheir professional services on an agreed upon contractual rate.  With respect to these arrangements, theprofessional component is included in our revenues, and our payments to theradiologists are included in costs of services.    Contract services revenues are recognizedover the applicable contract period. Revenues collected in advance are recorded as unearned revenue.

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d.              CASHEQUIVALENTS AND SHORT-TERM INVESTMENTS

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

e.               TRADEACCOUNTS RECEIVABLES

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

f.                 LONG-LIVEDASSETS

*Property and Equipment*.  Property and equipment are depreciated andamortized on the straight-line method using the following estimateduseful lives:
| Vehicles                                     |   | 3 to 8 years                                |   |
|----------------------------------------------|--------|---------------------------------------------|--------|
| Buildings                                    |   | 7 to 20 years                               |   |
| Leasehold improvements                       |   | Lesser of the useful  life or term of lease |   |
| Computer and office  equipment               |   | 3 to 5 years                                |   |
| Diagnostic and related  equipment            |   | 5 to 8 years                                |   |
| Equipment and vehicles  under capital leases |   | Lesser of the useful  life or term of lease |   |

 

We capitalize expenditures for improvements and majorequipment upgrades.  Maintenance, repairsand minor replacements are charged to operations as incurred. When assets aresold or otherwise disposed of, the cost and related accumulated depreciationare removed from the accounts and any resulting gain or loss is included in theresults of operations.

*Long-lived Asset Impairment*.  We review long-lived assets, includingidentified intangible assets, for impairment when events or changes in businessconditions indicate that their full carrying value may not be recovered.  We consider assets to be impaired and writethem down to fair value if expected associated undiscounted cash flows are lessthan the carrying amounts.  Fair value isdetermined based on the present value of the expected associated cash flows.

g.              DEFERREDFINANCING COSTS

Costs incurred inconnection with financing activities are deferred and amortized using theeffective interest method over the terms of the related debt agreements rangingfrom seven to ten years.  Amortization ofthese costs is charged to interest expense in the accompanying consolidatedstatements of operations.  Total costsdeferred and included in other assets in the accompanying consolidated balancesheets at June 30, 2006 and 2005 were approximately $16.8 million and $16.0million, respectively.

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h.              STOCK-BASED COMPENSATION

As permitted underStatement of Financial Accounting Standards, or SFAS, No. 123, “Accounting forStock Based Compensation” (SFAS 123), we account for the options and warrantsissued to employees in accordance with APB Opinion No. 25.  SFAS 123 requires that we present pro-formadisclosures of net income as if we had recognized compensation expense equal tothe fair value of options granted, as determined at the date of grant.  Our net (loss) income would have reflectedthe following pro-forma amounts (amounts in thousands):
|                     | ** **  | **Years Ended June 30,** | ** ** |
|---------------------|-------------|-----------------------------------------|------------|
| ** **          | ** **  | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net (loss)  income: | As reported |                                    | $          | (210,218 | ) | $ | (27,217 | ) | $ | 2,924 |   |
|                | Expense     |                                    | (291       | ) | (245 | ) | (377 | ) |
|                | Pro-forma   |                                    | $          | (210,509 | ) | $ | (27,462 | ) | $ | 2,547 |   |

 

The fair value of each option grant and warrant issuedis estimated on the date of grant or issuance using the Black-Scholespricing model with the following assumptions used for the grants and issuancesin the years ended June 30, 2006, 2005 and 2004, respectively:
|                                                           | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------|------------|
| **Assumptions**                                           | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted average  estimated fair value per option granted |       | 6.65                                    |       | 6.80 |   | 6.22 |   |
| Risk-free  interest rate                                  |       | 4.06-4.40%                              |       | 4.13-4.50% |   | 3.58-4.18% |   |
| Volatility                                                |       | 0.00%                                   |       | 0.00% |   | 0.00% |   |
| Expected  dividend yield                                  |       | 0.00%                                   |       | 0.00% |   | 0.00% |   |
| Estimated life                                            |       | 10.00 years                             |       | 10.00 years |   | 10.00 years |   |

 

i.                  GOODWILLAND OTHER INTANGIBLE ASSETS

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

We evaluate the carrying value of goodwill andacquisition-related intangible assets, including the related amortizationperiod, in the second quarter of each fiscal year.  Additionally, we review the carrying amountof goodwill whenever events and circumstances indicate that the carrying amountof goodwill may not be recoverable. Impairment indicators include, among otherconditions, cash flow deficits, historic or anticipated declines in revenue oroperating profit and adverse legal or regulatory developments.  In a business combination, goodwill isallocated to our two reporting units (mobile and fixed), which are the same asour reportable operating segments, based on relative fair value of the assetsacquired and liabilities assumed.  Inevaluating goodwill and intangible assets not subject to amortization, wecomplete the two-step goodwill impairment test as required by SFAS 142.  In the first of a two-step impairment test, wedetermine the fair value of these reporting units using a discounted cash flowvaluation model, market multiple model or appraised values, asappropriate.  SFAS 142 requires us tocompare the fair value of the reporting unit to its carrying value on an annualbasis to determine if there is potential impairment.  If the fair value of a reporting unit exceedsits carrying value, goodwill of the reporting unit is considered not impairedand no further testing is required.  Ifthe fair value does not exceed the carrying value, the second step of thegoodwill impairment test is performed to measure the amount of impairment loss,if any.  The second step compares theimplied fair value of the reporting unit with the

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carrying amount of that goodwill.  Impairment losses, if any, are reflected inthe consolidated statements of operations. As of June 30, 2006 based on the factors described in Note 7 to theconsolidated financial statements, we performed an interim valuation analysisin accordance with SFAS 142 and recognized a non-cash goodwill impairmentcharge in both of our reporting units.

We assess the ongoing recoverability of our intangibleassets subject to amortization in accordance with SFAS No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets” (SFAS 144), by determiningwhether the intangible asset balance can be recovered over the remainingamortization period through projected undiscounted future cash flows.  If projected future cash flows indicate thatthe unamortized intangible asset balances will not be recovered, an adjustmentis made to reduce the net intangible asset to an amount consistent withprojected future cash flows discounted at our incremental borrowing rate.  Cash flow projections, although subject to adegree of uncertainty, are based on trends of historical performance andmanagement’s estimate of future performance, giving consideration to existingand anticipated competitive and economic conditions.

j.                  INCOMETAXES

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

k.         COMPREHENSIVEINCOME (LOSS)

Components ofcomprehensive income (loss) are changes in equity other than those resultingfrom investments by owners and distributions to owners. Net income (loss) isthe primary component of comprehensive income (loss).  Our only component of comprehensive income(loss) other than net income (loss) is the change in unrealized gain or loss onderivatives qualifying for hedge accounting, net of tax. The aggregate amountof such changes to equity that have not yet been recognized in net income(loss) are reported in the equity portion of the accompanying consolidatedbalance sheets as accumulated other comprehensive income.

l.            FAIRVALUE OF FINANCIAL INSTRUMENTS

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

m.            NEWPRONOUNCEMENTS

In July 2006, the Financial Accounting StandardsBoard, or FASB, issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes - an interpretation of FASB Statement No. 109”(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in a company’s financial statements.  FIN 48 prescribes arecognition threshold and measurement attribute for financial statementrecognition and measurement of a tax position taken or expected to be taken inthe tax return. We are required to adopt the provisions of FIN 48 beginning infiscal 2008.  We are currently evaluating the effect FIN 48 will have onour financial condition and results of operations.

In June 2005, the Emerging Issues Task Force, or EITF, reached aconsensus on EITF 04-05, “Investor’s Accounting for an Investment in a LimitedPartnership When the Investor Is the Sole General Partner and the LimitedPartners Have Certain Rights” (EITF 04-05), which provides guidance on when asole general partner

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should consolidate a limited partnership.  A sole general partnerin a limited partnership is presumed to control that limited partnership andtherefore should include the limited partnership in its consolidated financialstatements, regardless of the sole general partner’s ownership interest in thelimited partnership.  The control presumption may be overcome if thelimited partners have the ability to remove the sole general partner orotherwise dissolve the limited partnership.  Other substantive participatingrights by the limited partners may also overcome the control presumption. We were required to adopt the provisions of EITF 04-05 for all existing limitedpartnerships at the beginning of fiscal 2007. The adoption of EITF 04-05 did not have a material impact on ourfinancial condition and results of operations.

In May 2005, the FASB issued SFAS No.154, “Accounting Changes and Error Corrections —a replacement of APB Opinion No. 20 and FASB Statement No. 3”(SFAS 154).  SFAS 154 changes the requirementsfor the accounting for and reporting of a change in accounting principle.  These requirements apply to all voluntarychanges and changes required by an accounting pronouncement in the unusualinstance that a pronouncement does not include specific transitionprovisions.  SFAS 154 is effective forfiscal years beginning after December 15, 2005. As such, we were required to adopt these provisions at the beginning offiscal 2007.  The adoption of SFAS 154did not have a material impact on our financial condition and results ofoperations.

In December 2004, the FASB issued SFASNo. 123R, “Share-Based Payment” (SFAS 123R). SFAS 123R requires expensing of stock options and other share-basedpayments and supersedes FASB’s earlierrule (SFAS 123) that had allowed companies to choose between expensing stockoptions or showing pro-forma disclosure only. We are required to implement SFAS 123R at the beginning of fiscal2007.  The impact of adopting SFAS 123Ris not expected to be materially different than the pro-forma disclosures underSFAS 123.

n.        RECLASSIFICATIONS

Certain prior year amounts have beenreclassified to conform to the current year presentation in the accompanyingfinancial statements.

**3.****                    ACQUISITIONS**

InAugust 2003, we acquired twenty-two (22) mobile facilities operatingprimarily in the Mid-Atlantic states.  The acquisition consisted ofcertain tangible and intangible assets, including diagnostic imaging equipment,customer contracts and other agreements.  The aggregate purchase price wasapproximately $49.9 million, which included approximately $28.1 million paid tothe seller and approximately $21.8 million for the payment of debt andtransaction costs.  The excess purchase price paid by us over our estimateof the fair value of the tangible and other intangible assets as of the date ofthe acquisition was approximately $29.1 million.

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

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**4.     TRADEACCOUNTS RECEIVABLES**

Trade accountsreceivables, net are comprised of the following (amounts in thousands):
|                                  | ** **                              | **June 30,** | ** ** |
|----------------------------------|-----------------------------------------|-------------------|------------|
| ** **                       | ** **                              | **2006**          | ** ** | **2005** | ** ** |
| Trade accounts  receivables      |                                    | $                 | 85,972     |   | $ | 96,646 |   |
| Less:                            | Allowances for  professional fees       |              | 9,782      |   | 11,897 |   |
|                             | Allowances for  contractual adjustments |              | 22,712     |   | 29,412 |   |
|                             | Allowances for  doubtful accounts       |              | 9,788      |   | 8,887 |   |
| Trade accounts  receivables, net |                                    | $                 | 43,690     |   | $ | 46,450 |   |

 

The allowances for doubtfulaccounts and contractual adjustments include management’s estimate of theamounts expected to be written off on specific accounts and for write-offson other unidentified accounts included in accounts receivables.  In estimating the write-offs and adjustmentson specific accounts, management relies on a combination of in-houseanalysis and a review of contractual payment rates from private healthinsurance programs or under the federal Medicare program.  In estimating the allowance for unidentifiedwrite-offs and adjustments, management relies on historicalexperience.  The amounts we willultimately realize could differ materially in the near term from the amountsassumed in arriving at the allowances for doubtful accounts and contractualadjustments in the accompanying consolidated financial statements at June 30,2006.

Wereserve a contractually agreed upon percentage at several of our fixed-sitecenters, averaging 20 percent of the accounts receivables balance from patientsand third-party payors for payments to radiologists representing professionalfees for interpreting the results of the diagnostic imaging procedures.  Payments to radiologists are only due whenamounts are received.  At that time, thebalance is transferred from the allowance account to a professional feespayable account.

**5.****                    OTHER CURRENT ASSETS**

Other currentassets are comprised of the following (amounts in thousands):
| ** **                                        | ** ** | **June 30,** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|
| ** **                                        | ** ** | **2006**          | ** ** | **2005** | ** ** |
| Prepaid expenses                                  |       | $                 | 7,405      |   | $ | 6,965 |   |
| Amounts due from  our unconsolidated partnerships |       | 984               |       | 1,005 |   |
|                                              |       | $                 | 8,389      |   | $ | 7,970 |   |

 

**6.  ****           PROPERTYAND EQUIPMENT**

Property and equipment,net are stated at cost and are comprised of the following (amounts inthousands):
| ** **                                       | ** ** | **June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|
| ** **                                       | ** ** | **2006**          | ** ** | **2005** | ** ** |
| Vehicles                                         |       | $                 | 5,382      |   | $ | 5,701 |   |
| Land, building  and leasehold improvements       |       | 30,706            |       | 29,335 |   |
| Computer and  office equipment                   |       | 48,517            |       | 44,996 |   |
| Diagnostic and  related equipment                |       | 249,801           |       | 231,351 |   |
| Equipment and  vehicles under capital leases     |       | 71,499            |       | 74,862 |   |
|                                             |       | 405,905           |       | 386,245 |   |
| Less:  Accumulated depreciation and amortization |       | 224,879           |       | 176,784 |   |
| Property and equipment,  net                     |       | $                 | 181,026    |   | $ | 209,461 |   |

 

Depreciation expense was approximately $61.1million, $61.6 million and $55.0 million for the years ended June 30, 2006,2005 and 2004, respectively.

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**7.      GOODWILL AND OTHER INTANGIBLE ASSETS**

As a result of (1) our negative financial trends and(2) the enactment of the Deficit Reduction Act of 2005 and its correspondinganticipated impact on our revenues, we determined that an interim impairmentanalysis of the fair value of our two reporting units (mobile and fixed) shouldbe performed in accordance with SFAS 142 using a discounted cash flow model anda market multiples model.  We completedour analysis of the fair value of our reporting units utilizing the assistanceof an independent valuation firm.  Theaudit committee of InSight’s board of directors (1) concluded that impairmentshad occurred and (2) ratified management’s determination that impairmentcharges were appropriate.  Accordingly,we recorded a non-cash goodwill impairment charge of approximately $189.4million related to our reporting units (approximately $126.8 million for ourfixed reporting unit and approximately $62.6 million for our mobile reportingunit).  Additionally, in accordance withSFAS 144, we recorded a non-cash impairment charge related to our otherintangible assets of approximately $1.4 million related to wholesale contractsin our mobile reporting unit.

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

 

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

(2)          We recorded a goodwillimpairment charge discussed above.

(3)          In December 2005, wedissolved a mobile lithotripsy partnership in Connecticut.  In connection with this dissolution, werecorded a $1.0 million reduction in associated goodwill.  In 2006, we increased the balance of goodwillby $3.5 million as a result of recording a deferred tax liability on theindefinite-lived intangible assets acquired in our fiscal 2002 acquisition ofInSight not previously recorded.

(4)          In October 2005, wepurchased the remaining ownership interest in a joint venture in Buffalo, NewYork.  In connection with this purchase,we recorded a $0.5 million increase in goodwill.

The followingreconciliation of other intangible assets is as follows (amounts in thousands):
| ** **                      | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **Gross**                   | ** ** | ** **                  | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Carrying**                | ** ** | **Accumulated**             | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                      | ** ** | **Value**                   | ** ** | **Amortization**            | ** ** | **Value** | ** ** | **Amortization** | ** ** |
| Amortized  intangible assets:   |       |                        |       |                        |       |   |   |   |   |
| Managed care contracts          |       | $                           | 24,410     |                        | $          | 3,388 |   | $ | 24,410 |   | $ | 2,656 |   |
| Wholesale contracts             |       | 14,006                      |       | 12,235                      |       | 15,380 |   | 9,355 |   |
|                            |       | 38,416                      |       | 15,623                      |       | 39,790 |   | 12,011 |   |
|                            |       |                        |       |                        |       |   |   |   |   |
| Unamortized  intangible assets: |       |                        |       |                        |       |   |   |   |   |
| Trademark                       |       | 8,680                       |       | —                      |       | 8,680 |   | — |   |
| Other intangible  assets        |       | $                           | 47,096     |                        | $          | 15,623 |   | $ | 48,470 |   | $ | 12,011 |   |

 

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

 

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Amortizationof intangible assets was approximately $3.6 million, $3.8 million and $3.6million for the years ended June 30, 2006, 2005 and 2004, respectively.

Estimatedamortization expense for the years ending June 30, are as follows (amounts inthousands):
| 2007 |   | $     | 2,002  |   |
|------|--------|-------|--------|--------|
| 2008 |   | 1,257 |   |
| 2009 |   | 1,257 |   |
| 2010 |   | 1,257 |   |
| 2011 |   | 814   |   |

 

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

Accounts payable andother accrued expenses are comprised of the following (amounts in thousands):
| ** **                         | ** ** | **June 30,** | ** ** |
|------------------------------------|------------|-------------------|------------|
| ** **                         | ** ** | **2006**          | ** ** | **2005** | ** ** |
| Accounts payable                   |       | $                 | 3,723      |   | $ | 2,193 |   |
| Accrued  equipment related costs   |       | 3,447             |       | 5,355 |   |
| Accrued payroll  and related costs |       | 12,977            |       | 11,677 |   |
| Accrued interest  expense          |       | 8,444             |       | 4,214 |   |
| Accrued  professional fees         |       | 2,206             |       | 2,365 |   |
| Accrued income  taxes              |       | 51                |       | 223 |   |
| Other accrued  expenses            |       | 9,229             |       | 10,442 |   |
|                               |       | $                 | 40,077     |   | $ | 36,469 |   |

 

**9.**      **NOTES PAYABLE**

Notes payable arecomprised of the following (amounts in thousands): 
| ** **                                                                                                                                                                                                                                                                                                                                                        | ** ** | **June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                        | ** ** | **2006**          | ** ** | **2005** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                              |       |              |       |   |   |
| Senior secured  floating rate notes payable (Floating Rate Notes), bearing interest at LIBOR  plus 5.25% (10.40% at June 30, 2006), interest payable quarterly, principal  due in November 2011. The Floating Rate Notes are collateralized by  substantially all of our assets. At June 30, 2006, the fair value of the  notes was approximately $272.3 million. |       | $                 | 300,000    |   | $ | — |   |
|                                                                                                                                                                                                                                                                                                                                                              |       |              |       |   |   |
| Notes payable to  bank (Credit Facility), repaid in September 2005. The notes were  collateralized by substantially all our our assets.                                                                                                                                                                                                                           |       | —            |       | 237,608 |   |
|                                                                                                                                                                                                                                                                                                                                                              |       |              |       |   |   |
| Unsecured senior  subordinated notes payable (Fixed Rate Notes), bearing interest at 9.875%, interest  payable semi-annually, principal due in November 2011. At June 30, 2006, the fair  value of the notes was approximately $85.6 million.                                                                                                                     |       | 194,500           |       | 250,000 |   |
|                                                                                                                                                                                                                                                                                                                                                              |       |              |       |   |   |
| Other notes  payable                                                                                                                                                                                                                                                                                                                                              |       | 1,614             |       | 718 |   |
|                                                                                                                                                                                                                                                                                                                                                              |       |              |       |   |   |
| Total notes  payable                                                                                                                                                                                                                                                                                                                                              |       | 496,114           |       | 488,326 |   |
| Less:  Unamortized discount on Floating Rate Notes                                                                                                                                                                                                                                                                                                                |       | 1,356             |       | — |   |
| Less: Current  portion                                                                                                                                                                                                                                                                                                                                            |       | 555               |       | 2,795 |   |
| Long-term notes  payable                                                                                                                                                                                                                                                                                                                                          |       | $                 | 494,203    |   | $ | 485,531 |   |

 

In September 2005,through InSight, we issued $300 million aggregate principal amount of seniorsecured floating rate notes, or Floating Rate Notes.  The proceeds from the issuance of theFloating Rate Notes were used to (1) repay all borrowings under our creditfacility with Bank of America, N.A. and a syndicate of other lenders

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(approximately$237.6 million); (2) repurchase approximately $55.5 million aggregate principalamount of our unsecured senior subordinated notes, or Fixed Rate Notes, inprivately negotiated transactions (discussed below); and (3) pay certain relatedfees and expenses (approximately $6.8 million). This transaction is considered a debt modification under accountingprinciples generally accepted in the United States.  The Floating Rate Notes are redeemable at ouroption, in whole or in part, on or after November 1, 2006.  In January 2006, we exchanged the FloatingRates Notes that were originally issued in September 2005, for a like principalamount of Floating Rate Notes that had been registered with the SEC.

Concurrently withthe issuance of the Floating Rate Notes and repayment of all outstandingborrowings under our credit facility, we amended and restated our creditfacility to reduce and modify the $50.0 million revolving credit facility to anasset-based revolving credit facility of up to $30.0 million.  As of June 30, 2006, we had approximately$27.0 million of availability under the amended revolving credit facility,based on our eligible borrowing base.  Asof June 30, 2006, there were no borrowings under the amended revolving creditfacility.  As of June 30, 2006, therewere letters of credit of approximately $2.6 million outstanding under ouramended revolving credit facility. Borrowings under the amended revolving credit facility bear interest atLIBOR plus 2.5% per annum (7.83% as of June 30, 2006) or, at our option, thebase rate (which is the Bank of America, N.A. prime rate).  We are required to pay an unused facility feeof 0.50% per annum, payable quarterly, on unborrowed amounts on the amendedrevolving credit facility. The amended revolving credit facility contains afixed charge coverage covenant that we would be required to meet if oureligible borrowing base (net of outstanding borrowings) plus eligible cashfalls below $15 million.  If we are unable to meet this covenant our availabilityunder the amended revolving credit facility would be restricted to keep oureligible borrowing base (net of outstanding borrowings) plus eligible cashabove $15 million.

Through InSight,we also have outstanding $194.5 million in Fixed Rate Notes (after givingeffect to the $55.5 million repurchase discussed above).  In connection with the $55.5 millionrepurchase, we realized a gain of approximately $3.1 million, net of a writeoff of deferred financing costs of approximately $2.5 million.  The Fixed Rate Notes are redeemable at ouroption, in whole or in part, on or after November 1, 2006.

In January 2006, throughInSight, we purchased an interest rate cap contract.  The contract is for a term of two years, witha notional amount of $100 million and a LIBOR cap of 5.0% (Note 18).

The agreementsgoverning our amended revolving credit facility, Floating Rate Notes and FixedRate Notes contain restrictions on additional borrowings, capital projects,asset sales, dividend payments and certain other covenants.  As of June 30, 2006, we were in compliancewith those agreements.  The agreementsgoverning our amended revolving credit facility and Floating Rate Notesrestrict our ability to prepay other indebtedness, including the Fixed RateNotes.

We believe, based on currently available information, that futurenet cash provided by operating activities and our amended revolving creditfacility will be adequate to meet our operating cash and debt servicerequirements for at least the next twelve months.  Moreover, if our net cash provided byoperating activities declines further than we have anticipated, we are preparedto take steps to conserve our cash, including delaying or restructuring ourcapital projects (entering into capital and operating leases rather than usingcash). We believe that steps such as these would still enable to us meet ourliquidity needs even if net cash provided operating activities falls below whatwe have anticipated. However, if our net cash provided by operating activitiesseverely declines, we may be unable to service our indebtedness or ourliquidity needs. If we are unable to service our indebtedness or fund our otherliquidity needs, we may need to restructure or refinance all or a portion ofour indebtedness on or before maturity or sell certain of our assets. We cannotassure you that we will be able to restructure or refinance any of ourindebtedness on commercially reasonable terms, if at all, which could cause usto default on our indebtedness and impair our liquidity. Any refinancing of ourindebtedness could be at higher interest rates and may require us to complywith more onerous covenants, which could further restrict our businessoperations. Although we are prepared to take these additional steps ifnecessary we cannot be certain such steps would be effective. However, wecontinue to believe that we will be able to meet our liquidity needs to allowus to continue normal operations.

Scheduledmaturities of equipment and other notes payable at June 30, 2006, are asfollows (amounts in thousands):
| 2006       |   | $       | 555     |   |
|------------|--------|---------|---------|--------|
| 2007       |   | 578     |    |
| 2008       |   | 481     |    |
| 2009       |   | —  |    |
| 2010       |   | —  |    |
| Thereafter |   | 494,500 |    |
|       |   | $       | 496,114 |   |

 

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

We lease diagnosticequipment, certain other equipment and our office and imaging facilities undervarious capital and operating leases. Future minimum scheduled rental payments required under thesenoncancelable leases at June 30, 2006 are as follows (amounts in thousands):
| ** **                                 | ** ** | **Capital** | ** ** | **Operating** | ** ** |
|--------------------------------------------|------------|-------------|------------|---------------|------------|
| 2007                                       |       | $           | 5,602      |          | $          | 10,381 |   |
| 2008                                       |       | 3,014       |       | 8,847         |       |
| 2009                                       |       | 474         |       | 6,882         |       |
| 2010                                       |       | 198         |       | 5,260         |       |
| 2011                                       |       | —      |       | 3,295         |       |
| Thereafter                                 |       | —      |       | 5,860         |       |
|                                       |       |        |       |          |       |
| Total minimum lease payments               |       | 9,288       |       | $             | 40,525     |   |
|                                       |       |        |       |          |       |
| Less: Amounts representing interest        |       | 664         |       |          |       |
|                                       |       |        |       |          |       |
| Present value of capital lease obligations |       | 8,624       |       |          |       |
|                                       |       |        |       |          |       |
| Less: Current portion                      |       | 5,105       |       |          |       |
|                                       |       |        |       |          |       |
| Long-term capital lease obligations        |       | $           | 3,519      |          |       |   |

 

Accumulateddepreciation on assets under capital leases was $13.1 million and $10.6 millionat June 30, 2006 and 2005, respectively.

Rental expense fordiagnostic equipment and other equipment for the years ended June 30, 2006,2005 and 2004 was $3.3 million, $2.3 million and $1.0 million, respectively.

We occupyfacilities under lease agreements expiring through October 2017.  Some of these lease agreements may includeprovisions for an increase in lease payments based on the Consumer Price Indexor scheduled increases based on a guaranteed minimum percentage or dollaramount.  Rental expense for thesefacilities for the years ended June 30, 2006, 2005 and 2004 was $8.9 million,$9.2 million and $7.9 million, respectively.

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

On February 3,2004, Southwest Outpatient Radiology, P.C, or SWOR, filed a Summons andComplaint against InSight Health Corp., one of InSight’s subsidiaries, in theSuperior Court, Maricopa County, Arizona, for Declaratory Relief seeking adeclaration as to the meaning and effect of a certain provision of theprofessional services agreement, or PSA, pursuant to which SWOR providedprofessional services at InSight’s facilities in Phoenix, Arizona.  SWOR claimed the PSA provided a right offirst refusal to provide professional services at any center InSight acquiredin Maricopa County.  InSight believes andit was intended that the provision related only to “de novo” centers whichInSight developed.  In April 2004,InSight acquired the stock of Comprehensive Medical Imaging, Inc., which ownedand operated 21 fixed-site centers, six of which were located in MaricopaCounty, pursuant to a stock purchase agreement.

Prior to signingthe stock purchase agreement, InSight gave SWOR 180 days notice to terminatethe PSA in accordance with the PSA.  SWORclaimed that the PSA had already terminated due to InSight’s breach of theright of first refusal provision. InSight answered the Summons and Complaint and was cooperating with SWORin expediting discovery and an early trial when SWOR decided to abandon theDeclaratory Relief action and on April 20, 2004, SWOR filed a First AmendedComplaint claiming breach of contract, anticipatory breach of contract,negligent misrepresentation, breach of covenant of good faith and fair dealing,intentional interference with contract, breach of fiduciary duty, declaratoryrelief and unspecified compensatory and punitive damages, prejudgment interest,and attorneys fees. We have answered the First Amended Complaint and discoveryhas commenced and is on-going.   We arevigorously defending this lawsuit and believe that SWOR’s claims are withoutmerit.  We are unable to predict theoutcome of this lawsuit.  

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In August 2003,InSight entered into a series of agreements and acquired a joint ventureinterest through a limited liability company it formed called Kessler ImagingAssociates, LLC, or KIA, in a CT fixed-site center in Hammonton, NewJersey.  KIA is owned 55% by InSight and45% by Bernard Neff, M.D., or Dr. Neff. KIA manages Kessler CAT Scan Associates, LLC, which provides CT, and mobileMRI and PET (using InSight mobile facilities) services to inpatients of WilliamB. Kessler Memorial Hospital, or Hospital, and community outpatients.

Dr. Neff providesradiology services at the Hospital and to the outpatients.  InSight does not control billing andcollections to the Hospital for inpatients or to third party payors foroutpatients.  Dr. Neff performs thatfunction.

Management at theHospital changed in 2005, and in late 2005 the Hospital notified the partiesthat it was “voiding” all the agreements because the prior management had noauthority to execute the agreements and stopped paying for the inpatientservices.  Immediately after theagreements were allegedly “voided,” Dr. Neff filed an arbitration claim againstthe Hospital, for among other things, collection of outstanding amounts owed bythe Hospital for services previously rendered. The Hospital has challenged Dr. Neff’s efforts to proceed witharbitration efforts in the New Jersey courts. The appellate division granted a stay motion, so the arbitration hasbeen stayed pending oral argument, which has not yet been held and no decisionhas yet been rendered.  Until theappellate court rules, matters in the arbitration cannot go forward.

On March 8,2006, InSight filed suit in the United States District Court for the Districtof New Jersey against the Hospital.  Bythe Complaint, InSight has asserted claims for fraud and seeks in excess of $4million in compensatory damages plus additional amounts for punitivedamages.  The Hospital has denied thesubstantive allegations against it.

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

On September 13, 2006, the Hospital filed a voluntarybankruptcy petition under Chapter 11 of Title 11 of the U.S. Bankruptcy Code inthe U.S. Bankruptcy Court, District of New Jersey (Camden).  As a result, this case and the arbitrationhave been stayed by operation of law.

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

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

Wehave one stock option plan, which provided for the granting of nonstatutorystock options to four key employees (all of whom are no longer with theCompany), all of which are fully vested. Holders of options for 175,990 shares of InSight common stock rolledover their options and received options for our common stock with the sameterms under our stock option plan.  AtJune 30, 2006, options to purchase 123,490 shares of our stock were outstandingunder this plan.

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Asof June 30, 2006, we had 115,500 shares available for issuance.  A summary of the status of our stock optionplans at June 30, 2006, 2005 and 2004 and changes during the periods ispresented below:
|                             | ** ** | ** ** | ** ** | **Weighted**            | ** ** |
|-----------------------------|------------|------------|------------|-------------------------|------------|
| ** **                  | ** ** | ** ** | ** ** | **Average**             | ** ** |
| ** **                  | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
| Outstanding,  June 30, 2003 |       | 632,815    |       | $                       | 16.16      |   |
| Granted                     |       | 30,000     |       | 19.07                   |       |
| Forfeited                   |       | (59,825    | )          | 18.27                   |       |
| Outstanding,  June 30, 2004 |       | 602,990    |       | 16.10                   |       |
| Granted                     |       | 209,500    |       | 19.82                   |       |
| Forfeited                   |       | (195,500   | )          | 18.07                   |       |
| Outstanding,  June 30, 2005 |       | 616,990    |       | 16.74                   |       |
| Granted                     |       | 338,236    |       | 19.82                   |       |
| Forfeited                   |       | (105,500   | )          | 19.43                   |       |
| Outstanding,  June 30, 2006 |       | 849,726    |       | $                       | 17.74      |   |
|                        |       |       |       |                    |       |
| Exercisable at:             |       |       |       |                    |       |
| June 30, 2004               |       | 168,790    |       | $                       | 10.96      |   |
| June 30, 2005               |       | 204,565    |       | $                       | 12.56      |   |
| June 30, 2006               |       | 241,415    |       | $                       | 13.50      |   |

 

Ofthe options outstanding at June 30, 2006, the characteristics are as follows:
| **Exercise Price** | ** **    | **Weighted Average** | ** ** | **Options**     | ** ** | **Total Options** | ** ** | **Remaining Contractual** | ** **  |
|-------------------------|---------------|---------------------------|------------|-----------------|------------|------------------------|------------|--------------------------------|-------------|
| **Range**               | ** **    | **Exercise Price**   | ** ** | **Exercisable** | ** ** | **Outstanding**        | ** ** | **Life**                       | ** **  |
| $                       | 8.37          |                      | $          | 8.37            |       | 123,490                |       | 123,490                        |        | 5.33  years |   |
|                    | 18.00 - 19.82 |                      | 18.88      |            | 117,925    |                   | 726,236    |                           | 7.47  years |   |
|                    |          |                      |       |            | 241,415    |                   | 849,726    |                           |        |   |
|                         |               |                           |            |                 |            |                        |            |                                |             |  |  |

 

**12.    INCOMETAXES**

The provision forincome taxes includes income taxes currently payable and those deferred becauseof temporary differences between the financial statements and tax bases ofassets and liabilities.  The provision forincome taxes for the years ended June 30, 2006, 2005 and 2004 is as follows(amounts in thousands):

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| ** **                                               | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current  provision:                                      |       |                                    |       |   |   |   |   |
| Federal                                                  |       | $                                       | —     |   | $ | — |   | $ | 1,640 |   |
| State                                                    |       | 400                                     |       | (155 | ) | 310 |   |
|                                                     |       | 400                                     |       | (155 | ) | 1,950 |   |
| Deferred taxes  arising from temporary differences:      |       |                                    |       |   |   |   |   |
| State income taxes                                       |       | 9                                       |       | (9 | ) | 173 |   |
| Accrued expenses                                         |       | 181                                     |       | (741 | ) | (46 | ) |
| Reserves                                                 |       | 103                                     |       | (1,376 | ) | 4,660 |   |
| Depreciation                                             |       | (7,114                                  | )          | 3,604 |   | 4,732 |   |
| Amortization                                             |       | (38,625                                 | )          | 5,367 |   | 4,962 |   |
| Creation/utilization of net operating losses             |       | (6,143                                  | )          | (11,758 | ) | (8,167 | ) |
| Section 481 adjustment                                   |       | —                                  |       | 1,161 |   | 1,161 |   |
| Changes in valuation allowance reducing goodwill         |       | —                                  |       | — |   | (6,800 | ) |
| Changes in valuation allowance                           |       | 39,855                                  |       | 20,694 |   | — |   |
| Non-goodwill intangible amortization                     |       | (11                                     | )          | (1,001 | ) | (1,399 | ) |
| (Loss) income from partnerships                          |       | (3,480                                  | )          | (536 | ) | 451 |   |
| Other                                                    |       | 1                                       |       | (181 | ) | 273 |   |
| Total deferred taxes arising from temporary  differences |       | (15,224                                 | )          | 15,224 |   | — |   |
| Total (benefit)  provision for income taxes              |       | $                                       | (14,824    | ) | $ | 15,069 |   | $ | 1,950 |   |

 

A reconciliation between the statutory federal incometax rate and our effective income tax rate is as follows:
|                                                                      | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                           | ** ** | **2006**                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Federal statutory tax  rate                                          |       | 34.0                     | %          | 34.0 | % | 34.0 | % |
| State income taxes, net  of federal benefit                          |       | 0.6                      |       | (11.8 | ) | 4.0 |   |
| Permanent items,  including goodwill and non-deductible merger costs |       | (0.1                     | )          | (1.5 | ) | 2.0 |   |
| Changes in valuation  allowance                                      |       | (15.7                    | )          | (138.9 | ) | — |   |
| Impairment of goodwill  and other intangible assets                  |       | (9.7                     | )          | — |   | — |   |
| Other, net                                                           |       | (2.5                     | )          | (5.8 | ) | — |   |
| Net effective tax rate                                               |       | 6.6                      | %          | (124.0 | )% | 40.0 | % |

 

The components ofour net deferred tax asset (including current and non-current portions) as ofJune 30, 2006 and 2005, respectively, which arise due to timing differencesbetween financial and tax reporting and net operating loss (NOL) carryforwardsare as follows (amounts in thousands):
|                                       | ** ** | **June 30,** | ** ** |
|---------------------------------------|------------|-------------------|------------|
| ** **                            | ** ** | **2006**          | ** ** | **2005** | ** ** |
| Accrued expenses                      |       | $                 | 1,911      |   | $ | 2,092 |   |
| Depreciation                          |       | (20,934           | )          | (28,048 | ) |
| Amortization                          |       | 23,400            |       | (15,224 | ) |
| Reserves                              |       | 2,087             |       | 2,191 |   |
| Income (loss)  from partnerships      |       | 3,472             |       | (8 | ) |
| State income  taxes                   |       | 3                 |       | 12 |   |
| Non-goodwill  intangible amortization |       | (10,135           | )          | (7,436 | ) |
| NOL  carryforwards                    |       | 62,218            |       | 56,076 |   |
| Other                                 |       | 78                |       | 80 |   |
| Net deferred asset                    |       | 62,100            |       | 9,735 |   |
| Valuation  allowance                  |       | (65,572           | )          | (24,959 | ) |
|                                  |       | $                 | (3,472     | ) | $ | (15,224 | ) |

 

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As of June 30, 2006, we had federal NOL carryforwardsof approximately $157.8 million and state NOL carryforwards of approximately $143.0million, expiring on various dates between 2007 and 2026.  The charitable contribution carryforwards ofapproximately $0.2 million will begin to expire in 2008 if not utilized.

A valuationallowance is provided against the net deferred tax asset when it is more likelythan not that the net deferred tax asset will not be realized.  Based upon (1) our losses during 2006, (2)the impairment charges recorded in 2006 (Note 7) and (3) the availableevidence, management determined that is more likely than not that the deferredtax assets related to certain NOL carryforwards and other assets as of June 30,2006 will not be realized.  Consequently,we recorded a valuation allowance in the amount of $65.6 million as of June 30,2006.  In determining the net assetsubject to a valuation allowance, we excluded a deferred tax liability relatedto our indefinite-lived other intangible asset that is not expected to reversein the foreseeable future resulting in a net deferred tax liability ofapproximately $3.5 million after application of the valuation allowance.  The valuation allowance may be reduced in thefuture if we forecast and realize future taxable income or other tax planningstrategies are implemented.  Ultimate realizationof the benefit of the NOLs is dependent upon our generating sufficient taxableincome prior to their expiration.

**13.   ****RETIREMENT SAVINGS PLANS**

InSight has a401(k) profit sharing plan (Plan), which is available to all eligibleemployees, pursuant to which InSight matches a percentage of employeecontributions to the Plan.  InSightcontributions of approximately $1.4 million, $1.3 million and $1.0 million weremade for the years ended June 30, 2006, 2005 and 2004.

**14.    INVESTMENTSIN AND TRANSACTIONS WITH PARTNERSHIPS**

We have directownership in five Partnerships at June 30, 2006, three of which operatefixed-site centers, one of which operates a mobile PET facility and one ofwhich is developing a fixed-site center that has not yet commenced operations.  We own between 33% and 50% of thesePartnerships, serve as the managing general partner and provide certainmanagement services.  These Partnershipsare accounted for under the equity method.

Set forth below iscertain financial data of these Partnerships (amounts in thousands):
|                                 | ** ** | **June 30,** | ** ** |
|---------------------------------|------------|-------------------|------------|
| ** **                      | ** ** | **2006**          | ** ** | **2005** | ** ** |
| Combined  Financial Position:   |       |              |       |   |   |
| Current assets:                 |       |              |       |   |   |
| Cash                            |       | $                 | 3,275      |   | $ | 3,534 |   |
| Trade accounts receivables, net |       | 2,958             |       | 3,038 |   |
| Other                           |       | 66                |       | 75 |   |
| Property and  equipment, net    |       | 3,073             |       | 3,846 |   |
| Intangible  assets, net         |       | 34                |       | 117 |   |
| Total assets                    |       | 9,406             |       | 10,610 |   |
| Current  liabilities            |       | (1,958            | )          | (2,286 | ) |
| Due to the  Company             |       | (873              | )          | (912 | ) |
| Long-term  liabilities          |       | (364              | )          | (674 | ) |
| Net assets                      |       | $                 | 6,211      |   | $ | 6,738 |   |

** **

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Setforth below are the combined operating results of the Partnerships and ourequity in earnings of the Partnerships (amounts in thousands):
| ** **                                         | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Operating  Results:                                |       |                                    |       |   |   |   |   |
| Revenues                                           |       | $                                       | 27,430     |   | $ | 25,935 |   | $ | 19,455 |   |
| Expenses                                           |       | 20,439                                  |       | 19,558 |   | 14,314 |   |
| Net income                                         |       | $                                       | 6,991      |   | $ | 6,377 |   | $ | 5,141 |   |
|                                               |       |                                    |       |   |   |   |   |
| Equity in  earnings of unconsolidated partnerships |       | $                                       | 3,072      |   | $ | 2,613 |   | $ | 2,181 |   |

 

**15.    RELATEDPARTY TRANSACTIONS**

We havea management agreement with J.W. Childs Advisors II, L.P., the general partnerof J.W. Childs Equity Partners II, L.P., and Halifax Genpar, L.P., the generalpartner of Halifax Capital Partners, L.P. J.W. Childs Advisors II, L.P. and Halifax Genpar, L.P. provide business,management and financial advisory services to InSight and the Company inconsideration of (i) an annual fee of $240,000 to be paid to J.W. ChildsAdvisors II, L.P. and (ii) an annual fee of $60,000 to be paid to HalifaxGenpar, L.P.  In addition, from August2004 through December 2005, we paid J.W. Childs Advisors II, L.P. amonthly fee of $10,000 for the services of Michael N. Cannizzaro, our chairmanof the board.

#### **1****6.   ****SEGMENT INFORMATION**

We have tworeportable segments:  mobile operationsand fixed operations, which are business units defined primarily by the type ofservice provided.    Mobile operationsconsist primarily of mobile facilities while fixed operations consist primarilyof fixed-site centers, although each segment generates contract services andpatient services revenues.  We do notallocate corporate and billing related costs, depreciation related to ourbilling system and amortization related to other intangible assets to the twosegments.    We also do not allocateincome taxes to the two segments.  Wemanage cash flows and assets on a consolidated basis, and not by segment.

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

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

 

Year ended June30, 2005:

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

 

Year ended June30, 2004:

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

** **

65

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**17.    RESULTSOF QUARTERLY OPERATIONS (unaudited)**
| ** **   | ** ** | **First**                            | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** | ** ** | ** ** |
|--------------|------------|--------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| ** **   | ** ** | **Quarter**                          | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Total**  | ** ** |
| ** **   | ** ** | **(amounts in thousands)** | ** ** |
|         |       |                                 |       |        |       |        |       |        |       |       |       |
| 2006:        |       |                                 |       |        |       |        |       |        |       |       |       |
| Revenues     |       | $                                    | 78,708     |        | $          | 75,639      |       | $           | 76,560     |       | $          | 75,391 |   | $ | 306,298 |   |
| Gross profit |       | 12,463                               |       | 9,333       |       | 7,533       |       | 5,697       |       | 35,026     |       |
| Net loss     |       | (2,447                               | )          | (9,819      | )          | (11,205     | )          | (186,747    | )          | (210,218   | )          |
|         |       |                                 |       |        |       |        |       |        |       |       |       |
| 2005:        |       |                                 |       |        |       |        |       |        |       |       |       |
| Revenues     |       | $                                    | 80,854     |        | $          | 78,115      |       | $           | 78,212     |       | $          | 79,692 |   | $ | 316,873 |   |
| Gross profit |       | 14,109                               |       | 12,659      |       | 11,502      |       | 10,446      |       | 48,716     |       |
| Net loss     |       | (786                                 | )          | (1,134      | )          | (2,011      | )          | (23,286     | )          | (27,217    | )          |

 

**18.    HEDGINGACTIVITIES**

We account forhedging activities under SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities” (SFAS 133).  Inaccordance with SFAS 133, we formally document our hedge relationships,including identification of the hedging instruments and the hedged items, aswell as our risk management objectives and strategies for undertaking thehedge.  We also formally assess, both atinception and at least quarterly thereafter, whether the derivative instrumentsthat are used in hedging transactions are highly effective in offsetting thechanges in either the fair value or cash flows of the hedged item.

In January 2006,through InSight, we purchased an interest rate cap contract for a cost ofapproximately $0.3 million.  The contractis for a term of two years, with a notional amount of $100 million and a LIBORcap of 5.0%.  We have designated thisinterest cap contract as a highly effective cash flow hedge of our FloatingRate Notes under SFAS 133.  Accordingly,the value of the contract is marked-to-market quarterly, with changes in thefair value of the contract included as a separate component of othercomprehensive income (loss).  The premiumpaid for the contract will be amortized over the life of the contract asrequired under SFAS 133.  The fair valueof the interest rate cap contract was approximately $0.9 million as of June 30,2006.

**19.    SUPPLEMENTALCONDENSED CONSOLIDATED FINANCIAL INFORMATION**

We and all ofInSight’s wholly owned subsidiaries, or guarantor subsidiaries, guaranteeInSight Health Services Corp.’s payment obligations under the Fixed andFloating Rate Notes (Note 9).  Theseguarantees are full, unconditional and joint and several.  The following condensed consolidatingfinancial information has been prepared and presented pursuant to SECRegulation S-X Rule 3-10 “Financial statements of guarantors and issuers ofguaranteed securities registered or being registered.”  We account for investment in InSight and itssubsidiaries under the equity method of accounting.  Dividends from InSight to us are restrictedunder the agreements governing our material indebtedness.  This information is not intended to presentthe financial position, results of operations and cash flows of the individualcompanies or groups of companies in accordance with accounting principlesgenerally accepted in the United States.

66

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**SUPPLEMENTALCONDENSED CONSOLIDATING BALANCE SHEET**

**JUNE 30, 2006**

**(Amounts in thousands)**

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

 

67

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**SUPPLEMENTAL CONDENSEDCONSOLIDATING BALANCE SHEET**

**JUNE 30, 2005**

**(Amounts in thousands)**

 
| ** **                                                         | ** ** | **PARENT**  | ** ** | ** **  | ** ** | ** **       | ** ** | **NON-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------|------------|-------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                         | ** ** | **COMPANY** | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **GUARANTOR**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                         | ** ** | **ONLY**    | ** ** | **INSIGHT** | ** ** | **SUBSIDIARIES** | ** ** | **SUBSIDIARIES** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| ASSETS                                                             |       |        |       |        |       |             |       |             |       |             |       |             |       |
| Current assets:                                                    |       |        |       |        |       |             |       |             |       |             |       |             |       |
| Cash and cash  equivalents                                         |       | $           | —     |        | $          | —           |       | $                | 17,971     |             | $          | 2,868            |       | $ | — |   | $ | 20,839 |   |
| Trade accounts  receivables, net                                   |       | —      |       | —      |       | 40,271           |       | 6,179            |       | —           |       | 46,450           |       |
| Short-term  investments                                            |       | —      |       | —      |       | 5,000            |       | —           |       |             |       | 5,000            |       |
| Other current  assets                                              |       | —      |       | —      |       | 7,487            |       | 483              |       | —           |       | 7,970            |       |
| Intercompany  accounts receivable                                  |       | 87,086      |       | 487,828     |       | 17,294           |       | —           |       | (592,208         | )          | —           |       |
| Total current  assets                                              |       | 87,086      |       | 487,828     |       | 88,023           |       | 9,530            |       | (592,208         | )          | 80,259           |       |
| Property and equipment,  net                                       |       | —      |       | —      |       | 191,044          |       | 18,417           |       | —           |       | 209,461          |       |
| Investments in  partnerships                                       |       | —      |       | —      |       | 3,513            |       | —           |       | —           |       | 3,513            |       |
| Investments in  consolidated subsidiaries                          |       | (19,362     | )          | (19,362     | )          | 8,289            |       | —           |       | 30,435           |       | —           |       |
| Other assets                                                       |       | —      |       | —      |       | 16,272           |       | 29               |       | —           |       | 16,301           |       |
| Goodwill and other  intangible assets, net                         |       | —      |       | —      |       | 310,486          |       | 4,503            |       | —           |       | 314,989          |       |
|                                                               |       | $           | 67,724     |        | $          | 468,466          |       | $                | 617,627    |             | $          | 32,479           |       | $ | (561,773 | ) | $ | 624,523 |   |
|                                                               |       |        |       |        |       |             |       |             |       |             |       |             |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                         |       |        |       |        |       |             |       |             |       |             |       |             |       |
| Current liabilities:                                               |       |        |       |        |       |             |       |             |       |             |       |             |       |
| Current portion  of notes payable and capital lease obligations    |       | $           | —     |        | $          | 2,564            |       | $                | 4,708      |             | $          | 450              |       | $ | — |   | $ | 7,722 |   |
| Accounts payable  and other accrued expenses                       |       | —      |       | —      |       | 34,915           |       | 1,554            |       | —           |       | 36,469           |       |
| Intercompany  accounts payable                                     |       | —      |       | —      |       | 574,915          |       | 17,293           |       | (592,208         | )          | —           |       |
| Total current  liabilities                                         |       | —      |       | 2,564       |       | 614,538          |       | 19,297           |       | (592,208         | )          | 44,191           |       |
| Notes payable and  capital lease obligations, less current portion |       | —      |       | 485,044     |       | 7,504            |       | 1,298            |       | —           |       | 493,846          |       |
| Other long-term  liabilities                                       |       | —      |       | 220         |       | 14,947           |       | 3,595            |       | —           |       | 18,762           |       |
| Stockholders’ equity  (deficit)                               |       | 67,724      |       | (19,362     | )          | (19,362          | )          | 8,289            |       | 30,435           |       | 67,724           |       |
|                                                               |       | $           | 67,724     |        | $          | 468,466          |       | $                | 617,627    |             | $          | 32,479           |       | $ | (561,773 | ) | $ | 624,523 |   |

 

68

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**SUPPLEMENTAL CONDENSED CONSOLIDATINGSTATEMENT OF OPERATIONS**

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

**(Amounts in thousands)**

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

 

69

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**SUPPLEMENTAL CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

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

**(Amounts in thousands)**

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

 

70

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**SUPPLEMENTAL CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

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

**(Amounts in thousands)**

 
| ** **                                                          | ** ** | **PARENT**  | ** ** | ** **  | ** ** | ** **       | ** ** | **NON-**         | ** ** | ** **      | ** ** | ** **       | ** ** |
|---------------------------------------------------------------------|------------|-------------|------------|-------------|------------|------------------|------------|------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                          | ** ** | **COMPANY** | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **GUARANTOR**    | ** ** | ** **      | ** ** | ** **       | ** ** |
| ** **                                                          | ** ** | **ONLY**    | ** ** | **INSIGHT** | ** ** | **SUBSIDIARIES** | ** ** | **SUBSIDIARIES** | ** ** | **ELIMINATION** | ** ** | **CONSOLIDATED** | ** ** |
| Revenues:                                                           |       |        |       |        |       |             |       |             |       |            |       |             |       |
| Contract services                                                   |       | $           | —     |        | $          | —           |       | $                | 120,508    |            | $          | 8,685            |       | $ | — |   | $ | 129,193 |   |
| Patient services                                                    |       | —      |       | —      |       | 121,919          |       | 39,772           |       | —          |       | 161,691          |       |
| Total revenues                                                      |       | —      |       | —      |       | 242,427          |       | 48,457           |       | —          |       | 290,884          |       |
|                                                                |       |        |       |        |       |             |       |             |       |            |       |             |       |
| Costs of operations                                                 |       | —      |       | —      |       | 191,303          |       | 42,118           |       | —          |       | 233,421          |       |
| Gross profit                                                        |       | —      |       | —      |       | 51,124           |       | 6,339            |       | —          |       | 57,463           |       |
|                                                                |       |        |       |        |       |             |       |             |       |            |       |             |       |
| Corporate operating expenses                                        |       | —      |       | —      |       | (16,217          | )          | —           |       | —          |       | (16,217          | )          |
|                                                                |       |        |       |        |       |             |       |             |       |            |       |             |       |
| Gain on sale of center                                              |       | —      |       | —      |       | 2,129            |       | —           |       | —          |       | 2,129            |       |
|                                                                |       |        |       |        |       |             |       |             |       |            |       |             |       |
| Equity in earnings of unconsolidated partnerships                   |       | —      |       | —      |       | 2,181            |       | —           |       | —          |       | 2,181            |       |
|                                                                |       |        |       |        |       |             |       |             |       |            |       |             |       |
| Interest expense, net                                               |       | —      |       | —      |       | (39,235          | )          | (1,447           | )          | —          |       | (40,682          | )          |
| (Loss) income before  income taxes                                  |       | —      |       | —      |       | (18              | )          | 4,892            |       | —          |       | 4,874            |       |
|                                                                |       |        |       |        |       |             |       |             |       |            |       |             |       |
| Provision for income taxes                                          |       | —      |       | —      |       | 1,950            |       | —           |       | —          |       | 1,950            |       |
| (Loss) income before  equity in income of consolidated subsidiaries |       | —      |       | —      |       | (1,968           | )          | 4,892            |       | —          |       | 2,924            |       |
|                                                                |       |        |       |        |       |             |       |             |       |            |       |             |       |
| Equity in income of consolidated subsidiaries                       |       | 2,924       |       | 2,924       |       | 4,892            |       | —           |       | (10,740         | )          | —           |       |
| Net income                                                          |       | $           | 2,924      |        | $          | 2,924            |       | $                | 2,924      |            | $          | 4,892            |       | $ | (10,740 | ) | $ | 2,924 |   |

 

71

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**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASHFLOWS**

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

**(Amounts in thousands)**

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

 

72

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**SUPPLEMENTAL CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

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

**(Amounts in thousands)**

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

 

73

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**SUPPLEMENTAL CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

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

**(Amounts in thousands)**

 
| ** **                                                                                   | ** ** | **PARENT**  | ** ** | ** **  | ** ** | ** **       | ** ** | **NON-**         | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                   | ** ** | **COMPANY** | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **GUARANTOR**    | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                   | ** ** | **ONLY**    | ** ** | **INSIGHT** | ** ** | **SUBSIDIARIES** | ** ** | **SUBSIDIARIES** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| OPERATING ACTIVITIES:                                                                        |       |        |       |        |       |             |       |             |       |             |       |             |       |
| Net income                                                                                   |       | $           | 2,924      |        | $          | 2,924            |       | $                | 2,924      |             | $          | 4,892            |       | $ | (10,740 | ) | $ | 2,924 |   |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities: |       |        |       |        |       |             |       |             |       |             |       |             |       |
| Gain on sale of center                                                                       |       | —      |       | —      |       | (2,129           | )          | —           |       | —           |       | (2,129           | )          |
| Depreciation and  amortization                                                               |       | —      |       | —      |       | 53,266           |       | 5,467            |       | —           |       | 58,733           |       |
| Amortization of debt  issuance costs                                                         |       | —      |       | —      |       | 2,911            |       | —           |       | —           |       | 2,911            |       |
| Equity in earnings of  unconsolidated partnerships                                           |       | —      |       | —      |       | (2,181           | )          | —           |       | —           |       | (2,181           | )          |
| Distributions from  unconsolidated partnerships                                              |       | —      |       | —      |       | 2,054            |       | —           |       | —           |       | 2,054            |       |
| Equity in income of  consolidated subsidiaries                                               |       | (2,924      | )          | (2,924      | )          | (4,892           | )          | —           |       | 10,740           |       | —           |       |
| Changes in operating  assets and liabilities:                                                |       |        |       |        |       |             |       |             |       |             |       |             |       |
| Trade accounts  receivables, net                                                             |       | —      |       | —      |       | (9,158           | )          | 703              |       | —           |       | (8,455           | )          |
| Intercompany  receivables, net                                                               |       | —      |       | (97,056     | )          | 103,500          |       | (6,444           | )          | —           |       | —           |       |
| Other current assets                                                                         |       | —      |       | —      |       | 2,781            |       | 303              |       | —           |       | 3,084            |       |
| Accounts payable and  other accrued expenses                                                 |       | —      |       | —      |       | 5,596            |       | 367              |       | —           |       | 5,963            |       |
| Net cash (used in)  provided by operating activities                                         |       | —      |       | (97,056     | )          | 154,672          |       | 5,288            |       | —           |       | 62,904           |       |
|                                                                                         |       |        |       |        |       |             |       |             |       |             |       |             |       |
| INVESTING ACTIVITIES:                                                                        |       |        |       |        |       |             |       |             |       |             |       |             |       |
| Acquisitions of fixed-site  centers and mobile facilities                                    |       | —      |       | —      |       | (101,334         | )          | —           |       | —           |       | (101,334         | )          |
| Proceeds from sale of  center                                                                |       | —      |       | —      |       | 5,413            |       | —           |       | —           |       | 5,413            |       |
| Additions to property  and equipment                                                         |       | —      |       | —      |       | (40,979          | )          | (5,755           | )          | —           |       | (46,734          | )          |
| Other                                                                                        |       | —      |       | —      |       | (2,379           | )          | —           |       | —           |       | (2,379           | )          |
| Net cash used in  investing activities                                                       |       | —      |       | —      |       | (139,279         | )          | (5,755           | )          | —           |       | (145,034         | )          |
|                                                                                         |       |        |       |        |       |             |       |             |       |             |       |             |       |
| FINANCING ACTIVITIES:                                                                        |       |        |       |        |       |             |       |             |       |             |       |             |       |
| Principal payments of  notes payable and capital lease obligations                           |       | —      |       | (2,201      | )          | (5,319           | )          | (689             | )          | —           |       | (8,209           | )          |
| Proceeds from issuance  of notes payable                                                     |       | —      |       | 100,000     |       | —           |       | 1,125            |       | —           |       | 101,125          |       |
| Other                                                                                        |       | —      |       | (743        | )          | (219             | )          | 1,034            |       | —           |       | 72               |       |
| Net cash provided by  (used in) financing activities                                         |       | —      |       | 97,056      |       | (5,538           | )          | 1,470            |       | —           |       | 92,988           |       |
|                                                                                         |       |        |       |        |       |             |       |             |       |             |       |             |       |
| INCREASE IN CASH AND CASH EQUIVALENTS                                                        |       | —      |       | —      |       | 9,855            |       | 1,003            |       | —           |       | 10,858           |       |
| Cash, beginning of year                                                                      |       | —      |       | —      |       | 15,965           |       | 3,589            |       | —           |       | 19,554           |       |
| Cash, end of year                                                                            |       | $           | —     |        | $          | —           |       | $                | 25,820     |             | $          | 4,592            |       | $ | — |   | $ | 30,412 |   |

 

74

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**ITEM 9.****                             CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE**

None.

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

We carried out an evaluation, with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of our disclosure controls andprocedures (pursuant to Rule 15d-15 under the Securities Exchange Act of 1934)as of the end of the period covered by this Form 10-K.  Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures are effective in timely alerting them to materialinformation relating to us (including our consolidated subsidiaries) requiredto be included in our periodic SEC filings. There has been no change in our internal control over financialreporting during the quarter ended June 30, 2006 that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

**ITEM 9B.       OTHERINFORMATION**

## None.

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**PART III**

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

Thefollowing table sets forth the names, ages and positions of our directors andexecutive officers, including the executive officers of InSight who are deemedour executive officers (as defined under Rule 3b-7 of the SecuritiesExchange Act of 1934), as of August 31, 2006:
| Michael N.  Cannizzaro     |   | 57     |   | Chairman of the Board and Director                                        |
|----------------------------|--------|--------|--------|---------------------------------------------------------------------------|
|                       |   |   |   |                                                                      |
| Bret W.  Jorgensen         |   | 47     |   | President and Chief Executive Officer and Director                        |
|                       |   |   |   |                                                                      |
| Patricia R.  Blank         |   | 56     |   | Executive Vice President – Clinical Services and  Support of InSight |
|                       |   |   |   |                                                                      |
| Louis E.  Hallman, III     |   | 47     |   | Executive Vice President and Chief Strategy Officer  of InSight           |
|                       |   |   |   |                                                                      |
| Donald F. Hankus           |   | 52     |   | Executive Vice President and Chief Information  Officer of InSight        |
|                       |   |   |   |                                                                      |
| Mitch C. Hill              |   | 47     |   | Executive Vice President and Chief Financial Officer                      |
|                       |   |   |   |                                                                      |
| Marilyn U.  MacNiven-Young |   | 55     |   | Executive Vice President, General Counsel and  Secretary                  |
|                       |   |   |   |                                                                      |
| Kenneth M. Doyle           |   | 41     |   | Director and Vice President                                               |
|                       |   |   |   |                                                                      |
| David W. Dupree            |   | 53     |   | Director                                                                  |
|                       |   |   |   |                                                                      |
| Steven G. Segal            |   | 46     |   | Director                                                                  |
|                       |   |   |   |                                                                      |
| Mark J. Tricolli           |   | 35     |   | Director and Vice President                                               |
|                       |   |   |   |                                                                      |
| Edward D. Yun              |   | 39     |   | Director and Vice President                                               |

*Michael N. Cannizzaro* served as ourPresident and Chief Executive Officer from August 9, 2004 until July 1,2005.  He has been a member of our board of directors since October 17,2001 and has been chairman of the board since May 30, 2002.  He has been an Operating Partner of J.W.Childs Associates, L.P. since October 29, 2001.  Prior to that, he wasPresident and Chief Executive Officer of Beltone Electronics Corporation from1998 to 2000. Prior to that, he was President of Caremark International’sPrescription Service Division from 1994 to 1997; Vice President, BusinessDevelopment of Caremark’s Nephrology Service Division from April 1994 toSeptember 1994; and President of Leica North America from 1993 to 1994. He heldnumerous positions in general management at Baxter Healthcare Corporation from1976 to 1993, including the position of President of four different divisions.He currently serves as a director of Universal Hospital Services, Inc.,chairman of the board and a director of Cornerstone Healthcare Group, vicechairman and a director of Sheridan Healthcare and chairman of the board and adirector of Ion Holdings, Inc.

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

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*Patricia R. Blank*has been InSight’sExecutive Vice President-Clinical Services and Support since March 28,2006.  She was InSight’s Executive VicePresident-Enterprise Operations from October 22, 2004 to March 28, 2006.  She was InSight’s Executive Vice Presidentand Chief Information Officer from September 1, 1999 to October 22, 2004.Prior to joining InSight, Ms. Blank was the principal of Blank &Company, a consulting firm specializing in healthcare consulting. From 1995 to1998, Ms. Blank served as Executive Vice President and Chief OperatingOfficer of HealthHelp, Inc., a Houston, Texas-based radiology servicesorganization managing radiology provider networks in multiple states. From 1988to 1995, she was corporate director of radiology of FHP, a California insurancecompany.

*Louis E. Hallman, III,* has been InSight’s Executive Vice President and Chief StrategyOfficer since August 10, 2005.  Prior to this appointment, Mr. Hallman wasthe President of Right Manufacturing LLC, a specialty manufacturer, fromJanuary 2003 through January 2005.  From January 2002 until January 2003,Mr. Hallman was a private investor and reviewed various businessopportunities.  From August 1999 through January 2002, he was Presidentand CEO of Homesquared Inc., a supplier of web-based software applicationsto production homebuilders.  In July 1989, Mr. Hallman co-founded TheraTx,Inc., which became a diversified healthcare services company listed onNASDAQ.  While at TheraTx, he served as Vice President CorporateDevelopment until its sale in April 1997.

*DonaldF. Hankus*was appointed InSight’s Executive Vice Presidentand Chief Information Officer on September 26, 2005. Prior to thisappointment, Mr. Hankus was the Director of Sales Operations of QuestSoftware, Inc., a provider of application, database and infrastructuresoftware, from January 2004 through September 2005. From January 2000 throughJanuary 2004, he was Chief Information Officer of Directfit. From December 1996to January 2000, he served as Director of Software Development for CendantCorporation, a real estate brokerage and hotel franchisor.

*MitchC. Hill* has been our Executive Vice President and ChiefFinancial Officer since January 10, 2005.  Prior to this appointment, Mr.Hill was President and Chief Executive Officer of BMS Reimbursement Management,a provider of outsourced billing collection, accounts receivable and practicemanagement service, from April 2001 to December 2004.  Prior tothat, he held the following positions with Buy.Com Inc., a multi-categoryInternet superstore, Chief Financial Officer from November 1999 toFebruary 2001 and President and Chief Financial Officer fromApril 2000 to February 2001.

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

*KennethM. Doyle*has been a member of our board of directors and VicePresident since June 13, 2001. Mr. Doyle is a Managing Director of The Halifax Group, L.L.C.Mr. Doyle joined The Halifax Group, L.L.C. in January 2000. Prior tojoining The Halifax Group, L.L.C. Mr. Doyle was an Industry Leader andVice President at GE Equity, the private equity subsidiary of GE Capital. Priorto joining GE Equity, Mr. Doyle spent four years in investment banking asa Senior Associate for the Telecommunications Corporate Finance Group atMerrill Lynch and as an Associate with Chase Manhattan Bank in the Media andTelecommunications Group. Mr. Doyle also spent three years withErnst & Young in the Entrepreneurial Services Group. Mr. Doylecurrently serves on the board of directors of Soil Safe, Inc. and MaverickHealthcare Group, LLC.

*DavidW. Dupree*has been a member of our board of directors sinceOctober 17, 2001.  Mr. Dupreeis a Managing Director of The Halifax Group, L.L.C. which he founded in January1999. Prior to joining The Halifax Group, L.L.C., Mr. Dupree was aManaging Director and Partner with The Carlyle Group, a global investment firmlocated in Washington, D.C., where he was primarily responsible forinvestments in healthcare and related sectors. Prior to joining The CarlyleGroup in 1992, Mr. Dupree was a Principal in Corporate Finance withMontgomery Securities and prior to that, he was Co-Head of Equity PrivatePlacements at Alex, Brown & Sons Incorporated. Mr. Dupreecurrently serves on the board of directors of Whole Foods Markets, Inc.,Universal Hospital Services, Inc., and PolyPipe Holdings, Inc. and previouslyserved on InSight’s board of directors, as a designee of The Carlyle Group,from October 1997 to December 1999.

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*StevenG. Segal*has been a member of our board of directors sinceOctober 17, 2001.  He is a SpecialLimited Partner of J.W. Childs Associates, L.P. and has been at J.W. ChildsAssociates, L.P. since 1995. Prior to that time, he was an executive at ThomasH. Lee Company from 1987, most recently holding the position of ManagingDirector. He is also a director of MAAX, Inc., The NutraSweet Company,Universal Hospital Services, Inc. and Round Grille, Inc. (d/b/a FIRE + iCE).

*MarkJ. Tricolli*has been a member of our board of directors andVice President since June 13, 2001. Mr. Tricolli is a Vice President of J.W. Childs Associates, L.P.and has been at J.W. Childs Associates, L.P. since July 2000.   During the summer of 1998, he worked atDonaldson, Lufkin & Jenrette. He is also a director of CornerstoneHealthcare Group, Sheridan Healthcare, Joseph Abboud and Universal HospitalServices, Inc.

*EdwardD. Yun*has been a member of our board of directors sinceJune 13, 2001 and has been a Vice President since February 11,2002.  He is a Partner of J.W. ChildsAssociates, L.P. and has been at J.W. Childs Associates, L.P. since 1996. From1994 until 1996, he was an Associate at DLJ Merchant Banking, Inc. He is also adirector of Pan Am International Flight Academy, Inc., Cornerstone HealthcareGroup, Sheridan Healthcare, Joseph Abboud and Universal Hospital Services, Inc.

*AuditCommittee*.  Our board of directors has not establishedcommittees.  Instead, the InSight boardof directors, which is identical to our board of directors, established anaudit committee, which oversees our (1) accounting and financial reportingprocesses and audits of our annual financial statements, (2) internal controlover financial reporting, and (3) the independent registered public accountingfirm’s qualifications and independence. The audit committee’s responsibilities are limited to oversight. Ourmanagement is responsible for the preparation, presentation and integrity ofour financial statements as well as our financial reporting process, accountingpolicies and internal control over financial reporting.

InSight’s board ofdirectors has determined that it presently has no “audit committee financialexpert” (as that term is defined in the rules promulgated by the SEC pursuantto the Sarbanes-Oxley Act of 2002) serving on the audit committee. InSight’s board of directors has determined that each of the members of theaudit committee is financially literate and has accounting or related financialmanagement expertise, as such terms are interpreted by InSight’s board ofdirectors.

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

 

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**ITEM 11.     EXECUTIVE COMPENSATION**

Thefollowing table sets forth information concerning the annual, long-term and allother compensation for services rendered in all capacities to us and oursubsidiaries for the years ended June 30, 2006, 2005 and 2004 of thepersons who served as (1) our chief executive officer during the yearended June 30, 2006 and (2) the other four most highly compensatedexecutive officers for the year ended June 30, 2006. We refer to the personsdescribed in clause (2) above as the Other Executive Officers and we referto persons discussed in clauses (1) and (2) above as the Named ExecutiveOfficers.

**Summary Compensation Table**

 
|                                                | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **         | ** ** | ** **         | ** ** | **Long Term**     | ** ** | ** **         | ** ** |
|------------------------------------------------|------------|------------------------------|------------|------------------|------------|--------------------|------------|--------------------|------------|------------------------|------------|--------------------|------------|
| ** **                                     | ** ** | **Annual Compensation** | ** ** | **Compensation** | ** ** | ** **         | ** ** |
| ** **                                     | ** ** | **Fiscal**                   | ** ** | ** **       | ** ** | ** **         | ** ** | ** **         | ** ** | **Awards**             | ** ** | ** **         | ** ** |
| ** **                                     | ** ** | **Year**                     | ** ** | ** **       | ** ** | ** **         | ** ** | ** **         | ** ** | **Stock Options** | ** ** | **All Other** | ** ** |
| **Name and Principal Position** | ** ** | **Ended**                    | ** ** | **Salary**       | ** ** | **Bonus (1)** | ** ** | **Other (2)** | ** ** | **(Shares)**           | ** ** | **Comp (2)**  | ** ** |
|                                           |       |                         |       |             |       |               |       |               |       |                   |       |               |       |
| Bret W. Jorgensen                              |       | 2006                         |       | $                | 400,000    |               | $          | 200,000            |       | $                      | 12,000     |               | 248,236    |   | $ | 34,601 |   |
| President and Chief  Executive                 |       | 2005                         |       | —           |       | —             |       | —             |       | —                 |       | —             |       |
| Officer                                        |       | 2004                         |       | —           |       | —             |       | —             |       | —                 |       | —             |       |
|                                           |       |                         |       |             |       |               |       |               |       |                   |       |               |       |
| Michael N. Cannizzaro (3)                      |       | 2006                         |       | $                | —     |               | $          | —             |       | $                      | —     |               | —     |   | $ | — |   |
| Chairman of the Board of                       |       | 2005                         |       | —           |       | —             |       | —             |       | 40,000                 |       | —             |       |
| Directors                                      |       | 2004                         |       | —           |       | —             |       | —             |       | —                 |       | —             |       |
|                                           |       |                         |       |             |       |               |       |               |       |                   |       |               |       |
| Mitch C. Hill                                  |       | 2006                         |       | $                | 275,000    |               | $          | 42,500             |       | $                      | 9,000      |               | —     |   | $ | 28,337 |   |
| Executive Vice President and                   |       | 2005                         |       | 121,600          |       | 55,000             |       | 4,500              |       | 40,000                 |       | 10,199             |       |
| Chief Financial Officer                        |       | 2004                         |       | —           |       | —             |       | —             |       | —                 |       | —             |       |
|                                           |       |                         |       |             |       |               |       |               |       |                   |       |               |       |
| Patricia R. Blank (4)                          |       | 2006                         |       | $                | 275,000    |               | $          | 31,625             |       | $                      | 9,000      |               | —     |   | $ | 31,459 |   |
| Executive Vice President -                     |       | 2005                         |       | 275,000          |       | 97,000             |       | 9,000              |       | 30,000                 |       | 31,873             |       |
| Clinical Services and  Support                 |       | 2004                         |       | 224,700          |       | 42,000             |       | 9,000              |       | —                 |       | 30,367             |       |
|                                           |       |                         |       |             |       |               |       |               |       |                   |       |               |       |
| Michael A. Boylan (5)                          |       | 2006                         |       | $                | 275,000    |               | $          | 30,938             |       | $                      | 9,000      |               | —     |   | $ | 30,795 |   |
| Executive Vice President -                     |       | 2005                         |       | 275,000          |       | 97,000             |       | 9,000              |       | —                 |       | 29,872             |       |
| Enterprise Development                         |       | 2004                         |       | 249,700          |       | 82,950             |       | 9,000              |       | —                 |       | 25,692             |       |
|                                           |       |                         |       |             |       |               |       |               |       |                   |       |               |       |
| Marilyn U. MacNiven-Young                      |       | 2006                         |       | $                | 275,000    |               | $          | 39,750             |       | $                      | 9,000      |               | —     |   | $ | 14,609 |   |
| Executive Vice President,                      |       | 2005                         |       | 275,000          |       | 85,000             |       | 9,000              |       | 10,000                 |       | 14,087             |       |
| General Counsel and  Secretary                 |       | 2004                         |       | 267,500          |       | 52,400             |       | 9,000              |       | —                 |       | 12,644             |       |

 

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(1)          Bonuses which are basedon our performance are earned and accrued during the year and paid subsequentto the end of each year.  Discretionarybonuses are earned and paid in the year in which they are awarded by InSight’scompensation committee.

(2)          Amounts of Other AnnualCompensation include perquisites (auto allowances) and amounts of All OtherCompensation include (i) amounts contributed to InSight’s 401(k) profitsharing plan, (ii) specified premiums on executive life insurancearrangements, (iii) specified premiums on executive health insurancearrangements and (iv) certain professional membership dues.

(3)          Mr. Cannizarro served asPresident and Chief Executive Officer from August 9, 2004 to July 1, 2005.

(4)          Effective March 28,2006, Ms. Blank’s title changed from Executive Vice President-EnterpriseOperations to Executive Vice President-Clinical Services and Support.

(5)          Mr. Boylan served asExecutive Vice President-Enterprise Development until June 30, 2006.

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

OPTIONGRANTS.  During the year ended June 30,2006, a stock option was granted by us pursuant to a stock option agreement toour chief executive officer, as follows:
| ** **        | ** ** | **Individual Grants** | ** ** | ** **             | ** ** | ** **                  | ** ** |
|-------------------|------------|----------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **        | ** ** | **Number of**         | ** ** | **Percent of**    | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Securities**             | ** ** | **Total Options** | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | **Potential Realizable Value** | ** ** |
| ** **        | ** ** | **Underlying**             | ** ** | **Granted to**    | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | **at Assumed Annual Rates** | ** ** |
| ** **        | ** ** | **Options**                | ** ** | **Employees in**  | ** ** | **Exercise Price**     | ** ** | **Market Price on** | ** ** | **Expiration** | ** ** | **of Stock Price Appreciation** | ** ** |
| **Name**          | ** ** | **Granted**                | ** ** | **Fiscal Year**   | ** ** | **Per Share (1)** | ** ** | **Grant Date** | ** ** | **Date (3)** | ** ** | **for Option Term (2)** | ** ** |
| ** **        | ** ** | ** **                 | ** ** | ** **             | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | **5%** | ** ** | **10%** | ** ** |
| Bret W. Jorgensen |       | 248,236                    |       | 73.9%                  |       | $ 19.82                |       | $ 19.82 |   | 7/1/2015 |   | $ | 3,094,186 |   | $ | 7,841,274 |   |
|                   |            |                            |            |                        |            |                             |            |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Theoption was granted at an exercise price of $19.82 per share, the estimatedprice per share determined by the board of directors.

(2)          Potential realizablevalue is determined by taking the exercise price per share and applying thestated annual appreciation rate compounded annually for the remaining term ofthe option (ten years), subtracting the exercise price per share at the end ofthe period and multiplying the remaining number by the number of optionsgranted.  Actual gains, if any, on stockoption exercises and the Company’s common stock holdings are dependent on thefuture performance of the common stock.

(3)          The option isexercisable starting twelve months after the date of grant with the sharesvesting on the following schedule:  (i) 15%of the shares becoming exercisable upon each anniversary of the grant date ineach of the fiscal years ending on June 30 in the years 2007-2011 and (ii) 25%of the shares becoming exercisable upon the attainment of certain performancetargets on an exit event.  The option wasgranted for a term of ten years, subject to earlier termination in certainevents related to termination of employment.

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*Option Exercises and Year-End Values.*During the year ended June 30, 2006, none of the Named Executive Officersexercised any stock options. The following table sets forth information withrespect to the unexercised options to purchase common stock granted under our2001 Stock Option Plan and pursuant to stock option agreements, for the NamedExecutive Officers at June 30, 2006: 
| ** **                | ** ** | **Number of** | ** ** | ** **   | ** ** | ** **                                       | ** ** | ** **                                   | ** ** | ** **                         | ** ** | ** **        | ** ** |
|---------------------------|------------|--------------------|------------|--------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------|------------|-------------------|------------|
| ** **                | ** ** | **Shares**         | ** ** | ** **   | ** ** | ** **                                       | ** ** | ** **                                   | ** ** | **Value of Unexercised** | ** ** |
| ** **                | ** ** | **Acquired**       | ** ** | ** **   | ** ** | **Number of Unexercised Options** | ** ** | **In-the-Money Options**                | ** ** |
| ** **                | ** ** | **on**             | ** ** | **Value**    | ** ** | **at June 30, 2006**              | ** ** | **at June 30, 2006 (1)** | ** ** |
| **Name**                  | ** ** | **Exercise**       | ** ** | **Realized** | ** ** | **Exercisable**                                  | ** ** | **Unexercisable**                            | ** ** | **Exercisable**                    | ** ** | **Unexercisable** | ** ** |
|                      |       |               |       |         |       |                                             |       |                                         |       |                               |       |              |       |
| Bret W. Jorgensen         |       | —             |       | $            | —     |                                             | —     |                                         | 248,236    |                               | $          | —            |       | $ | — |   |
|                      |       |               |       |         |       |                                             |       |                                         |       |                               |       |              |       |
| Michael N. Cannizzaro     |       | —             |       | —       |       | 40,000                                           |       | —                                       |       | —                             |       | —            |       |
|                      |       |               |       |         |       |                                             |       |                                         |       |                               |       |              |       |
| Mitch C. Hill             |       | —             |       | —       |       | 4,000                                            |       | 36,000                                       |       | —                             |       | —            |       |
|                      |       |               |       |         |       |                                             |       |                                         |       |                               |       |              |       |
| Patricia R. Blank         |       | —             |       | —       |       | 10,500                                           |       | 49,500                                       |       | —                             |       | —            |       |
|                      |       |               |       |         |       |                                             |       |                                         |       |                               |       |              |       |
| Michael A. Boylan         |       | —             |       | —       |       | 64,490                                           |       | —                                       |       | —                             |       | —            |       |
|                      |       |               |       |         |       |                                             |       |                                         |       |                               |       |              |       |
| Marilyn U. MacNiven-Young |       | —             |       | —       |       | 8,500                                            |       | 31,500                                       |       | —                             |       | —            |       |
|                           |            |                    |            |              |            |                                                  |            |                                              |            |                                    |            |                   |            |  |  |  |

 

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(1)          Basedon the price at which the common stock was valued on that date of $0.01 pershare.

*Indemnification Agreements.* InSight hasentered into separate indemnification agreements with each of its directors andexecutive officers that could require InSight, among other things, to indemnifythem against certain liabilities that may arise by reason of their status orservice as directors and executive officers of InSight and its affiliates andto advance expenses incurred by them as a result of any proceedings againstthem as to which they could be indemnified.

*EmploymentAgreements. *Inconnection with our acquisition of InSight, Mr. Boylan and Ms. Blank enteredinto employment agreements with us.  Ms.MacNiven-Young entered into an employment agreement with us in December2001.  In January 2005, we entered into anew employment agreement with Ms. Blank as a result of her appointment asInSight’s Executive Vice President - Enterprise Operations on October 22,2004.  We entered into employmentagreements with Messrs. Hill, Jorgensen, Hallman and Hankus in January, July,August and September of 2005, respectively. Effective as of June 30, 2006, Mr. Boylan was no longer employed byus.  We entered into a separation agreementwith him that was consistent with the terms of his employment agreement, aswell as a short-term consulting arrangement. See Item 13. “CertainRelationships and Related Transactions—Severance and Consulting Arrangements.”

Each ofthe employment agreements with the Other Executive Officers and Messrs.Jorgensen, Hallman and Hankus provides for a term of 12 months on acontinuing basis, subject to certain termination rights. These 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 (except in the case of Mr. Jorgensen’s whose goalsshall be agreed upon by InSight’s board of directors and himself). Eachexecutive is provided with a life insurance policy of three times the amount ofhis or her annual base salary and is entitled to participate in InSight’s lifeinsurance, medical, health and accident and disability plan or program, pensionplan or other similar benefit plan and our stock option plans. Each executiveis subject to a noncompetition covenant and nonsolicitation provisions(relating to InSight’s employees and customers) during the term of his or herrespective employment agreement and continuing for a period of 12 monthsafter the termination of his or her respective employment. Each executive’semployment agreement will terminate and each of them will be entitled to allaccrued and unpaid compensation, as well as 12 months of compensation atthe annual salary rate then in effect (1) upon the executive’s permanentand total disability (as defined in the respective employment agreement);(2) upon InSight’s 30 days’ written notice to the executive of thetermination of the executive’s employment without cause (as defined in the respectiveemployment agreement); (3) if the executive terminates his or heremployment with InSight for good reason (as defined in the respectiveemployment agreement); and (4) if the executive’s employment is

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terminatedby InSight without cause or he or she terminates his or her employment for goodreason within 12 months of a change in control (as defined in therespective employment agreement). In addition, InSight will maintain at itsexpense until the earlier of 12 months after the date of termination orcommencement of the executive’s benefits pursuant to full time employment witha new employer under such employer’s standard benefits program, all lifeinsurance, medical, health and accident and disability plans or programs, inwhich the executive was entitled to participate immediately prior to the dateof termination. Each executive’s employment will immediately terminate upon hisor her death and the executors or administrators of his or her estate or his orher heirs or legatees (as the case may be) will be entitled to all accrued andunpaid compensation up to the date of his or her death. The executive’semployment will terminate and the executive will not be entitled to receive anymonetary compensation or benefit upon (1) the termination of his or herrespective employment by InSight for cause, or (2) his or her voluntarytermination of his or her respective employment with InSight without goodreason.

Underhis employment agreement, Mr. Jorgensen was entitled to a bonus equal to 50% ofhis annual salary for the fiscal year ended June 30, 2006.  Under his employment agreement, Mr. Hallmanwas eligible to receive a bonus of 40% of his annual salary for the fiscal yearended June 30, 2006 (50% of this bonus is guaranteed).  Bonus payments of $200,000 and $48,822 weremade during the first quarter of fiscal 2007 to Mr. Jorgensen and Mr. Hallman,respectively.

*Compensation Committee Interlocks and Insider Participation*.  The InSight board of directors, which isidentical to our board of directors, established a compensation committee toact with regard to compensation and other matters for us.  During the year ended June 30, 2006, InSight’scompensation committee consisted of Messrs. Cannizzaro (chairman), Dupree,Jorgensen, and Segal.  Mr. Cannizzaro servedas our President and Chief Executive Officer from August 9, 2004 to July 1,2005.  Neither Mr. Cannizzaro nor Mr.Jorgensen participated in decisions relating to his own compensation or awardof stock options.

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

The following table sets forth certain informationregarding beneficial ownership of our common stock as of August 31, 2006,by:  (i) each person or entity known to us owning beneficially 5% or moreof our common stock; (ii) each member of our board of directors; (iii) each ofthe Named Executive Officers; and (iv) all directors and executive officers (asdefined by Rule 3b-7), as a group.  At August 31, 2006, our outstandingsecurities consisted of approximately 5,468,814 shares of common stock andoptions to purchase 282,750 shares of common stock which are immediatelyexercisable.  Beneficial ownership of the securities listed in the tablehas been determined in accordance with the applicable rules and regulationspromulgated under the Securities Exchange Act of 1934.

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|                                                                       | ** ** | **Amount and Nature** | ** ** | **Percent of**   | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------|------------|-----------------------|------------|
| ** **                                                            | ** ** | **of Beneficial**          | ** ** | **Common Stock** | ** ** |
| ** **                                                            | ** ** | **Ownership of**           | ** ** | **Beneficially**      | ** ** |
| **Names and Addresses of Beneficial Owners** | ** ** | **Common Stock (1)**  | ** ** | **Owned (1)**    | ** ** |
|                                                                  |       |                            |       |                  |       |
| J.W. Childs Equity Partners  II, L.P. (2)                             |       |                            |       |                  |       |
| 111 Huntington Avenue, Suite  2900                                    |       |                            |       |                  |       |
| Boston, Massachusetts 02199                                           |       | 4,350,290                       |       | 79.5                  | %          |
|                                                                  |       |                            |       |                  |       |
| JWC-InSight Co-invest LLC  (3)                                        |       |                            |       |                  |       |
| 111 Huntington Avenue, Suite  2900                                    |       |                            |       |                  |       |
| Boston, 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  2900                                    |       |                            |       |                  |       |
| Boston, Massachusetts 02199                                           |       | —                          |       | —                |       |
|                                                                  |       |                            |       |                  |       |
| Edward D. Yun (6)                                                     |       |                            |       |                  |       |
| 111 Huntington Avenue, Suite  2900                                    |       |                            |       |                  |       |
| Boston, Massachusetts 02199                                           |       | —                          |       | —                |       |
|                                                                  |       |                            |       |                  |       |
| Michael N. Cannizzaro (7)                                             |       |                            |       |                  |       |
| 111 Huntington Avenue, Suite  2900                                    |       |                            |       |                  |       |
| Boston, Massachusetts 02199                                           |       | 40,000                          |       | *                     |       |
|                                                                  |       |                            |       |                  |       |
| Mark J. Tricolli (8)                                                  |       |                            |       |                  |       |
| 111 Huntington Avenue, Suite  2900                                    |       |                            |       |                  |       |
| Boston, 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                                                |       | —                          |       | —                |       |
|                                                                  |       |                            |       |                  |       |
| Bret W. Jorgensen (11)                                                |       |                            |       |                  |       |
| 26250 Enterprise Court,  Suite 100                                    |       |                            |       |                  |       |
| Lake Forest, CA 92630                                                 |       | 37,235                          |       | *                     |       |
|                                                                  |       |                            |       |                  |       |
| Mitch C. Hill (12)                                                    |       |                            |       |                  |       |
| 26250 Enterprise Court,  Suite 100                                    |       |                            |       |                  |       |
| Lake Forest, CA 92630                                                 |       | 4,000                           |       | *                     |       |
|                                                                  |       |                            |       |                  |       |
| Marilyn U. MacNiven-Young  (13)                                       |       |                            |       |                  |       |
| 26250 Enterprise Court,  Suite 100                                    |       |                            |       |                  |       |
| Lake Forest, CA 92630                                                 |       | 11,500                          |       | *                     |       |
|                                                                  |       |                            |       |                  |       |
| Patricia R. Blank (14)                                                |       |                            |       |                  |       |
| 26250 Enterprise Court,  Suite 100                                    |       |                            |       |                  |       |
| Lake Forest, CA 92630                                                 |       | 13,500                          |       | *                     |       |
|                                                                  |       |                            |       |                  |       |
| All directors and executive  officers, as a group (12 persons)        |       | 118,327                         |       | 2.1                   | %          |

 

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*Less than 1%

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(1)          For purposes of thistable, a person is deemed to have “beneficial ownership” of any security thatsuch person has the right to acquire within 60 days after August 31, 2006.

(2)          Includes 4,011,758shares of our common stock owned directly by J.W. Childs Equity Partners II,L.P. and 338,532 shares of our common stock owned directly by JWC-InSightCo-invest LLC, an affiliate of J.W. Childs Equity Partners II, L.P.  The general partner of J.W. Childs EquityPartners II, L.P. is J.W. Childs Advisors II, L.P., a Delaware limitedpartnership.  The general partner of J.W.Childs Advisors II, L.P. is J.W. Childs Associates, L.P., a Delaware limitedpartnership.  The general partner of J.W.Childs Associates, L.P. is J.W. Childs Associates, Inc., a Delawarecorporation.  J.W. Childs Advisors II,L.P., J.W. Childs Associates, L.P. and J.W. Childs Associates, Inc. may bedeemed to beneficially own the 4,350,290 shares of our common stock held byJ.W. Childs Equity Partners II, L.P. and JWC-InSight Co-invest LLC.  John W. Childs, Glenn A. Hopkins, Dana L.Schmaltz, Adam L. Suttin, William E. Watts, James Rhee and Jeffrey Teschke, aswell as Steven G. Segal, Edward D. Yun, Michael N. Cannizzaro and Mark J.Tricolli (as indicated in footnotes 5, 6, 7, and 8, respectively) share votingand investment control over, and therefore may be deemed to beneficially own,the shares of common stock held by these entities.

(3)          JWC-InSight Co-invest LLCis a Delaware limited liability company and affiliate of J.W. Childs EquityPartners II, L.P.  J.W. ChildsAssociates, Inc. is the managing member of JWC-InSight Co-invest LLC.  As the managing member, J.W. ChildsAssociates, Inc. owns the 338,532 shares of our common stock to be helddirectly by JWC-InSight Co-invest LLC. John W. Childs, Glenn A. Hopkins, Dana L. Schmaltz, Adam L. Suttin,William E. Watts, James Rhee and Jeffrey Teschke, as well as Steven G. Segal,Edward D. Yun, Michael N. Cannizzaro and Mark J. Tricolli (as indicated infootnotes 5, 6, 7, and 8, respectively) share voting and investment controlover, and therefore may be deemed to beneficially own, the shares of commonstock held by these entities.

(4)          Includes 1,107,020shares of our common stock owned directly by Halifax Capital Partners, L.P. and4,092 shares of our common stock owned directly by Mr. Dupree, a ManagingDirector of The Halifax Group, L.L.C. The general partner of Halifax Capital Partners, L.P. is Halifax Genpar,L.P., a Delaware limited partnership. The general partner of Halifax Genpar, L.P. is The Halifax Group, L.L.C.a Delaware limited liability company. Halifax Genpar, L.P. and The Halifax Group, L.L.C. may be deemed tobeneficially own the 1,111,112 shares of our common stock held by HalifaxCapital Partners, L.P. and its affiliate, Mr. Dupree.  Halifax Capital Partners, L.P., HalifaxGenpar, L.P. and The Halifax Group, L.L.C. disclaim beneficial ownership of the4,092 shares of our common stock owned directly by Mr. Dupree.  William L. Rogers, A. Judson Hill, Michael T.Marshall and Brent D. Williams, as well as Mr. Dupree and Kenneth M. Doyle (asindicated in footnotes 9 and 10, respectively) share voting and investmentcontrol over, and therefore may be deemed to beneficially own, the shares ofcommon stock held by these entities.

(5)          As a Special LimitedPartner of J.W. Childs Associates, L.P., which manages J.W. Childs EquityPartners II, L.P., and a member of JWC-InSight Co-invest LLC, Mr. Segal may bedeemed to beneficially own the 4,011,758 shares of our common stock owned byJ.W. Childs Equity Partners II, L.P. and the 338,532 shares of our common stockheld directly by JWC-InSight Co-invest LLC. Mr. Segal disclaims beneficial ownership of such shares.

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

(7)          As an Operating Partnerof J.W. Childs Associates, L.P., which manages J.W. Childs Equity Partners II,L.P. and a member of JWC-InSight Co-invest LLC, Mr. Cannizzaro may be deemed tobeneficially own the 4,011,758 shares of our common stock owned by J.W. ChildsEquity Partners II, L.P. and the 338,532 shares of our common stock helddirectly by JWC-InSight Co-invest LLC. Mr. Cannizzaro disclaims beneficial ownership of such shares.  Includes options to purchase 40,000 shares ofour common stock at an exercise price of $19.82 per share, which are fullyvested and immediately exercisable.

85

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(8)          As a Vice President atJ.W. Childs Associates, L.P., which manages J.W. Childs Equity Partners II,L.P. and a member of JWC-InSight Co-invest LLC, Mr. Tricolli may be deemed tobeneficially own the 4,011,758 shares of our common stock owned by J.W. ChildsEquity Partners II, L.P. and the 338,532 shares of our common stock helddirectly by JWC-InSight Co-invest LLC. Mr. Tricolli disclaims beneficial ownership of such shares.

(9)          As a Managing Directorof The Halifax Group, L.L.C., which manages Halifax Capital Partners, L.P., Mr.Dupree may be deemed to beneficially own the 1,107,020 shares of our commonstock owned by Halifax Capital Partners, L.P. and its affiliates.  Mr. Dupree disclaims beneficial ownership ofsuch shares.

(10)    As a Managing Director of TheHalifax Group, L.L.C., which manages Halifax Capital Partners, L.P., Mr. Doylemay be deemed to beneficially own the 1,111,112 shares of our common stockowned by Halifax Capital Partners, L.P. and its affiliates.  Mr. Doyle disclaims beneficial ownership ofsuch shares.

(11)    Includes an option to purchase 37,235 shares of our common stock at aprice of $19.82 per share.  Does notinclude an option to purchase 211,001 shares of our common stock at an exerciseprice of $19.82 per share, which is not currently exercisable.

(12)    Includes an option to purchase 4,000 shares of our common stock at aprice of $19.82 per share.  Doesnot include an option to purchase 36,000 shares of our common stock at anexercise price of $19.82 per share, which is not currently exercisable.

(13)    Includes (i) an option topurchase 10,500 shares of our common stock at an exercise price of $18.00 pershare and (ii) an option to purchase 1,000 shares of our common stock at anexercise price of $19.82 per share.  Doesnot include (i) an option to purchase 19,500 shares of our common stock at anexercise price of $18.00 per share and (ii) an option to purchase 9,000 sharesof our common stock at an exercise price of $19.82 per share, which are notcurrently exercisable.

(14)    Includes an option to purchase10,500 shares of our common stock at an exercise price of $18.00 per share and(ii) an option to purchase 3,000 shares of our common stock at an exerciseprice of $19.82 per share.  Does notinclude (i) an option to purchase 19,500 shares of our common stock at anexercise price of $18.00 per share and (ii) an option to purchase 27,000 sharesof our common stock at an exercise price of $19.82 per share, which are notcurrently exercisable.

Except as otherwise noted, we believe that each of thestockholders listed in the table above has sole voting and dispositive powerover all shares beneficially owned.  Eachof our stockholders in the table above is party to a stockholders agreementwhich governs the transferability and voting of shares of our common stock heldby them.  See Item 13. “CertainRelationships and Related Transactions—Stockholders Agreement.”

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EQUITYCOMPENSATION PLAN INFORMATION.  Thefollowing table provides information as of June 30, 2006, with respect tocompensation plans under which our common stock is authorized forissuance.  These compensation plansinclude:  (i) the 2001 Stock Option Plan;and (ii) stock options granted pursuant to stock option agreements.  Our stockholders approved the 2001 StockOption Plan and the issuance of options to purchase up to 726,236 shares of ourcommon stock, pursuant to individual stock option agreements.
|                                                     | ** ** | ** **                  | ** ** | ** **              | ** ** | **Number of Shares**         | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **                                          | ** ** | ** **                  | ** ** | ** **              | ** ** | **Remaining Available for**  | ** ** |
| ** **                                          | ** ** | ** **                  | ** ** | ** **              | ** ** | **Future Issuance Under**    | ** ** |
| ** **                                          | ** ** | **Number of Shares to be**  | ** ** | **Weighted Average**    | ** ** | **Equity Compensation**      | ** ** |
| ** **                                          | ** ** | **Issued Upon Exercise of** | ** ** | **Exercise Price of**   | ** ** | **Plans (Excluding Shares**  | ** ** |
| **Plan Category**                                   | ** ** | **Outstanding Options**     | ** ** | **Outstanding Options** | ** ** | **Reflected in Column (a))** | ** ** |
| ** **                                          | ** ** | **(a)**                     | ** ** | **(b)**                 | ** ** | **(c)**                      | ** ** |
|                                                |       |                        |       |                    |       |                         |       |
| Equity compensation  plans approved by stockholders |       | 849,726                     |       | $                       | 17.74      |                         | 115,500    |   |
|                                                     |            |                             |            |                         |            |                              |            |  |

 

**ITEM 13**.       **CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS**

MANAGEMENTAGREEMENT.  We entered into a managementagreement with J.W. Childs Advisors II, L.P., the general partner of J.W.Childs Equity Partners II, L.P. and Halifax Genpar, L.P., the general partnerof Halifax Capital Partners, L.P.  J.W.Childs Advisors II, L.P. and Halifax Genpar, L.P. will provide business, managementand financial advisory services to us in consideration of (i) an annual fee of$240,000 to be paid to J.W. Childs Advisors II, L.P. and (ii) an annual fee of$60,000 to be paid to Halifax Genpar, L.P. From August 2004 through December 2005, we paid J.W. Childs Advisors II,L.P. a monthly fee of $10,000 for the services of Michael N. Cannizzaro, ourChairman of the Board.  We will alsoreimburse such entities for all travel and other out-of-pocket expensesincurred by such entities in connection with their performance of the advisoryservices under the agreement.  Themanagement agreement has an initial term of five years, which term willautomatically renew for one year periods thereafter and is subject to earliertermination by our board of directors. Furthermore, we and InSight have agreed to indemnify and hold harmlessJ.W. Childs Advisors II, L.P. and Halifax Genpar, L.P. and their affiliates,from and against any and all claims, losses, damages and expenses arising outof the Acquisition or the performance by J.W. Childs Advisors II, L.P. andHalifax Genpar, L.P. of their obligations under the management agreement.

STOCKHOLDERSAGREEMENT.  We, J.W. Childs EquityPartners II, L.P., JWC-InSight Co-invest LLC, Halifax Capital Partners, L.P.,Mr. Dupree, management of InSight and all other holders of our capital stock orstock options have entered into a stockholders agreement.  Under the stockholders agreement, we and eachof our stockholders have a right of first refusal to purchase any stock proposedto be sold by all other stockholders, except J.W. Childs Equity Partners II,L.P. and JWC-InSight Co-invest LLC. Additionally, the stockholders agreement affords: (1) stockholders,other than J.W. Childs Equity Partners II, L.P. and JWC-InSight Co-invest LLC,so-called “tag-along rights”, which give these stockholders the right toparticipate with respect to proposed sales of our capital stock by J.W. ChildsEquity Partners II, L.P. and JWC - InSight Co-invest LLC; (2) J.W. ChildsEquity Partners II, L.P. and JWC-InSight Co-invest LLC “drag-along rights”,which gives these stockholders the right to require other stockholders toparticipate in proposed sales of a majority of our capital stock; and (3) allstockholders certain registration rights with respect to our capital stock.  Furthermore, the stockholders agreementcontains put and call features on capital stock and stock options held byInSight management which are triggered upon termination of such individual’semployment with InSight; however, these put and call features are inapplicableto Mr. Jorgensen’s capital stock and stock options.  The stockholders agreement also obligates usand our stockholders to take all necessary action to appoint, as our directors,up to eight nominees designated by J.W. Childs Equity Partners II, L.P. (aswould constitute a majority of our entire board of directors) and two nomineesdesignated by Halifax Capital Partners, L.P.****

SEVERANCE ANDCONSULTING ARRANGEMENTS.  Pursuant to theterms of a separation agreement with us, Michael A. Boylan, InSight’s formerExecutive Vice President — Enterprise Development, will receive severance equalto 12 months salary at his level of compensation as of June 30, 2006, which was$275,000 per year and benefits in accordance with the terms of his employmentagreement.  We also entered into ashort-term consulting agreement with Mr. Boylan, pursuant to which Mr. Boylanwill provide consulting services to us in connection with

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certainacquisitions, joint ventures and disposition arrangements, in exchange for afee of $25,500 per month, plus reimbursement of his reasonable out-of-pocketexpenses incurred in providing such services.

FAMILY-MEMBERRELATIONSHIP.  Patricia K. Kincaid, M.D.is a sister-in-law of Donald F. Hankus, InSight’s Executive Vice President andChief Information Officer, and a principal or partner of West Rad MedicalGroup, Inc. (“WRMG”), a professional radiology medical group.  During the year ended June 30, 2006, we paidWRMG approximately $0.5 million in connection with its provision of certain professionalservices to four fixed-site centers in California.  In addition, an affiliated company of WRMG’shas economic interest in the joint venture that owns one of these fixed-sitecenters.  WRMG’s provision ofprofessional services to us began more than two years prior to our employmentof Mr. Hankus.

**ITEM 14.       PRINCIPALACCOUNTANT FEES AND SERVICES**

***Independent Registered Public AccountingFirm***

Thefollowing table presents information about fees that PricewaterhouseCoopers LLPcharged us (1) to audit our annual consolidated financial statements for theyears ended June 30, 2006 and 2005, and (2) for other services rendered inthose years.
|                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |
| Audit Fees (1)      |       | $        | 566,000    |     | $          | 249,000 |   |
|                |       |     |       |     |       |
| Audit Related  Fees |       | —   |       | —   |       |
|                |       |     |       |     |       |
| Tax Fees (2)        |       | 110,000  |       | 84,000   |       |
|                |       |     |       |     |       |
| Subtotal            |       | $        | 676,000    |     | $          | 333,000 |   |
|                |       |     |       |     |       |
| All Other Fees      |       | —   |       | —   |       |
|                |       |     |       |     |       |
| Total Fees          |       | $        | 676,000    |     | $          | 333,000 |   |

 

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(1)          AuditFees – fees for auditing our annual consolidated financial statements,reviewing the condensed consolidated financial statements included in ourquarterly reports on Form 10-Q, the offering memorandum and registrationstatement related to $300 million of Floating Rate Notes and other SEC filings.

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

Allaudit and non-audit services performed by our independent registered publicaccounting firm must be specifically pre-approved by InSight’s auditcommittee.  Consistent with this policy,for the year ended June 30, 2006 all audit and non-audit services initiated byPricewaterhouseCoopers LLP were pre-approved by InSight’s audit committee.

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**PARTIV**

**ITEM 15.       EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

ITEM 15 (a) (1).  FINANCIAL STATEMENTS

Included in PartII of this report:

Report of IndependentRegistered Public Accounting Firm

ConsolidatedBalance Sheets

ConsolidatedStatements of Operations

ConsolidatedStatements of Stockholders’ Equity

ConsolidatedStatements of Cash Flows

Notes to ConsolidatedFinancial Statements

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

Schedule II -Valuation and Qualifying Accounts

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

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ITEM 15 (a)(3).    EXHIBITS
| EXHIBIT NUMBER | ** ** | **DESCRIPTION AND REFERENCES**                                                                                                                                                                                                                                                                                                                                            |
|----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                |
| *2.1           |       | Agreement and Plan of Merger, dated as of  June 29, 2001, by and among InSight Health Services Holdings Corp. (the  “Company”), JWCH Merger Corp. and InSight Health Services Corp. (“InSight”),  previously filed and incorporated herein by reference from InSight’s Current  Report on Form 8-K, filed on July 2, 2001.        |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *2.2           |       | Amendment No. 1 to Agreement and Plan of  Merger, dated as of June 29, 2001, by and among Company, JWCH Merger  Corp. and InSight, previously filed and incorporated by reference from  InSight’s Annual Report on Form 10-K, filed on September 14, 2001.                                                                                       |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *2.3           |       | Amendment No. 2 to Agreement and Plan of  Merger, dated as of October 9, 2001, by and among Company, InSight  Health Services Acquisition Corp. and InSight, previously filed and  incorporated herein by reference from InSight’s Current Report on Form 8-K,  filed on October 9, 2001.                                                        |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *2.4           |       | Asset Purchase Agreement, dated 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 Company’s Current Report on Form 8-K, filed on August 11,  2003.                                                                      |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *2.5           |       | Stock Purchase Agreement, dated February 13,  2004, by and among InSight Health Corp., Comprehensive Medical Imaging, Inc.,  Cardinal Health 414, Inc. and Cardinal Health, Inc., previously filed and  incorporated herein by reference from Company’s Current Report on  Form 8-K, filed on April 8, 2004.                                          |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *2.6           |       | Amendment No. 1 to Stock Purchase Agreement,  dated April 1, 2004, by and among InSight Health Corp., Comprehensive  Medical Imaging, Inc., Cardinal Health 414, Inc. and Cardinal Health, Inc.,  previously filed and incorporated herein by reference from Company’s Current  Report on Form 8-K, filed on April 8, 2004.                      |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *3.1           |       | Certificate of Incorporation of the Company, as  amended, previously filed and incorporated herein by reference from InSight’s  Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                            |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *3.2           |       | Bylaws of the Company, previously filed and  incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                                                                              |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *4.1           |       | Indenture, dated October 30, 2001, with U.S.  Bank Trust National Association formerly State Street Bank and Trust Company,  N.A., as Trustee, with respect to 97/8% 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. |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *4.2           |       | Supplemental Indenture, dated February 25,  2002, with respect to adding an additional Subsidiary Guarantor (named  therein), previously filed and incorporated herein by reference from  InSight’s Amendment No. 1 to Registration Statement on Form S-4,  filed on March 25, 2002.                                                             |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *4.3           |       | Supplemental Indenture, dated April 2, 2003,  with respect to adding additional Subsidiary Guarantors (named therein),  previously filed and incorporated herein by reference from Company’s Annual  Report on Form 10-K, filed on September 26, 2003.                                                                                                |

 

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| *4.4   |   | Third Supplemental Indenture, dated as of  March 8, 2004, with respect to adding additional Subsidiary Guarantors  (named therein), previously filed and incorporated herein by reference from  Company’s Quarterly Report on Form 10-Q, filed on May 13, 2004.                 |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                |
| *4.5   |   | Fourth Supplemental Indenture, dated as of  June 8, 2004, with respect to adding additional Subsidiary Guarantors  (named therein), previously filed and incorporated herein by reference from  Company’s Annual Report on Form 10-K, filed on September 24, 2004.              |
|   |   |                                                                                                                                                                                                                                                                                                |
| 4.6    |   | Fifth Supplemental Indenture, dated as of May 18,  2006, with respect to adding an additional Subsidiary Guarantor (named  therein), filed herewith.                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                |
| *4.7   |   | Indenture, dated September 22, 2005, with  U.S. Bank National Association, as Trustee, with respect to Senior  Secured Floating Rate Notes due 2011, previously filed with InSight’s  Registration Statement on Form S-4, filed on October 28, 2005.                       |
|   |   |                                                                                                                                                                                                                                                                                                |
| 4.8    |   | First Supplemental Indenture, dated as of May 18,  2006, with respect to adding an additional Subsidiary Guarantor (named  therein), filed herewith.                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                |
| *4.9   |   | Security Agreement, dated September 22, 2005,  by and among the Loan Parties (as defined therein) and U.S. Bank  National Association, as Collateral Agent, previously filed with InSight’s  Registration Statement on Form S-4, filed on October 28, 2005.                |
|   |   |                                                                                                                                                                                                                                                                                                |
| *4.10  |   | Pledge Agreement, dated September 22, 2005, by  and among the Loan Parties (as defined therein) and U.S. Bank National  Association, as Collateral Agent, previously filed with InSight’s  Registration Statement on Form S-4, filed on October 28, 2005.                  |
|   |   |                                                                                                                                                                                                                                                                                                |
| *4.11  |   | Collateral Agency Agreement, dated  September 22, 2005, among the Loan Parties (as defined therein) and  U.S. Bank National Association, as Trustee and Collateral Agent,  previously filed with InSight’s Registration Statement on Form S-4, filed  on October 28, 2005. |
|   |   |                                                                                                                                                                                                                                                                                                |
| *10.1  |   | Amended and Restated Loan and Security Agreement,  dated September 22, 2005, by and among InSight, and its subsidiaries  listed therein and Bank of America, N.A. as Lender, previously filed with  InSight’s Registration Statement on Form S-4, filed on October 28,  2005.   |
|   |   |                                                                                                                                                                                                                                                                                                |
| *10.2  |   | Company 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.                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                |
| *10.3  |   | Executive Employment Agreement, dated July 1,  2005, among InSight, Company and Bret W. Jorgensen, previously filed and  incorporated herein by reference from Company’s Current Report on  Form 8-K, filed on July 8, 2005.                                                    |
|   |   |                                                                                                                                                                                                                                                                                                |
| *10.4  |   | Executive Employment Agreement, dated  October 22, 2004, among InSight, Company and Patricia R. Blank,  previously filed and incorporated herein by reference from Company’s Current  Report on Form 8-K, filed on January 26, 2005.                                            |
|   |   |                                                                                                                                                                                                                                                                                                |
| *10.5  |   | Executive Employment Agreement, dated  January 10, 2005, among InSight, Company and Mitch C. Hill, previously  filed and incorporated herein by reference from Company’s Current Report on  Form 8-K, filed on January 14, 2005.                                                |
|   |   |                                                                                                                                                                                                                                                                                                |
| *10.6  |   | Executive Employment Agreement, dated  August 10, 2005, among InSight, Company and Louis E. Hallman, previously  filed and incorporated herein by reference from Company’s Current Report on  Form 8-K, filed on August 15, 2005.                                               |

 

91

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| *10.7  |   | Executive Employment Agreement, dated  August 10, 2005, among InSight, Company and Donald F. Hankus, previously  filed and incorporated herein by reference from Company’s Current Report on  Form 8-K, filed on September 30, 2005.                                                                                                                                                                       |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.8  |   | 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.                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.9  |   | Form of Company Performance Based Option Agreement,  previously filed and incorporated herein by reference from InSight’s Registration  Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.10 |   | Form of Amended and Restated Indemnification  Agreement, previously filed and incorporated herein by reference from  Company’s Annual Report on Form 10-K, filed on September 22, 2005.                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.11 |   | Fourth Amended and Restated Stockholders Agreement,  dated as of July 1, 2005, among the Company, the JWC Holders (as defined  therein), the Halifax Holders (as defined therein), the Management Holders  (as defined therein) and the Additional Holders (as defined therein),  previously filed and incorporated herein by reference from Company’s Current  Report on Form 8-K, filed on July 8, 2005. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.12 |   | Management Agreement, dated as of October 17,  2001, by and among J.W. Childs Advisors II, L.P., Halifax Genpar, L.P.,  Company and InSight, previously filed and incorporated herein by reference  from InSight’s Registration Statement on Form S-4, filed on  December 27, 2001.                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.13 |   | Separation Agreement, dated June 30, 2006, by and  between the Company, InSight and Michael A. Boylan, previously filed and  incorporated herein by reference from the Company’s Current Report on Form  8-K, filed on July 3, 2006.                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.14 |   | Services Agreement, dated June 30, 2006, by and  between Michael A. Boylan and InSight Health Corp., previously filed and  incorporated herein by reference from the Company’s Current Report on Form  8-K, filed on July 3, 2006.                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.15 |   | Stock Option Agreement, dated August 12, 2004,  by and between Company and Michael N. Cannizzaro, previously filed and  incorporated by reference from Company’s Quarterly Report on Form 10-Q,  filed on November 10, 2004.                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.16 |   | Stock Option Agreement, dated April 8, 2005, by  and between Company and Michael N. Cannizzaro, previously filed and  incorporated herein by reference from Company’s Annual Report on  Form 10-K, filed on September 22, 2005.                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 21.1   |   | Subsidiaries of Company, filed herewith.                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.1   |   | Certification of Bret W. Jorgensen, the Company’s  Chief Executive Officer, pursuant to Rule 15d-14 of the Securities Exchange  Act of 1934, filed herewith.                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2   |   | Certification of Mitch C. Hill, the Company’s Chief  Financial Officer, pursuant to Rule 15d-14 of the Securities Exchange Act of  1934, filed herewith.                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.1   |   | Certification of Bret W. Jorgensen, the Company’s  Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                                                                    |

 

92

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| 32.2 |   | Certification of Mitch C. Hill, the Company’s Chief  Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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*  Previously filed

ITEM 15 (b).                                                                 TheExhibits described above in Item 15(a)(3) are attached hereto or incorporatedby reference herein, as noted.

ITEM 15 (c).                                                                  Notapplicable.

 

93

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** **

**SIGNATURES**

Pursuant to therequirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|   | INSIGHT HEALTH SERVICES HOLDINGS CORP. |
|--------|----------------------------------------|
|   |                                   |
|   | By                                     | /s/ Bret W. Jorgensen |   |
|   |                                   | Bret W.  Jorgensen, President and |
|   |                                   | Chief Executive  Officer |
|   |                                   |   |
|   | Date: September 27, 2006               |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.
| Signature                 | ** ** | **Title**                      | ** **                 | **Date** |
|---------------------------|------------|--------------------------------|----------------------------|----------|
|                      |       |                           |                       |     |
| /s/ Bret W. Jorgensen     |       |                           | President                  |     | September 27,  2006 |
| Bret W. Jorgensen         |       | and Chief  Executive Officer   |                       |     |
|                      |       | and Director                   |                       |     |
|                      |       | (Principal  Executive Officer) |                       |     |
|                      |       |                           |                       |     |
| /s/ Mitch C. Hill         |       |                           | Executive Vice  President  |     | September 27,  2006 |
| Mitch C. Hill             |       | and Chief  Financial Officer   |                       |     |
|                      |       | (Principal  Financial and      |                       |     |
|                      |       | Accounting Officer)            |                       |     |
|                      |       |                           |                       |     |
| /s/ Michael N. Cannizzaro |       |                           | Chairman of the  Board and |     | September 27,  2006 |
| Michael N. Cannizzaro     |       | Director                       |                       |     |
|                      |       |                           |                       |     |
| /s/ Kenneth M. Doyle      |       |                           | Director                   |     | September 27,  2006 |
| Kenneth M. Doyle          |       |                           |                       |     |
|                      |       |                           |                       |     |
| /s/ David W. Dupree       |       |                           | Director                   |     | September 27,  2006 |
| David W. Dupree           |       |                           |                       |     |
|                      |       |                           |                       |     |
| /s/ Steven G. Segal       |       |                           | Director                   |     | September 27,  2006 |
| Steven G. Segal           |       |                           |                       |     |
|                      |       |                           |                       |     |
| /s/ Mark J. Tricolli      |       |                           | Director                   |     | September 27,  2006 |
| Mark J. Tricolli          |       |                           |                       |     |
|                      |       |                           |                       |     |
| /s/ Edward D. Yun         |       |                           | Director                   |     | September 27, 2006 |
| Edward D. Yun             |       |                           |                       |     |

 

94

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**SCHEDULE II**

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

**VALUATION AND QUALIFYING ACCOUNTS**

**FOR THE YEARS ENDED JUNE 30, 2006, 2005, AND 2004**

(amountsin thousands)

 
| ** **                             | ** ** | **Balance at**   | ** ** | ** **          | ** ** | ** **          | ** ** | ** ** | ** ** | **Balance at** | ** ** |
|----------------------------------------|------------|-----------------------|------------|---------------------|------------|---------------------|------------|------------|------------|---------------------|------------|
| ** **                             | ** ** | **Beginning of** | ** ** | **Charges to** | ** ** | **Charges to** | ** ** | ** ** | ** ** | **End of**     | ** ** |
| ** **                             | ** ** | **Year**              | ** ** | **Expenses**        | ** ** | **Revenues**        | ** ** | **Other**  | ** ** | **Year**            | ** ** |
| June 30, 2004:                         |       |                  |       |                |       |                |       |       |       |                |       |
| Allowance for  doubtful accounts       |       | $                     | 7,904      |                | $          | 4,998               |       | $          | —     |                | $          | (4,805 | )(A) | $ | 8,097 |   |
| Allowance for  contractual adjustments |       | 28,369                |       | —              |       | 176,172             |       | (167,332   | )(B)       | 37,209              |       |
|                                   |       | $                     | 36,273     |                | $          | 4,998               |       | $          | 176,172    |                | $          | (172,137 | ) | $ | 45,306 |   |
|                                   |       |                  |       |                |       |                |       |       |       |                |       |
| June 30, 2005:                         |       |                  |       |                |       |                |       |       |       |                |       |
| Allowance for  doubtful accounts       |       | $                     | 8,097      |                | $          | 5,723               |       | $          | —     |                | $          | (4,933 | )(A) | $ | 8,887 |   |
| Allowance for  contractual adjustments |       | 37,209                |       | —              |       | 194,928             |       | (202,725   | )(B)       | 29,412              |       |
|                                   |       | $                     | 45,306     |                | $          | 5,723               |       | $          | 194,928    |                | $          | (207,658 | ) | $ | 38,299 |   |
|                                   |       |                  |       |                |       |                |       |       |       |                |       |
| June 30, 2006:                         |       |                  |       |                |       |                |       |       |       |                |       |
| Allowance for  doubtful accounts       |       | $                     | 8,887      |                | $          | 5,351               |       | $          | —     |                | $          | (4,450 | )(A) | $ | 9,788 |   |
| Allowance for  contractual adjustments |       | 29,412                |       | —              |       | 183,751             |       | (190,451   | )(B)       | 22,712              |       |
|                                   |       | $                     | 38,299     |                | $          | 5,351               |       | $          | 183,751    |                | $          | (194,901 | ) | $ | 32,500 |   |

 

----

(A)         Write-off of uncollectible accounts.

(B)           Write-off of contractual adjustments, representing the differencebetween our charge for a procedure and what we receive from payors.

95

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EXHIBIT INDEX
| EXHIBIT NUMBER | ** ** | **DESCRIPTION AND REFERENCES**                                                                                                                                                                                                                                                                                                                                            |
|----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                |
| *2.1           |       | Agreement and Plan of Merger, dated as of  June 29, 2001, by and among InSight Health Services Holdings Corp. (the  “Company”), JWCH Merger Corp. and InSight Health Services Corp. (“InSight”),  previously filed and incorporated herein by reference from InSight’s Current  Report on Form 8-K, filed on July 2, 2001.        |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *2.2           |       | Amendment No. 1 to Agreement and Plan of  Merger, dated as of June 29, 2001, by and among Company, JWCH Merger  Corp. and InSight, previously filed and incorporated by reference from  InSight’s Annual Report on Form 10-K, filed on September 14, 2001.                                                                                       |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *2.3           |       | Amendment No. 2 to Agreement and Plan of  Merger, dated as of October 9, 2001, by and among Company, InSight  Health Services Acquisition Corp. and InSight, previously filed and  incorporated herein by reference from InSight’s Current Report on  Form 8-K, filed on October 9, 2001.                                                        |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *2.4           |       | Asset Purchase Agreement, dated 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 Company’s Current Report on Form 8-K, filed on August 11,  2003.                                                                      |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *2.5           |       | Stock Purchase Agreement, dated February 13,  2004, by and among InSight Health Corp., Comprehensive Medical Imaging, Inc.,  Cardinal Health 414, Inc. and Cardinal Health, Inc., previously filed and  incorporated herein by reference from Company’s Current Report on  Form 8-K, filed on April 8, 2004.                                          |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *2.6           |       | Amendment No. 1 to Stock Purchase Agreement,  dated April 1, 2004, by and among InSight Health Corp., Comprehensive  Medical Imaging, Inc., Cardinal Health 414, Inc. and Cardinal Health, Inc.,  previously filed and incorporated herein by reference from Company’s Current  Report on Form 8-K, filed on April 8, 2004.                      |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *3.1           |       | Certificate of Incorporation of the Company, as  amended, previously filed and incorporated herein by reference from InSight’s  Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                            |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *3.2           |       | Bylaws of the Company, previously filed and  incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                                                                              |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *4.1           |       | Indenture, dated October 30, 2001, with U.S.  Bank Trust National Association formerly State Street Bank and Trust Company,  N.A., as Trustee, with respect to 97/8% 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. |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *4.2           |       | Supplemental Indenture, dated February 25,  2002, with respect to adding an additional Subsidiary Guarantor (named  therein), previously filed and incorporated herein by reference from  InSight’s Amendment No. 1 to Registration Statement on Form S-4,  filed on March 25, 2002.                                                             |
|           |       |                                                                                                                                                                                                                                                                                                                                                                      |
| *4.3           |       | Supplemental Indenture, dated April 2, 2003,  with respect to adding additional Subsidiary Guarantors (named therein),  previously filed and incorporated herein by reference from Company’s Annual  Report on Form 10-K, filed on September 26, 2003.                                                                                                |

 

96

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| *4.4   |   | Third Supplemental Indenture, dated as of  March 8, 2004, with respect to adding additional Subsidiary Guarantors  (named therein), previously filed and incorporated herein by reference from  Company’s Quarterly Report on Form 10-Q, filed on May 13, 2004.                 |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                |
| *4.5   |   | Fourth Supplemental Indenture, dated as of  June 8, 2004, with respect to adding additional Subsidiary Guarantors  (named therein), previously filed and incorporated herein by reference from  Company’s Annual Report on Form 10-K, filed on September 24, 2004.              |
|   |   |                                                                                                                                                                                                                                                                                                |
| 4.6    |   | Fifth Supplemental Indenture, dated as of May 18,  2006, with respect to adding an additional Subsidiary Guarantor (named  therein), filed herewith.                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                |
| *4.7   |   | Indenture, dated September 22, 2005, with  U.S. Bank National Association, as Trustee, with respect to Senior  Secured Floating Rate Notes due 2011, previously filed with InSight’s  Registration Statement on Form S-4, filed on October 28, 2005.                       |
|   |   |                                                                                                                                                                                                                                                                                                |
| 4.8    |   | First Supplemental Indenture, dated as of May 18,  2006, with respect to adding an additional Subsidiary Guarantor (named  therein), filed herewith.                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                |
| *4.9   |   | Security Agreement, dated September 22, 2005,  by and among the Loan Parties (as defined therein) and U.S. Bank  National Association, as Collateral Agent, previously filed with InSight’s  Registration Statement on Form S-4, filed on October 28, 2005.                |
|   |   |                                                                                                                                                                                                                                                                                                |
| *4.10  |   | Pledge Agreement, dated September 22, 2005, by  and among the Loan Parties (as defined therein) and U.S. Bank National  Association, as Collateral Agent, previously filed with InSight’s  Registration Statement on Form S-4, filed on October 28, 2005.                  |
|   |   |                                                                                                                                                                                                                                                                                                |
| *4.11  |   | Collateral Agency Agreement, dated  September 22, 2005, among the Loan Parties (as defined therein) and  U.S. Bank National Association, as Trustee and Collateral Agent,  previously filed with InSight’s Registration Statement on Form S-4,  filed on October 28, 2005. |
|   |   |                                                                                                                                                                                                                                                                                                |
| *10.1  |   | Amended and Restated Loan and Security Agreement,  dated September 22, 2005, by and among InSight, and its subsidiaries  listed therein and Bank of America, N.A. as Lender, previously filed with  InSight’s Registration Statement on Form S-4, filed on October 28,  2005.   |
|   |   |                                                                                                                                                                                                                                                                                                |
| *10.2  |   | Company 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.                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                |
| *10.3  |   | Executive Employment Agreement, dated July 1,  2005, among InSight, Company and Bret W. Jorgensen, previously filed and  incorporated herein by reference from Company’s Current Report on  Form 8-K, filed on July 8, 2005.                                                    |
|   |   |                                                                                                                                                                                                                                                                                                |
| *10.4  |   | Executive Employment Agreement, dated  October 22, 2004, among InSight, Company and Patricia R. Blank,  previously filed and incorporated herein by reference from Company’s Current  Report on Form 8-K, filed on January 26, 2005.                                            |
|   |   |                                                                                                                                                                                                                                                                                                |
| *10.5  |   | Executive Employment Agreement, dated  January 10, 2005, among InSight, Company and Mitch C. Hill, previously  filed and incorporated herein by reference from Company’s Current Report on  Form 8-K, filed on January 14, 2005.                                                |
|   |   |                                                                                                                                                                                                                                                                                                |
| *10.6  |   | Executive Employment Agreement, dated  August 10, 2005, among InSight, Company and Louis E. Hallman, previously  filed and incorporated herein by reference from Company’s Current Report on  Form 8-K, filed on August 15, 2005.                                               |

 

97

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| *10.7  |   | Executive Employment Agreement, dated  August 10, 2005, among InSight, Company and Donald F. Hankus, previously  filed and incorporated herein by reference from Company’s Current Report on  Form 8-K, filed on September 30, 2005.                                                                                                                                                                       |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.8  |   | 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.                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.9  |   | Form of Company Performance Based Option Agreement,  previously filed and incorporated herein by reference from InSight’s  Registration Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.10 |   | Form of Amended and Restated Indemnification  Agreement, previously filed and incorporated herein by reference from  Company’s Annual Report on Form 10-K, filed on September 22, 2005.                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.11 |   | Fourth Amended and Restated Stockholders Agreement,  dated as of July 1, 2005, among the Company, the JWC Holders (as defined  therein), the Halifax Holders (as defined therein), the Management Holders  (as defined therein) and the Additional Holders (as defined therein),  previously filed and incorporated herein by reference from Company’s Current  Report on Form 8-K, filed on July 8, 2005. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.12 |   | Management Agreement, dated as of October 17,  2001, by and among J.W. Childs Advisors II, L.P., Halifax Genpar, L.P.,  Company and InSight, previously filed and incorporated herein by reference  from InSight’s Registration Statement on Form S-4, filed on  December 27, 2001.                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.13 |   | Separation Agreement, dated June 30, 2006, by and  between the Company, InSight and Michael A. Boylan, previously filed and  incorporated herein by reference from the Company’s Current Report on Form  8-K, filed on July 3, 2006.                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.14 |   | Services Agreement by and between Michael A. Boylan  and InSight Health Corp., previously filed and incorporated herein by  reference from the Company’s Current Report on Form 8-K, filed on July 3,  2006.                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.15 |   | Stock Option Agreement, dated August 12, 2004,  by and between Company and Michael N. Cannizzaro, previously filed and  incorporated by reference from Company’s Quarterly Report on Form 10-Q,  filed on November 10, 2004.                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| *10.16 |   | Stock Option Agreement, dated April 8, 2005, by  and between Company and Michael N. Cannizzaro, previously filed and  incorporated herein by reference from Company’s Annual Report on  Form 10-K, filed on September 22, 2005.                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 21.1   |   | Subsidiaries of Company, filed herewith.                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.1   |   | Certification of Bret W. Jorgensen, the Company’s  Chief Executive Officer, pursuant to Rule 15d-14 of the Securities Exchange  Act of 1934, filed herewith.                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2   |   | Certification of Mitch C. Hill, the Company’s Chief  Financial Officer, pursuant to Rule 15d-14 of the Securities Exchange Act of  1934, filed herewith.                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.1   |   | Certification of Bret W. Jorgensen, the Company’s  Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                                                                    |

 

98

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| 32.2 |   | Certification of Mitch C. Hill, the Company’s Chief  Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

----

*  Previously filed

99

----