** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

**(MarkOne)**

 

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

**ACT OF 1934**

 

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

 

**OR**

 

**TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES**

**EXCHANGE ACT OF 1934**

 

**FOR THE TRANSITION PERIOD FROM         TO         **

 

**COMMISSION FILE NUMBER 333-75984**

 

**INSIGHT HEALTH SERVICES HOLDINGS CORP.**

(Exact name of Registrant as specified in its charter)

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

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

 

**(949) 282-6000**

(Registrant’s telephone number including area code)

 

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

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

(Title of Class)

 

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes  oNo ý

 

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

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes oNo ý

 

The aggregate market value of the voting and non-voting common stockheld by non-affiliates of the Registrant as of December 31, 2004 (based onthe price at which the common stock was valued on that date) was $146,906.  The number of shares outstanding of theRegistrant’s common stock as of August 31, 2005 was 5,468,814.

 

 

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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 the Form 10-K, mean InSight Health Services HoldingsCorp., a Delaware corporation, and all entities and subsidiaries owned orcontrolled by InSight Health Services Holdings Corp. All references to*“*InSight*”*in this Form 10-K mean our wholly owned subsidiary, InSight HealthServices Corp., a Delaware corporation, and all entities and subsidiaries ownedor controlled 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 targeted regions throughout the United States.Our services include magnetic resonance imaging, or MRI, positron emissiontomography, or PET, computed tomography, or CT, and other technologies. Theseservices are noninvasive techniques that generate representations of internalanatomy on film or digital media which are used by physicians for the diagnosisand assessment of diseases and disorders.

 

As of June 30, 2005, our network consists of 120fixed-site centers and 115 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 fixed-sitecenters include freestanding centers and joint ventures with hospitals andradiology groups. Our mobile facilities provide hospitals, physician groups andother heathcare providers 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 imaging procedures and quality assurance. Wedo not engage in the practice of medicine. We have two reportable segments, fixed operations and mobileoperations.  Our mobile operationsinclude 33 parked mobile facilities, each of which serves a singlecustomer.  Our fixed operations includefour mobile facilities 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, we pursued a strategy that was largelyfocused on growth through the acquisition of imaging businesses in variousparts of the country. We plan to refocus our strategic efforts away fromacquisition growth to organic growth and will look to leverage our presence andadvanced imaging systems in our targeted regions. We also plan to driveoperational efficiencies, improve utilization of our imaging systems andenhance relationships with provider partners, including radiologists andhospitals, and with the payor community.

 

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

 

We file annual, quarterly and special reports and other informationwith the SEC.  You may read and copymaterials that we have filed with the SEC at the following SEC public referenceroom:

 

450 Fifth Street, N.W.

Room 1024

Washington, D.C. 20549

 

Please call the SEC at 1-800-SEC-0330 for further information on thepublic reference room.  Our SEC filingsare also available to the public on the SEC’s Internet website athttp://www.sec.gov.

 

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**Fixed-Site Business**

 

Our fixed-site centers provide a full spectrum ofdiagnostic imaging services to patients, physicians, insurancepayors and managed care organizations. Of our 120 fixed-site centers, 77 offer MRI services exclusively andthree offer either PET or another type of service exclusively.  Our remaining 40 fixed-site centers aremulti-modality sites typically offering MRI and one or more of PET, CT, x-ray,mammography, ultrasound, nuclear medicine, bone densitometry and nuclearcardiology. Diagnostic services are provided to a patient upon referral by aphysician.  Physicians refer patients toour fixed-site centers based on our service reputation, equipment, breadth ofmanaged care contracts and convenient locations. Our fixed-site centers providethe equipment and technologists for the procedures, contract with radiologiststo interpret the procedures, and bill payors directly.  We have more than 1,000 managed carecontracts with managed care organizations at our fixed-site centers.  These managed care contracts often last for aperiod of multiple years because (1) they do not have specific terms orspecific 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 and radiology groups. Under thesearrangements, the hospital outsources its radiology function (primarily MRI) tous and we then install the appropriate imaging equipment on the hospitalcampus. Joint ventures are attractive to hospitals that lack the resources,management expertise or patient volume to provide their own imaging services orrequire incremental capacity. Joint ventures provide us with motivated partnerscapable of generating significant inpatient procedure volumes throughfixed-site centers. Furthermore, our joint ventures allow us to charge amanagement and billing fee for supporting the day-to-day operations of thejointly owned centers.

 

**Mobile Business**

 

Hospitals can access our diverse diagnostic imagingtechnology through our network of 115 mobile facilities. We currently havecontracts with more than 300 hospitals, physician groups and other healthcareproviders. We enable hospitals, physician groups and other healthcare providersto benefit from our advanced equipment without investing their own capitaldirectly. We do not provide interpretation services for the diagnostic imagesproduced.  Interpretation services areprovided by the hospital’s radiologists or physician groups.

 

After reviewing the needs of our customers, route patterns,travel times, fuel costs and equipment utilization, our field managersimplement planning and route management to maximize the utilization of ourmobile equipment while controlling the costs to locate and relocate the mobilefacilities. Our mobile facilities are scheduled for as little as one-half dayand up to seven days per week at any particular site. We generally enter intoone to five year-term contracts with our mobile customers under which theyassume responsibility for billing and collections. We are paid directly by ourmobile customers on a contracted amount for our services, regardless of whetherthey are reimbursed.

 

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

 

**DIAGNOSTIC IMAGING TECHNOLOGY**

 

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

 

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*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 MRI systems.  The structure of conventional MRI systems(including the narrow tubes into which a patient is inserted) allows for highermagnet field strengths, better image quality and faster scanning times thanOpen MRI systems.  However, Open MRIsystems are able to service patients who have access difficulties with thenarrow tubes of 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.

 

*PositronEmission Tomography or PET*

 

PET is a nuclear medicine procedure that producespictures of the body’s metabolic and biological functions. PET can provide earlier detectionas well as monitoring of certain cancers, coronary diseases or neurologicalproblems than other diagnostic imaging systems. The information provided by PETtechnology often obviates the need to perform further highly invasive ordiagnostic surgical procedures. Interest in PET scanning has increased recentlydue to several factors including a growing recognition by clinicians that PETis a powerful diagnostic tool, increased third-partypayor coverage and reimbursement and the availability of the isotopes used forPET scanning.  PET/CT is a “fusion” scanner, which makes it possible to collect bothanatomical and biological 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 million each.

 

*ComputedTomography or CT*

 

In CT imaging, a computeranalyzes the information received from x-ray beams to produce multiplecross-sectional images of a particular organ or area of the body. CT imaging isused to detect tumors and other conditions affecting bones and internal organs. A typical CTexamination takes from 15 to 30 minutes. CT systems are typically priced in the range of $0.3 million to$1.1 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 scanners and digital x-ray systems.

 

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

 

•                  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.

 

**BUSINESSDEVELOPMENT**

 

Our objective is to be the leading provider ofdiagnostic imaging services in our targeted regions.  We plan to further develop and expand ourtargeted regions by continuing to emphasize quality of care, produce cost-effectivediagnostic information and provide superior service and convenience to ourcustomers.  Our strategy is focused on two components.

 

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Firstly, we intend to maximize utilization of ourexisting facilities by:

 

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

 

•                  focusing ourmarketing efforts on attracting additional managed care customers;

 

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

 

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

 

Secondly, we intend to pursue expansion opportunitieswithin our existing regional markets by developing new fixed-site centers,developing mobile routes and making disciplined acquisitions where attractivereturns on investment can be achieved and sustained.  We also anticipatethat some of these developments will be through joint ventures with hospitalsbecause we believe that they have the potential to provide us with a steadysource of procedure volume.  Management believes that this will continueto be an area for growth because we expect hospitals and other healthcareproviders to respond to federal healthcare regulatory requirements byoutsourcing radiology services to imaging centers that are jointly owned andmanaged with third parties.  We believethat the expansion of our business through such activities is a key factor inimproving profitability.  Generally, these activities are aimed atincreasing revenues and gross profit, maximizing utilization of existingcapacity and increasing economies of scale.  Incremental gross profitresulting from such activities will vary depending on geographic location,whether facilities are mobile or fixed, the range of services provided and thestrength of our joint venture partners.  We cannot assure you, however,that we will be able to identify suitable opportunities or thereafter completesuch opportunities on terms acceptable to us.

 

**GOVERNMENT REGULATION**

 

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

 

*Federal False Claims Act:* There has been an increase in actionsbrought under the federal False Claims Act and in particular, under the FalseClaims Act’s “qui tam” or “whistleblower” provisions.  Those provisionsallow a private individual to bring actions in the name of the governmentalleging that the defendant has made false claims for payment from federalfunds. After the individual has initiated the lawsuit, the government mustdecide whether to intervene in the lawsuit and to become the primaryprosecutor. Until the government makes a decision, the lawsuit is kept secret.If the government declines to join the lawsuit, the individual may choose topursue the case alone, in which case the individual’s counsel will have primary control over theprosecution, although the government must be kept apprised of the progress ofthe lawsuit, and may intervene later. Whether or not the federal governmentintervenes in the case, it will receive the majority of any recovery. If thelitigation is successful, the individual is entitled to no less than 15%, butno more than 30%, of whatever amount the government recovers that is related tothe whistleblower’s allegations. The percentage of the individual’s recovery varies, depending on whetherthe government intervened in the case and other factors.  In recent years the number of suits broughtagainst healthcare providers by government regulators and private individualshas increased dramatically. In addition, various states are considering or haveenacted laws modeled after the federal False Claims Act, penalizing falseclaims against state funds. If a whistleblower action is brought against us,even if it is dismissed with no judgment or settlement, we may 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 business, financial condition andresults of operations.

 

When an entity is determined to have violated thefederal False Claims Act, it must pay three times the actual damages sustainedby the government, plus mandatory civil penalties of between $5,500 to $11,000for each separate false claim, as well as the government’s attorneysfees. Liability arises when an entity knowingly submits,

 

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or causes someone else to submit, a falseclaim for reimbursement to the federal government or submits a false claim withreckless disregard for, or in deliberate ignorance of, its truth or falsity.Simple negligence should not give rise to liability. Examples of the otheractions which may lead to liability under the False Claims Act:

 

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

 

•                  Failure to complywith Medicare requirements concerning the circumstances in which a hospital,rather than we, must bill Medicare for diagnostic imaging services we provideto outpatients treated by the hospital.

 

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

 

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

 

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

 

•                  The pastconduct of the businesses we have acquired.

 

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

 

*Anti-kickback Statutes:* We are subject to federal and state lawswhich govern financial and other arrangements between healthcare providers.These include the federal anti-kickback statute which, among other things,prohibits the knowing and willful solicitation, offer, payment or receipt ofany remuneration, direct or indirect, in cash or in kind, in return for or toinduce the referral of patients for items or services covered by Medicare,Medicaid and certain other governmental health programs. Violation of theanti-kickback statute may result in civil or criminal penalties and exclusionfrom the Medicare, Medicaid and other federal healthcare programs. In addition,it is possible that private parties may file “qui tam” actions based on claims resulting from relationshipsthat violate this statute, seeking significant financial rewards. Many stateshave enacted similar statutes, which are not limited to items and services paidfor under Medicare or a federally funded healthcare program. In recent years,there has been increasing scrutiny by law enforcement authorities, theDepartment of Health and Human Services, or HHS, the courts and Congress offinancial arrangements between healthcare providers and potential sources ofreferrals to ensure that such arrangements do not violate the anti-kickbackprovisions. HHS and the federal courts interpret “remuneration” broadly to apply to a wide range of financialincentives, including, under certain circumstances, distributions ofpartnership and corporate profits to investors who refer federal healthcareprogram patients to a corporation or partnership in which they have anownership interest and payments for service contracts and equipment leases thatare designed, even if only in part, to provide direct or indirect remunerationfor patient referrals or similar opportunities to furnish reimbursable items orservices. HHS has issued “safe harbor” regulations that set forth certain provisions which,if met, will assure that healthcare providers andother parties who refer patients or other business opportunities, or whoprovide reimbursable items or services, will be deemed not to violate theanti-kickback statutes. The safe harbors are narrowly drawn and some of ourrelationships may not qualify for any “safe harbor”; however, failure to comply with a “safe harbor” does not create a presumption of liability. Webelieve that our operations materially comply with the anti-kickback statutes;however, because these provisions are interpreted broadly by regulatoryauthorities, we cannot assure you that law enforcement officials or others willnot challenge our operations under these statutes.

 

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

 

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

 

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

 

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

 

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

 

Designated health services under Stark includeradiology services (MRI, CT, x-ray, ultrasound and others), radiation therapy,inpatient and outpatient hospital services and several other services. Aviolation of the Stark Law does not require a showing of intent. If a physicianhas a financial relationship with an entity that does not qualify for anexception, the referral of Medicare patients to that entity for designatedhealth services is prohibited and, if the entity bills for such services, theStark sanctions apply.

 

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

 

The federal Stark Law prohibition is expansive, andits statutory language and implementing regulations are ambiguous. Consequently,the statute has been difficult to interpret. In 1995, the Centers for Medicareand Medicaid Services, or CMS, published final regulations interpreting theStark prohibition 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. On March 26,2004, CMS published Phase II of the final Stark regulations which becameeffective in July 2004. Phase II included some additional regulatoryexceptions and definitions providing more flexibility in some areas and morespecificity in others, but did not extend designated health services to PET ornuclear medicine.  However, proposedregulations published in August 2005, include PET and nuclear medicine asdesignated health services under Stark. Until final regulations are published, it is unclear whether CMS willgrandfather in existing PET and nuclear medicine arrangements as exceptions tothe rule.

 

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

 

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The Stark Law does notdirectly prohibit referral of Medicaid patients, but rather denies federalfinancial participation to state Medicaid programs for services providedpursuant to a tainted referral. Thus, Medicaid referrals are subject towhatever sanctions the relevant state has adopted.  Several states in which 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 islikely.

 

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

 

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

 

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

 

*Radiologist and Facility Licensing:* The radiologists with whom we contractto provide professional services are subject to licensing and relatedregulations by the states, including registrations to use radioactivematerials. As a result, we require our radiologists to have and maintainappropriate licensure and registrations. In addition, some states also imposelicensing or other requirements on us at our facilities and other states mayimpose similar requirements in the future. Some local authorities may alsorequire us to obtain various licenses, permits and approvals. We believe thatwe have obtained all required licenses and permits; however, the criteriagoverning licensing or permitting may change or additional laws and licensingrequirements governing our facilities may be enacted. These changes couldadversely affect our business, financial condition and results of operations.

 

*Liability Insurance:* The hospitals, physician groups andother healthcare providers who use our diagnostic imaging systems are involvedin the delivery of healthcare services to the public and, therefore, areexposed to the risk of liability claims. Our position is that we do not engagein the practice of medicine. We provide only the equipment and technicalcomponents of diagnostic imaging, including certain limited nursing services,and we have not experienced any material losses due to claims for malpractice.Nevertheless, claims for malpractice have been asserted against us in the pastand any future claims, if successful, could entail significant defense costsand could result in substantial damage awards to the claimants, which mayexceed 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 business,financial condition and results of operations.

 

*IndependentDiagnostic Treatment Facilities:* CMS has established acategory of Medicare provider referred to as Independent Diagnostic TreatmentFacilities, or IDTFs. Imaging centers have the option to participate in theMedicare program as either IDTFs or medical groups. Most of our fixed-sitecenters are IDTFs. IDTFs are being monitored by CMS, particularly with respectto physician supervision requirements; however, if CMS exercised increasedoversight of IDTFs, our business, financial condition and results of operationscould be adversely affected.

 

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

 

*Environmental, Health and Safety Laws:***** Our PET 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) materiallyimpact our revenues or our competitive position.

 

**SALES ANDMARKETING**

 

We engage in marketing activities to obtain new sources of revenues,expand business relationships, grow revenues at existing facilities, andmaintain present business alliances and contractual relationships. Marketingactivities for the fixed operations include educating physicians on newapplications and uses of the technology and customer service programs. Inaddition, we leverage our targeted regional market concentration to developcontractual relationships with managed care payors to increase patient volume.Marketing activities for our mobile business include direct marketing tohospitals and developing leads through current customers, equipmentmanufacturers, and other vendors. In addition, marketing activities for ourmobile operations include contacting referring physicians associated withhospital customers and educating physicians.

 

**COMPETITION**

 

The healthcare industryin general, and the market for diagnostic imagingservices in particular, is highly competitive and fragmented, with only a fewnational providers. We compete principally on the basis of our servicereputation, equipment, breadth of managed care contracts and convenientlocations. Our operations must compete with groups of radiologists, establishedhospitals and certain other independent organizations, including equipmentmanufacturers and leasing companies that own and operate imaging equipment. Wewill continue to encounter substantial competition from hospitals andindependent organizations, including Alliance Imaging, Inc., HEALTHSOUTHCorporation, MedQuest, Inc., Radiologix, Inc., Shared Imaging andOtter Tail Corporation.  Some of ourdirect competitors may have access to greater financial resources than we do.

 

Certain hospitals, particularly the larger or morefinancially stable hospitals, may be expected to directly acquire and operate imagingand treatment equipment on-site as part of their overall inpatient servicingcapability, assume the associated financial risk, employ the necessarytechnologists and satisfy applicable CON and licensure requirements, if any. Inaddition, some physician practices that have refrained from establishingdiagnostic imaging capability may decide to do so.  Historically, smaller hospitals have beenreluctant to purchase imaging and treatment equipment, but recently have chosento do so with attractive financing offered by equipment manufacturers.

 

**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 contractualrate per procedure and fixed fee contracts. Contract services revenues are primarily earned through mobilefacilities and are generally paid

 

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pursuantto contracts with a term from one to five years.  A significant number of our mobile contractswill expire each year.  Our mobilefacility contract renewal rate was 78% for the year ended June 30,2005.  However, we expect that some highvolume customer accounts will elect not to renew their contracts and insteadwill purchase or lease their own diagnostic imaging equipment and somecustomers may choose an alternative services provider.

 

During the year ended June 30,2005, approximately 57% of our revenues were generated from patient servicesand approximately 43% were generated from contract services.

 

**DIAGNOSTICIMAGING AND OTHER EQUIPMENT**

 

As of June 30, 2005,we owned or leased 276 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 170 conventional MRIsystems, 153 have a magnet field of 1.5 Tesla, which is the industry standardmagnet strength for conventional fixed and mobile MRI systems.

 

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

 

Several large companiespresently manufacture MRI (including Open MRI), PET, PET/CT,CT and other diagnostic imaging equipment, including General Electric HealthCare, Hitachi Medical Systems, Siemens Medical Systems, Toshiba AmericanMedical Systems 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 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 relationshipswith many of the major manufacturers to better ensure adequate supply as wellas access to those types of diagnostic imaging systems which appear mostappropriate for the specific imaging facility to be established.

 

**INFORMATIONSYSTEMS**

 

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

 

**COMPLIANCE PROGRAM**

 

We have voluntarily implemented a program to monitor compliance withfederal and state laws and regulations applicable to healthcare entities. Wehave appointed a compliance officer who is charged with implementing andsupervising our compliance program, which includes a code of ethical conductfor our employees and affiliates and a process for reporting regulatory orethical concerns to our compliance officer, including a toll-free telephonehotline. We believe that our compliance program meets the relevant standardsprovided by the Office of Inspector General of the HHS. An important part ofour compliance program consists of conducting periodic reviews of variousaspects of our operations. Our compliance program also contemplates mandatoryeducation programs designed to familiarize our employees with the regulatoryrequirements and specific elements of our compliance program.

 

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**EMPLOYEES**

 

As of August 31,2005, we had approximately 1,660 full-time, 110 part-time and500 per diem employees.  None of ouremployees is covered by a collective bargaining agreement. Management believesits employee relations to be satisfactory.

 

**FORWARD-LOOKING STATEMENTS DISCLOSURE**

 

This Form 10-K includes “forward-looking statements.”  Forward-looking statements include statementsconcerning our plans, objectives, goals, strategies, future events, futurerevenues or performance, capital expenditures, financing needs, plans orintentions relating to acquisitions, competitive strengths and weaknesses,business strategy and the trends that we anticipate in the industry andeconomies in which we operate and other information that is not historicalinformation.  When used in this report thewords “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,”and variations of such words or similar expressions are intended to identifyforward-looking statements.  Allforward-looking statements, including, without limitation, our examination ofhistorical operating trends, are based upon our current expectations andvarious assumptions.  Our expectations,beliefs and projections are expressed in good faith, and we believe there is areasonable basis for them, but we can give no assurance that our expectations,beliefs and projections will be realized.

 

There are a number of risks and uncertainties that could cause ouractual results to differ materially from the forward-looking statementscontained in this Form 10-K. Important factors that could cause our actual results to differmaterially from the forward-looking statements made in this Form 10-K areset forth in this Form 10-K, including the factors described in the section entitled“Risk Factors,” and the following:

 

•                  limitations and delays in reimbursement by third-partypayors;

 

•                  contract renewals and financial stability of customers;

 

•                  conditions within the healthcare environment;

 

•                  adverse utilization trends for certain diagnostic imagingprocedures;

 

•                  our ability to successfully integrate acquisitions;

 

•                  market competition;

 

•                  operating, legal, governmental and regulatory risks; and

 

•                  economic, political and competitive forces affecting ourbusiness.

 

If any of these risks or uncertainties materializes, or if any of ourunderlying assumptions is incorrect, our actual results may differsignificantly from the results that we express in or imply by any of ourforward-looking statements.    We do notundertake any obligation to revise these forward-looking statements to reflectfuture events or circumstances.

 

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**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 business, financial condition oroperating results could be adversely affected.

 

RISKS RELATING TO OUR INDEBTEDNESS

 

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

 

As of June 30, 2005, we had total indebtedness ofapproximately $501.6 million.  Oursubstantial indebtedness could have important consequences to us. For example,it could:

 

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

 

•                  increase 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 expenditures, acquisitions and investments and othergeneral corporate purposes;

 

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

 

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

 

•                  limit ourability to borrow additional funds.

 

In addition, we may incur substantial additionalindebtedness in the future.  The terms ofthe indenture governing our senior subordinated notes and the credit agreementgoverning our credit facility allow us to issue and incur additional debtsubject to certain limitations.  Ifadditional debt is added to current debt levels, the related risks describedabove could increase.

 

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

 

The agreements governing our indebtedness imposesignificant operating and financial restrictions on us.  These restrictions prohibit or limit, amongother things:

 

•                  the incurrence ofadditional indebtedness and the issuance of preferred stock and certainredeemable capital stock;

 

•                  a number ofother restricted payments, including investments;

 

•                  specified sales ofassets;

 

•                  specified transactions withaffiliates;

 

•                  the creation of acertain types of liens;

 

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

 

•                  our ability tochange the nature of our business.

 

These restrictions could limit our ability to obtain futurefinancing, make acquisitions, withstand downturns in our business or takeadvantage of business opportunities.

 

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The terms of our credit facility include severalrestrictive covenants that prohibit us from prepaying our other indebtedness,including the senior subordinated notes, while indebtedness under our creditfacility is outstanding. Our credit facility also requires us to maintaincertain specified financial ratios and satisfy financial condition tests. Ourability to comply with the ratios or tests may be affected by events beyond ourcontrol, including prevailing economic, financial and industry conditions.

 

A breach of any of these covenants, ratios or testscould result in a default under our credit facility or the indenture. Events ofdefault under our credit facility would prohibit us from making payments on thesenior subordinated notes in cash, including payment of interest when due.  In addition, upon the occurrence of an eventof default under our credit facility, the lenders could elect to declare allamounts outstanding under our credit facility, together with accrued interest,to be immediately due and payable.  If wewere unable to repay those amounts, the lenders could proceed against thesecurity granted to them to secure that indebtedness.

 

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

 

Our ability to make payments on our indebtedness willdepend on our ability to generate cash flow in the future which, to a certainextent, is subject to general economic, financial, competitive, legislative,regulatory and other factors that are beyond our control.  In addition, future borrowings may not beavailable to us in amounts sufficient to enable us to pay our indebtedness orto fund our other cash needs.  We may notbe able to refinance any of our indebtedness, including our credit facility andour senior subordinated notes, on commercially reasonable terms or at all.  Any refinancing of our indebtedness could beat higher interest rates and may require us to comply with more onerouscovenants which could further restrict our business operations.

 

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

 

Our property and equipment (other than land, buildingand leasehold improvements and assets securing our capital lease obligations),which make up a significant portion of our tangible assets, had a net bookvalue as of June 30, 2005 of approximately $162.9 million.  The book value of these assets should not berelied on as a measure of realizable value for such assets.  The realizable value may be greater or lowerthan such net book value.  The value ofour assets in the event of liquidation will depend upon market and economicconditions, the availability of buyers and similar factors.  A sale of these assets in a bankruptcy orsimilar proceeding would likely be made under duress, which would reduce theamounts 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, 2005 of approximately $315.0 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 a result, in the event of a default underthe agreements governing our material indebtedness or any bankruptcy ordissolution of our company, the realizable value of these assets will likely besubstantially lower and may be insufficient to satisfy the claims of our creditors.

 

The condition of our assets will likely deteriorateduring any period of financial distress preceding a sale of our assets.  In addition, much of our assets consists of illiquid assets that may have to be sold at asubstantial 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.

 

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

 

As a result of the subordinated nature of our notesand related guarantees, upon any distribution to our creditors or the creditorsof the subsidiary guarantors in bankruptcy, liquidation or reorganization orsimilar proceeding relating to us or the subsidiary guarantors or our or theirproperty, the holders of our senior indebtedness and senior indebtedness of thesubsidiary guarantors will be entitled to be paid in full in cash before anypayment may be made with respect to our senior subordinated notes or thesubsidiary guarantees.

 

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In the event of a bankruptcy, liquidation orreorganization or similar proceeding relating to us or the subsidiaryguarantors, holders of our senior subordinated notes will participate with allother holders of unsecured indebtedness of ours or the subsidiary guarantors thatare similarly subordinated in the assets remaining after we and the subsidiaryguarantors have paid all senior indebtedness. However, because of the existence of the subordination provisions,including the requirement that holders of the senior subordinated notes payover distributions to holders of senior indebtedness, holders of the seniorsubordinated notes may receive less, ratably, than our other unsecuredcreditors, including trade creditors.  Inany of these cases, we and the subsidiary guarantors may not have sufficientfunds to pay all of our creditors. Holders of our senior subordinated notes may, therefore, receive less,ratably, than the holders of our senior indebtedness.

 

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

 

An increase in prevailing interest rates would have an immediate effecton the interest rates charged on our variable rate indebtedness, which rise andfall upon changes in interest rates.  At June 30,2005, approximately 48% of our indebtedness was variable rate indebtedness.Increases in interest rates would also impact the refinancing of our fixed rateindebtedness.  If interest rates arehigher when our fixed indebtedness becomes due, we may be forced to borrow atthe higher rates.  If prevailinginterest rates or other factors result in higher interest rates, the increasedinterest expense would adversely affect our cash flow and our ability toservice our indebtedness.  As aprotection against rising interest rates, we may enter into agreements such asinterest rate swaps, caps, floors and other interest rate exchangecontracts.  These agreements, however,increase our risks as to the other parties to the agreements not performing orthat the agreements could be unenforceable.

 

*RISKS RELATING TO OUR BUSINESS*

 

***Changes in therates or methods of third-party reimbursements for diagnostic imaging andtherapeutic services could result in reduced demand for our services or createdownward pricing pressure, which would result in a decline in our revenues andharm our financial position.***

 

For fiscal 2005 we derived approximately 57% 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 43% 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 decreased reimbursementrates. In addition, the Medicare Payment Advisory Commission, in its March 2005report to Congress, recommended that the government adopt standards forphysicians and providers who bill Medicare for interpreting diagnostic imagingstudies and adopt utilization management techniques used by third-party privatepayors, such as the credentialing of physicians, in an attempt to control therise 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.  Recently, athird-party payor announced a requirement of participation, which has not yetbeen fully implemented, that would require freestanding imaging centerproviders to be multi-modality and not simply offer one type of diagnosticimaging service. Similar initiatives enacted in the future by numerousadditional third-party payors would have a material adverse impact on ourfinancial condition and our results of operations.

 

Under Medicare’s prospective payment system forhospital outpatient services, or OPPS, a hospital is paid for outpatient serviceson a rate per service basis that varies according to the ambulatory paymentclassification group, or APC, to which the service is assigned rather than on ahospital’s costs. OPPS was implemented on August 1, 2000 and due to theanticipated adverse economic effect on hospitals, Congress provided for outlierpayments for especially costly cases, as well as transitional payments for newtechnologies and innovative medical devices, drugs and biologics. While most ofthe transitional payments expired in 2003, CMS continues to make payments fornew technology until sufficient data is collected to assign the new technologyto an APC. Each year CMS publishes new APC rates that are determined inaccordance with the promulgated methodology. The overall effect of OPPS hasbeen to decrease reimbursement rates from those paid under the prior cost-basedsystem.

 

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In November 2004, CMS announced a 21% reductionin hospital reimbursement rates for PET, effective January 1, 2005.Although the immediate effect on us of this rate reduction has been minimal, ona long-term basis, this will have a negative impact on our PET and PET/CTrevenues as more hospital customers (both existing and future) negotiate lowerrates with us. Because unfavorable reimbursement policies constrict the profitmargins of the mobile customers we bill directly, we have lowered and maycontinue to lower, our fees to retain existing PET and PET/CT customers andattract new ones. Any further modifications under OPPS further reducingreimbursement to hospitals may adversely impact our financial condition and ouroperations since hospitals will seek to offset such additional modifications.

 

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, CMShas identified families of imaging procedures by imaging modality andcontiguous body area. Medicare will pay 100% of the technical component of thehigher priced procedure and 50% for the technical component of each additionalprocedure for procedures involving contiguous body parts within a family ofcodes when performed in the same session. Under the current methodology,Medicare pays 100% of the technical component of each procedure. Theimplementation of these regulations would adversely impact our financialcondition and our results of operations since our hospital customers will seekto offset their reduced reimbursement through lower rates with us.

 

Services provided in non-hospital based freestandingfacilities, including IDTFs, are paid under the Medicare Part B feeschedule. CMS has also published proposed regulations, which would implementthe same multi-procedure methodology rate reduction proposed for hospitaloutpatient services, for procedures reimbursed under the Part B feeschedule. In addition, CMS is proposing an overall decrease of 4.3% in the Part Bfee schedule for CMS’s fiscal year 2006. Accordingly, if these changesbecome final and take effect, these reductions in Medicare payment fordiagnostic imaging services under the Part B fee schedule may have amaterial adverse effect on our financial condition and results of operations.

 

Implementation of any of the initiatives mentionedabove and any further changes in the rates of or conditions for reimbursementcould substantially reduce the amounts reimbursed to us or our customers forservices provided by us. If third-party payors reduce the amount of theirpayments 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.

 

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

 

Our financial results depend on our ability to sustainand grow our revenues from existing customers. Our revenues would decline if we are unable to renew our existingcustomer contracts or renew these contracts on favorable terms. For our mobilefacilities, we generally enter into contracts with hospitals having one to fiveyear terms. A significant number of our mobile contracts will expire eachyear.  Our mobile facility contractrenewal rate was 78% for the year ended June 30, 2005.  We may not, however, achieve these renewalrates in the future.  To the extent we donot 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 caused, andmay continue to cause, hospitals and physician groups who have utilized sharedmobile services from our company and our competitors to purchase and operatetheir own equipment.  We expect that somehigh volume customer accounts will continue to elect not to renew theiragreements with us and instead purchase or lease their own diagnostic imagingequipment.  This would adversely affectour business, financial operation and results of operations.  Although the non-renewal of a single customercontract would have a material impact on our contract services revenues,non-renewal of several contracts on favorable terms or at all could have asignificant negative impact on our business, financial condition and results ofoperations.

 

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***We have experienced, and will continue to experience,competition from hospitals, physician groups and other diagnostic imagingcompanies and this competition could adversely affect our revenues and ourbusiness.***

 

The healthcare industry in general,and the market for diagnostic imaging services in particular, is highlycompetitive and fragmented, with only a few national providers.  We compete principally on the basis of ourservice reputation, equipment, breadth of managed care contracts and convenientlocations.  Our operations must competewith groups of radiologists, established hospitals and certain otherindependent organizations, including equipment manufacturers and leasingcompanies that own and operate imaging equipment.  We have encountered and we will continue toencounter competition from hospitals and physician groups that purchase theirown diagnostic imaging equipment from equipment manufacturers who providelow-cost financing.  Some of our directcompetitors may have access to greater financial resources than we do. If weare unable to successfully compete, our customer base would decline and ourbusiness, financial condition and results of operations would be adverselyaffected.

 

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

 

Our fixed-site centers are principally dependent onour ability to attract referrals from physicians and other healthcare providersrepresenting a variety of specialties. Our eligibility to provide service in response to a referral is oftendependent on the existence of a contractual arrangement with the referredpatient’s managedcare organization.  We currently havemore than 1,000 contracts with managed care organizations for diagnosticimaging services provided at our fixed-site centers.  Despite having a large number of contractswith managed care organizations, healthcare providers may be inhibited fromreferring patients to us in cases where the patient is not associated with oneof the managed care organizations with which we have contracted.  The loss of patient referrals causes us tolose procedure volume which adversely impacts our revenues.  A significant decline in referrals would havea material adverse effect on our business, financial condition and results ofoperations.

 

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

 

We operate in a competitive,capital intensive, high fixed-cost industry. The development of newtechnologies or refinements of existing ones might (1) make our existingsystems technologically or economically obsolete, or (2) reduce the needfor our systems.   MRI and otherdiagnostic imaging systems are currently manufactured by numerouscompanies.   Competition amongmanufacturers for a greater share of the MRI and other diagnostic imagingsystems market has resulted in and likely will continue to result intechnological advances in the speed and imaging capacity of these newsystems.  Consequently, the obsolescenceof our systems may be accelerated.  Otherthan ultra-high field MRI systems and PET/CT or “fusion” systems, we are awareof no imminent substantial technological changes; however, should such changes occur, we may not be able to acquire the new or improvedsystems.   In the future, to theextent we are unable to generate sufficient cash from our operations or obtainadditional funds through bank financing or the issuance of equity or debt securities, we may be unable to maintain a competitiveequipment base.  In addition, advancingtechnology may enable hospitals, physicians or other diagnostic serviceproviders to perform procedures without the assistance of diagnostic serviceproviders such as ourselves.  As aresult, we may not be able to maintain our competitive position in our targetedregions or expand our business.

 

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

 

Harsh weather conditions can adversely impact ouroperations and financial condition.  Tothe extent severe weather patterns affect the regions in which we operate,potential patients may find it difficult to travel to our centers and we mayhave difficulty moving our mobile facilities along their scheduled routes.   As a result, we would experience a decreasein procedure volume during that period.  Our equipment utilization, procedure volume or revenues could beadversely affected by similar conditions in the future.

 

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

 

A high percentage of our expenses are fixed, meaningthey do not vary significantly with the increase or decrease in revenues.  Such expenses include, but are not limitedto, debt service and capital lease payments, rent and operating lease payments,salaries, maintenance, insurance and vehicle operationcosts.  As a result, a relatively smallreduction in the prices we charge for our services or procedure volume couldhave a disproportionate negative effect on our financial results.

 

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

 

We have not experienced any material losses due toclaims for malpractice.  However, claimsfor malpractice have been asserted against us in the past and any futureclaims, if successful, could entail significant defense costs and could resultin substantial damage awards to the claimants, which may exceed the limits ofany applicable insurance coverage. Successful malpractice claims asserted against us, to the extent notcovered by our liability insurance, could have a material adverse affect on ourbusiness, 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 against possible professional liabilityfrom malpractice claims, we maintain professional liability insurance inamounts that we believe are appropriate in light of the risks and industrypractice.  However, if we are unable tomaintain insurance in the future at an acceptable cost or at all or if ourinsurance does not fully cover us in the event a successful claim was made againstus, we could incur substantial losses. Any successful malpractice or other professional liability claim madeagainst us not fully covered by insurance could be costly to defend against,result in a substantial damage award against us and divert the attention of ourmanagement from our operations, which could have a material adverse effect onour business, financial condition and results of operations.

 

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

 

As part of our business strategy, we have pursued, andmay continue to pursue, selective acquisitions and arrangements throughpartnerships and joint ventures with hospitals and other healthcareproviders.  Our acquisition and jointventure strategies require substantial capital which may exceed the fundsavailable to us from internally generated funds and our available financingarrangements.  We may not be able toraise any necessary additional funds through bank financing or through theissuance of equity or debt securities on terms acceptable to us, if at all.

 

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

 

•                  demands on managementrelated 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 of informationsystems;

 

•                  risks associatedwith unanticipated events or liabilities;

 

•                  difficulties in theassimilation and retention of employees;

 

•                  potential adverseeffects on operating results;

 

•                  challenges in retainingcustomers and referral sources; and

 

•                  amortization or write-offsof acquired intangible assets.

 

Although we believe we have successfully integratedacquisitions in the past, we may not be able to successfully integrate theoperations from any future acquisitions. If we do not successfully integrate our acquisitions, we may not realizeanticipated operating advantages, economies of scale and cost savings.   Also, we may not be able to maintain thelevels of operating efficiency that the acquired companies would have achievedor might have achieved separately. Successful integration of 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,qualified employees, particularly technologists, could limit our growth andnegatively impact our operations.***

 

Our future success depends on our continuing abilityto identify, hire, develop, motivate and retain highly skilled personnel forall areas of our organization. Competition in our industry for qualified employees is intense.   In particular, there is a very high demandfor qualified technologists who are necessary to operate our systems,particularly PET technologists.  We maynot be able to hire and retain a sufficient number of technologists, and weexpect that our costs for the salaries and benefits of technologists willcontinue to increase for the foreseeable future because of the industry’scompetitive demand for their services. Our continued ability to compete effectively depends on our ability toattract new employees and to retain and motivate our existing employees.

 

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

 

Our PET and PET/CT service and some of our otherimaging and therapeutic services require the use of radioactive materials toproduce the images.   While thisradioactive material has a short half-life, meaning it quickly breaks down intonon-radioactive substances, storage, use and disposal of these materialspresent the risk of accidental environmental 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.

 

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

 

Our corporate headquarters and a material portion ofour fixed-site centers are located in California, which has a high risk forearthquakes.  Depending upon its magnitude,an earthquake could severely damage our facilities or prevent potentialpatients from traveling to our centers. Damage to our equipment or any interruption in our business wouldadversely affect our financial condition. 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 fuelcosts would harm our operations.***

 

Fuel costs constitute a significant portion of ourmobile operating expenses. Historically, fuel costs have been subject to wideprice fluctuations based on geopolitical issues and supply and demand. Fuelavailability is also affected by demand for home heating oil, diesel, gasolineand other petroleum products. Because of the effect of these events on the priceand availability of fuel, the cost and future availability of fuel cannot bepredicted with any degree of certainty. In the event of a fuel supply shortageor further increases in fuel prices, a curtailment of scheduled mobile servicecould result. There have been significant increases in fuel costs and continuedhigh fuel costs or further increases would harm our financial condition andresults of operations.

 

RISKS RELATING TO GOVERNMENT REGULATION OF OURBUSINESS

 

***Complying with federal and state regulations pertaining toour business is an expensive and time-consuming process, and any failure tocomply could result in substantial penalties.***

 

We are directly or indirectly through our customerssubject to extensive regulation by both the federal government and the states in which we conduct our business, including:

 

•                  the federal FalseClaims Act;

 

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

 

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•                  the federal CivilMoney Penalty Law;

 

•                  the federal HealthInsurance 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 licensing andcertification requirements, including certificates of need; and

 

•                  federal and state lawsgoverning the diagnostic imaging and therapeutic equipment used in our businessconcerning patient safety, equipment operating specifications and radiationexposure levels.

 

If our operations are found to be in violation of anyof the laws and regulations to which we or our customers are subject, we may besubject to the applicable penalty associated with the violation, includingcivil and criminal penalties, damages, fines and the curtailment of ouroperations.  Any penalties, damages,fines or curtailment of our operations, individually or in the aggregate, couldadversely affect our ability to operate our business and our financialresults.  The risks of our being found inviolation of these laws and regulations is increased by the fact that many ofthem have not been fully interpreted by the regulatory authorities or thecourts, and their provisions are open to a variety of interpretations.  Any action brought against us for violationof these laws or regulations, even if we successfully defend against it, couldcause us to incur significant legal expenses and divert our management’s attention from the operation of ourbusiness.

 

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

 

Healthcare laws and regulations may changesignificantly in the future.  Wecontinuously monitor these developments and modify our operations from time totime as the regulatory environment changes. However, we may not be able to adapt our operations to address newregulations, which could adversely affect our business. In addition, althoughwe believe that we are operating in compliance with applicable federal andstate laws, neither our current or anticipated business operations nor theoperations of our contracted radiology groups have been the subject of judicialor regulatory interpretation.  A reviewof our business by courts or regulatory authorities may result in adetermination that could adversely affect our operations or the healthcare regulatoryenvironment may change in a way that restricts our operations.

 
| **ITEM 2.** | **PROPERTIES** |
|-------------|----------------|

 

We lease approximately 48,400 square feet ofoffice space for our corporate headquarters and a billing office at26250 Enterprise Court, Lake Forest, California 92630. The lease for thislocation expires in 2008.

 
| **ITEM 3.** | **LEGAL  PROCEEDINGS** |
|-------------|------------------------|

 

We are engaged from time to time in the defense oflawsuits arising out of the ordinary course and conduct of our business andhave insurance policies covering such potential insurable losses where suchcoverage is cost-effective. We believe that the outcome of any such lawsuitswill not have a material adverse impact on our business, financial conditionand results of operations.

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

 

None.

 

19

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**PART II**

 

**ITEM 5.****                             MARKETFOR REGISTRANT**’**S COMMON EQUITY ANDRELATED STOCKHOLDER MATTERS**

 

Our common stock is notpublicly traded on any exchange or in any market.  At August 31, 2005, we had six recordholders of our common stock.  We havenever paid a cash dividend on our common stock and do not expect to do so inthe foreseeable future.  The agreementsgoverning our material indebtedness obligations contain restrictions on ourability to pay dividends on our common stock.

 

Information regarding securities authorized forissuance under our equity compensation plans is set forth under “Item 12.  Security Ownership of Certain Beneficial Owners and Management.”

 

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

 

We were incorporated in June 2001.  On October 17, 2001, we acquired InSight(Acquisition) and InSight became our wholly owned subsidiary.  Ourconsolidated operations after the Acquisition are substantially consistent withthe operations of InSight prior to the Acquisition.  In addition, we have no operations other thanour investment in InSight.  InSight isconsidered our predecessor in accordance with Regulation S-X.

 

The selected consolidated financial data presented as of and for theyears ended June 30, 2005, 2004, 2003 and 2002 has been derived from ouraudited consolidated financial statements. The selected consolidated financial data presented as of and for theperiod from July 1, 2001 to October 17, 2001 and for the year ended June 30,2001 has been derived from the audited consolidated financial statements ofInSight.  The information in thefollowing table should be read together with our audited consolidated financialstatements and related notes, and “Item 7.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations, “included elsewhere in this Form 10-K.

 
| ** **                   | ** ** | **Company**                   | ** ** | **Predecessor**      | ** ** |
|------------------------------|------------|-------------------------------|------------|----------------------|------------|
| ** **                   | ** ** | ** **                    | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | **Period from** | ** ** | **Year** | ** ** |
| ** **                   | ** ** | ** **                    | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | **July 1 to** | ** ** | **Ended** | ** ** |
| ** **                   | ** ** | **Years Ended June 30,** | ** ** | **October 17,** | ** ** | **June 30,** | ** ** |
| ** **                   | ** ** | **2005**                      | ** ** | **2004**             | ** ** | **2003** | ** ** | **2002 (1)** | ** ** | **2001** | ** ** | **2001** | ** ** |
| ** **                   | ** ** | **(Amounts in thousands)**    | ** ** |
| STATEMENT OF  INCOME DATA:   |       |                          |       |                 |       |   |   |   |   |   |   |   |   |
| Revenues                     |       | $                             | 316,873    |                 | $          | 290,884 |   | $ | 237,752 |   | $ | 155,407 |   | $ | 63,678 |   | $ | 211,503 |   |
| Gross profit                 |       | 48,716                        |       | 57,463               |       | 57,708 |   | 39,823 |   | 17,991 |   | 49,631 |   |
| Interest  expense, net       |       | 44,860                        |       | 40,682               |       | 37,514 |   | 32,546 |   | 6,321 |   | 23,394 |   |
| Net (loss)  income (2)(3)(4) |       | (27,217                       | )          | 2,924                |       | 4,922 |   | 9 |   | (4,648 | ) | 13,801 |   |
|                              |            |                               |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                            | ** ** | **June 30,** | ** ** | ** ** | ** ** | **June 30,** | ** ** |
|---------------------------------------|------------|-------------------|------------|------------|------------|-------------------|------------|
| ** **                            | ** ** | **2005**          | ** ** | **2004**   | ** ** | **2003**          | ** ** | **2002** | ** ** | ** ** | ** ** | **2001** | ** ** |
| BALANCE SHEET  DATA:                  |       |              |       |       |       |              |       |   |   |   |   |   |   |
| Working capital                       |       | $                 | 36,068     |       | $          | 48,116            |       | $ | 32,580 |   | $ | 35,907 |   |   |   | $ | 16,791 |   |
| Property and  equipment, net          |       | 209,461           |       | 242,336    |       | 219,121           |       | 172,056 |   |   |   | 148,255 |   |
| Goodwill and  other intangible assets |       | 314,989           |       | 319,463    |       | 260,292           |       | 234,644 |   |   |   | 89,202 |   |
| Total assets                          |       | 624,523           |       | 675,631    |       | 577,317           |       | 499,401 |   |   |   | 321,056 |   |
| Total long-term  liabilities          |       | 512,608           |       | 537,177    |       | 442,484           |       | 378,234 |   |   |   | 197,388 |   |
| Stockholders’  equity            |       | 67,724            |       | 94,941     |       | 91,614            |       | 87,376 |   |   |   | 65,471 |   |
|                                       |            |                   |            |            |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |

 

----

(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 from July 1,2001 to October 17, 2001.

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

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

 

20

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| **ITEM 7.** | **MANAGEMENT**’**S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS** |
|-------------|-----------------------------------------------------------------------------------------------------|

 

The following discussion and analysis of our financial condition andresults of operations should be read in conjunction with our consolidatedfinancial statements and accompanying notes which appear elsewhere in this Form 10-K.It contains forward-looking statements that reflect our plans, estimates andbeliefs, and which involve risks, uncertainties and assumptions. Please see “Forward-LookingStatements Disclosure” for more information. Our actual results could differmaterially from those anticipated in these forward-looking statements as aresult of various factors, including those discussed below and elsewhere inthis Form 10-K, particularly under the headings “Risk Factors” and “Forward-LookingStatements Disclosure.”

 

**Overview**

 

We are a nationwide provider of diagnostic imagingservices through our integrated network of fixed-site centers and mobilefacilities which are focused in targeted regions throughout the UnitedStates.  Our services include magneticresonance imaging, or MRI, positron emission tomography, or PET, computedtomography, or CT, and other technologies. These services are noninvasive techniques that generate representationsof internal anatomy on film or digital media which are used by physicians forthe diagnosis and assessment of diseases and disorders.

 

We serve a diverse portfolio of customers, including healthcareproviders, such as hospitals and physicians, and payors, such as managed careorganizations, Medicare, Medicaid and insurance companies.  We operate in 34 states and areprimarily concentrated in California, Arizona, New England, the Carolinas,Florida and the Mid-Atlantic states.  While we generated approximately 71% of our total revenues from MRIservices during the year ended June 30, 2005, we provide a comprehensiveoffering of diagnostic imaging and treatment services, including PET, PET/CT, CT, mammography, bone densitometry, diagnostic ultrasound,lithotripsy and x-ray.   We havedeveloped and continue to develop strong regional networks of diagnosticimaging centers and facilities, enabling us to effectively serve our customersand maximize utilization of our imaging equipment.

 

As of June 30, 2005, our network consists of 120fixed-site centers and 115 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 33 parkedmobile facilities, each of which serves a single customer.  Our fixed operations include four mobile facilitiesas part of our fixed operations in Maine. Certain financial information regarding our reportable segments isincluded in Note 16 to our consolidated financial statements, which are a partof this Form 10-K.

 

Given our size and expertise, we believe we are well positioned tocapitalize on the ongoing growth in the diagnostic imaging industry. Growth inthe diagnostic imaging industry has been and will continue to be driven by (1) anaging population, (2) the increasing acceptance of diagnostic imaging,particularly PET and PET/CT, and the expansion of reimbursement coverage forPET and PET/CT from Medicare and other third-party payors and (3) expandingapplications of CT, MRI and PET technologies.

 

**Acquisitions and Dispositions**

 

On April 1,2004, we acquired the stock of Comprehensive Medical Imaging, Inc., orCMI, a subsidiary of Cardinal Health, Inc., which owned and operated 21fixed-site centers located in California, Arizona, Texas, Kansas, Pennsylvaniaand Virginia.  The aggregate purchaseprice for these centers was approximately $48.6 million.  We refer to this acquisition as the CMIacquisition.  On August 1, 2003, weacquired 22 mobile facilities primarily operating in the Mid-Atlantic states from CDL Medical Technologies, Inc.  The aggregate purchase price for thesefacilities was approximately $49.9 million. We refer to this acquisition as the CDL acquisition.  On April 2, 2003, we acquired13 fixed-site centers located in Southern California from CMI. Theaggregate purchase price for these centers was approximately$46.5 million. We refer to this acquisition as the Central Valleyacquisition.  These acquisitionssignificantly expanded our presence in the Los Angeles, Phoenix and NorthernCalifornia markets and the Mid-Atlantic states. The aggregate cost of the CMI, CDL and Central Valley acquisitions totaled$145.0 million, none of which was assumed debt. We funded the consideration through (1) our credit facility and (2) $25million in a private placement of 9 7/8% senior subordinated notes due November 2011.

 

21

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In May 2005,we sold our joint venture interest in a fixed-site center in Valparaiso,Indiana, which resulted in a gain on sale of approximately $0.5 million.  In April 2005, we sold a fixed-sitecenter in Overland Park, Kansas, which resulted in a loss on sale ofapproximately $0.8 million.  In March 2005,we sold our joint venture interest in a fixed-site center in Marina Del Rey,California, which resulted in a gain on sale of approximately $0.1million.  In December 2003, we solda fixed-site center located in Hobart, Indiana, which resulted in a gain onsale of approximately $2.1 million.  In August 2004,through a joint venture we opened a fixed-site center in Columbus, Ohio.  In April 2004, we opened a fixed-sitecenter in Simi Valley, California.  In February 2004,we acquired the remaining joint venture interest in a fixed-site center inHenderson, Nevada.  In August 2003,we acquired a joint venture interest in a fixed-site center located inHammonton, New Jersey.  All of theseacquisitions and new centers were financed with internally generated funds.

 

**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.  However, ourfixed operations also include four mobile facilities as part of our fixedoperations in Maine.  Revenues at ourfixed-site centers are primarily generated from services billed, on afee-for-service basis, directly to patients or third-party payors such asmanaged care organizations, Medicare, Medicaid, commercial insurance carriersand workers’ compensation funds, which we generally refer to as our patientservices revenues and management fees. Revenues from our fixed operations are dependent on our ability to:

 

•                  attract patient referrals fromphysician groups and hospitals;

 

•                  increaseprocedure volume to maximize equipment utilization;

 

•                  maintain our existing contracts andenter into new ones with managed care organizations and commercial insurancecarriers; and

 

•                  develop newfixed-site centers.

 

Revenues from our fixedoperations have been and will continue to be driven by the growth in thediagnostic imaging industry discussed above. These positive trends have been and will continue to be adverselyaffected by:

 

•                  attractive financing arrangements by equipment manufacturerswhich have increased competition in our targeted regions, including byphysician owned imaging facilities;

 

•                  industry-wideincreases in salaries and benefits for technologists;

 

•                  increases indeductibles and co-payment charges to patients;

 

•                  increases in thepreauthorization requirements applicable to diagnostic imaging services bycertain managed care organizations and state Medicaid programs;

 

•                  reductions in reimbursement from certain third-party payorsincluding proposed reductions from Medicare; and

 

•                  reductions in reimbursement as a result of patient referralsfrom “third-party gatekeeper organizations.”

 

*MobileOperations: *Our mobileoperations consist of mobile facilities, which provide services to hospitals,physician groups and other healthcare providers.  Our mobile operations include 33 parkedmobile facilities, each of which serves a single customer.  Revenues from our mobile operations areprimarily generated from fee-for-service arrangements and fixed fee contractsbilled directly to our hospital, physician group and other healthcare providercustomers, which we generally refer to as contract services revenues.  Our mobile operations revenues depend on ourability to:

 

22

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•                  establish newmobile customers within our targeted regions;

 

•                  structure efficient mobile routes that maximize equipmentutilization; and

 

•                  renew existingmobile contracts with our hospital, physician group and other healthcareprovider customers.

 

Revenues from our mobileoperations have been and will continue to be driven by the growth in thediagnostic imaging industry as discussed above. These positive trends have been and will continue to be adverselyaffected by:

 

•                  increases in competition in our targeted regions from othermobile service providers;

 

•                  industry-wide increases in salaries and benefits fortechnologists;

 

•                  reductions in reimbursement from certain third-party payorsincluding proposed reductions from Medicare;

 

•                  attractive financing arrangements by equipment manufacturerswhich cause some of our customers and some of our customers’ referral sourcesto invest in their own diagnostic imaging equipment; and

 

•                  a reduction in outpatient volumes at our fee-for-servicecustomers due to increased deductibles and co-payment charges to patients.

 

Revenues from both our fixed and mobile operations could also beaffected by the timing of holidays, patient and referring physician vacationschedules and inclement weather.

 

**Reimbursement**

 

*Medicare.***The Medicare program providesreimbursement for hospitalization, physician, diagnostic and certain otherservices to eligible persons 65 years of age and over and certain others.Providers are paid by the federal government in accordance with regulationspromulgated by the United States Department of Health and Human Services andgenerally accept the payment with nominal deductible and co-insurance amountsrequired to be paid by the service recipient, as payment in full. Since 1983,hospital inpatient services have been reimbursed under a prospective paymentsystem. Hospitals receive a specific prospective payment for inpatienttreatment services based upon 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 adverseeconomic effect on hospitals, Congress provided for outlier payments forespecially costly cases, as well as transitional payments for new technologiesand innovative medical devices, drugs and biologics. While most of the 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% reductionin hospital reimbursement rates for PET, effective January 1, 2005.Although the immediate effect on us of this rate reduction has been minimal, ona long-term basis this will have a negative impact on our PET and PET/CTrevenues as more hospital customers (both existing and future) negotiate lowerrates with us. Because unfavorable reimbursement policies constrict the profitmargins of the mobile customers we bill directly, we have and may continue tolower our fees to retain existing PET and PET/CT customers and attract newones; however, CMS recently announced that it will reimburse for additional PETprocedures, including for Alzheimer’s disease and cervical cancer.  Any further modifications under OPPS furtherreducing reimbursement to hospitals may adversely impact our financialcondition and our operations since hospitals will seek to offset suchadditional modifications.

 

23

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Furthermore, in August 2005, CMS publishedproposed regulations that apply to hospital outpatient services thatsignificantly decrease the reimbursement for diagnostic procedures performedtogether 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 pricedprocedure and 50% for the technical component of each additional procedure forprocedures involving contiguous body parts within a family of codes whenperformed in the same session. Under the current methodology, Medicare pays100% of the technical component of each procedure. The implementation of theseregulations would adversely impact our financial condition and our operationssince our hospital customers will seek to offset their reduced reimbursementthrough lower rates.

 

Services provided in non-hospital based freestandingfacilities, such as IDTFs, are paid under the Medicare Part B feeschedule. CMS has also published proposed regulations, which would implementthe same multi-procedure methodology rate reduction proposed for hospitaloutpatient services, for procedures reimbursed under the Part B feeschedule. Accordingly, Medicare payment for diagnostic imaging services underthe Part B fee schedule may also be reduced. In addition, CMS isproposing an overall decrease of 4.3% in the Part B fee schedule forCMS’s fiscal year 2006. Accordingly, if these changes become final and takeeffect, these reductions in Medicare payment for diagnostic imaging servicesunder the Part B fee schedule may have a material adverse effect onour financial condition and results of operations.

 

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.***The Medicaid program is a jointly-fundedfederal and state program providing coverage for low-income persons. Inaddition to federally-mandated basic services, the services offered andreimbursement methods vary from state to state. In many states, 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.

 

*ManagedCare.***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 has become very competitiveand reimbursement schedules are at or below Medicare reimbursement levels. Thedevelopment and expansion of HMOs, PPOs and other managed care organizationswithin our targeted regional networks could have a negative impact onutilization of our services in certain markets and/or affect the revenues perprocedure which we can collect, since such organizations will exert greatercontrol over patients’ access to diagnostic imaging services, the selection ofthe provider of such services and the reimbursement thereof.

 

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 will also reduce reimbursement in responseto reductions in government reimbursement, which could have an adverse impacton our business, 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. Recently, athird-party payor announced a requirement of participation, which has not yetbeen fully implemented, that would require freestanding imaging centerproviders to be multi-modality and not simply offer one type of diagnosticimaging service. Similar initiatives enacted in the future by a significant numberof additional third-party payors would have an adverse impact on our financialcondition and our operations.

 

24

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**Revenues**

 

We earn revenues byproviding services to patients, hospitals and other healthcare providers.  Our patient services revenues are billed, ona fee-for-service basis, directly to patients or third-party payors such asmanaged care organizations, Medicare, Medicaid, commercial insurance carriersand 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 contractualadjustments, which represent the difference between our charge for a procedureand what we will ultimately receive from payors and (2) payments due toradiologists for interpreting the results of the diagnostic imagingprocedures.  Our billing system does notgenerate contractual adjustments. Contractual adjustments are manual estimates based upon an analysis of (1) historicalexperience of contractual payments from payors and (2) the outstandingaccounts receivables from payors. Contractual adjustments are written off against their correspondingasset account at the time payment is received from a payor,with a reduction to the allowance for contractual adjustments to the extentsuch an allowance was previously recorded. We report payments to radiologists on a net basis because (1) InSightis not the primary obligor for the provision of professional services, (2) theradiologists receive contractually agreed upon amounts from collections and (3) theradiologists bear the risk of non-collection. Our collection policy is toobtain all required insurance information at the time a procedure is scheduled,and to submit an invoice to the payor immediately after a procedure is completed.  Most third-party payors requirepreauthorization before an MRI or PET procedure is performed on a patient.

 

We refer to ourrevenues from hospitals, physician groups and other healthcare providers ascontract services revenues.  Contractservices revenues are primarily generated from fee-for-service arrangements,fixed fee contracts and management fees billed to the hospital, physician groupor other healthcare provider.  Contractservices revenues are generally billed to our customers on a monthlybasis.  Contract services revenues arerecognized over the applicable contract period. Revenues collected in advance are recorded as unearned revenue.

 

The provision fordoubtful accounts related to revenues is reflected as an operating expenserather than a reduction of revenues and represents our estimate of amounts thatwill be uncollectible from patients, payors, hospitals and other healthcareproviders.  The provision for doubtfulaccounts includes amounts to be written off with respect to (1) specificaccounts 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,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 doubtfulaccounts to the extent such an allowance was previously recorded.  Our historical write-offs for uncollectibleaccounts are not concentrated in a specific payor class.

 

The followingillustrates our payor mix based on revenues for the year ended June 30,2005 (unaudited):

 
| **Percent of Total Revenues**                                    | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|
|                                                             |       |       |       |
| Hospitals,  physician groups, and other healthcare providers (1) |       | 45         | %          |
| Managed care and  insurance                                      |       | 38         | %          |
| Medicare/Medicaid                                                |       | 13         | %          |
| Workers’  compensation                                      |       | 3          | %          |
| 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.

 

As of June 30, 2005,our days sales outstanding for trade accountsreceivables on a net basis was 53 days. We calculate days sales outstanding by dividingaccounts receivables, net of allowances, by the three-month average revenue perday.

 

25

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The aging of our grossand net trade accounts receivables as of June 30, 2005 is as follows(amounts in thousands):

 
| ** **                                                   | ** **                             | ** **      | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | **120 days**  | ** ** | ** ** | ** ** |
|--------------------------------------------------------------|----------------------------------------|-----------------|------------|-------------|------------|-------------|------------|-------------|------------|---------------|------------|------------|------------|
| ** **                                                   | ** **                             | **Current**     | ** ** | **30 days** | ** ** | **60 days** | ** ** | **90 days** | ** ** | **and older** | ** ** | **Total**  | ** ** |
| ** **                                                   | ** **                             | **(unaudited)** | ** ** |
|                                                         |                                   |            |       |        |       |        |       |        |       |          |       |       |       |
| Hospitals, physicians groups and other healthcare  providers |                                   | $               | 11,799     |        | $          | 5,724       |       | $           | 1,559      |          | $          | 480        |       | $ | 867 |   | $ | 20,429 |   |
| Managed care and insurance                                   |                                   | 22,362          |       | 10,392      |       | 5,271       |       | 3,055       |       | 11,839        |       | 52,919     |       |
| Medicare/Medicaid                                            |                                   | 7,439           |       | 1,835       |       | 1,213       |       | 1,160       |       | 3,812         |       | 15,459     |       |
| Workers’ compensation                                   |                                   | 2,102           |       | 1,381       |       | 786         |       | 529         |       | 2,399         |       | 7,197      |       |
| Other, including self-pay patients                           |                                   | 229             |       | 169         |       | 134         |       | 92          |       | 18            |       | 642        |       |
| Trade accounts receivables                                   |                                   | 43,931          |       | 19,501      |       | 8,963       |       | 5,316       |       | 18,935        |       | 96,646     |       |
| Less:                                                        | Allowances for contractual adjustments |            | (14,943    | )           | (6,412     | )           | (3,307     | )           | (445       | )             | (4,305     | )          | (29,412    | ) |
|                                                         | Allowances for professional fees       |            | (5,291     | )           | (2,213     | )           | (1,167     | )           | (731       | )             | (2,495     | )          | (11,897    | ) |
|                                                         | Allowances for doubtful accounts       |            | (341       | )           | (163       | )           | (52        | )           | (1,843     | )             | (6,488     | )          | (8,887     | ) |
| Trade accounts receivables, net                              |                                   | $               | 23,356     |        | $          | 10,713      |       | $           | 4,437      |          | $          | 2,297      |       | $ | 5,647 |   | $ | 46,450 |   |

 

**OperatingExpenses**

 

We operate in a capital intensive industry that requires significantamounts of capital to fund operations. As a result, a high percentage of our total operating expenses arefixed.  Our fixed costs include debtservice and capital lease payments, rent and operating lease payments, salariesand benefit obligations, equipment maintenance expenses, and insurance andvehicle operation costs.  We expect thatour costs for the salaries and benefits of technologists will continue toincrease for the foreseeable future because of the industry’s competitivedemand for their services.  Due to theincrease in our mobile PET and PET/CT facilities, which are moved morefrequently, our vehicle operation costs will continue to increase until we canmaximize geographic operating efficiencies. Because a large portion of our operating expenses are fixed, anyincrease in our procedure volume disproportionately increases our operating cashflow.  Conversely, any decrease in ourprocedure volume disproportionately decreases our operating cash flow.  Our variable costs, which comprise only asmall portion of our total operating expenses, include the cost of servicesupplies such as film, contrast media and radiopharmaceuticals used in PET andPET/CT procedures.

 

**Resultsof Operations**

 

The following table sets forth certain condensedhistorical financial data expressed as a percentage of revenues for each of theperiods indicated:

 
| ** **                                         | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                         | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                               |       |                          |       |   |   |   |   |
| REVENUES                                           |       | 100.0                         | %          | 100.0 | % | 100.0 | % |
| COSTS OF  OPERATIONS:                              |       |                          |       |   |   |   |   |
| Costs of services                                  |       | 61.4                          |       | 58.0 |   | 52.9 |   |
| Provision for doubtful accounts                    |       | 1.8                           |       | 1.7 |   | 1.7 |   |
| Equipment leases                                   |       | 0.7                           |       | 0.3 |   | 0.3 |   |
| Depreciation and amortization                      |       | 20.7                          |       | 20.2 |   | 20.7 |   |
| Total costs of operations                          |       | 84.6                          |       | 80.2 |   | 75.6 |   |
| Gross profit                                       |       | 15.4                          |       | 19.8 |   | 24.4 |   |
| CORPORATE  OPERATING EXPENSES                      |       | (5.8                          | )          | (5.6 | ) | (5.8 | ) |
| (LOSS) GAIN ON  SALES OF CENTERS                   |       | —                        |       | 0.7 |   | — |   |
| EQUITY IN  EARNINGS OF UNCONSOLIDATED PARTNERSHIPS |       | 0.8                           |       | 0.8 |   | 0.7 |   |
| INTEREST  EXPENSE, net                             |       | (14.2                         | )          | (14.0 | ) | (15.8 | ) |
| (Loss) income before income taxes                  |       | (3.8                          | )          | 1.7 |   | 3.5 |   |
| PROVISION FOR  INCOME TAXES                        |       | 4.8                           |       | 0.7 |   | 1.4 |   |
| Net (loss) income                                  |       | (8.6                          | )%         | 1.0 | % | 2.1 | % |

 

26

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

 
| ** **         | ** ** | **Years Ended June 30,** | ** ** |
|--------------------|------------|-------------------------------|------------|
| ** **         | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|               |       |                          |       |   |   |   |   |
| Fixed operations   |       | $                             | 196,482    |   | $ | 176,763 |   | $ | 139,816 |   |
| Mobile  operations |       | 120,391                       |       | 114,121 |   | 97,936 |   |
| Total              |       | $                             | 316,873    |   | $ | 290,884 |   | $ | 237,752 |   |

 

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

 

*Revenues:*  Revenues increased approximately 8.9% fromapproximately $290.9 million for the year ended June 30, 2004, to approximately$316.9 million for the year ended June 30, 2005.  This increase was due to higher revenues fromour fixed operations (approximately $19.7 million) and our mobile operations(approximately $6.3 million). Revenues from our fixed operations and mobile operations representedapproximately 62% and 38%, respectively, of our total revenues for the yearended June 30, 2005.

 

Revenues from our fixed operations increased approximately 11.1% fromapproximately $176.8 million for the year ended June 30, 2004, toapproximately $196.5 million for the year ended June 30, 2005.  The increase was due primarily to (1) theCMI acquisition (approximately $29.7 million); and (2) revenues fromthe fixed-site centers we opened in fiscal 2005 and 2004 (approximately $1.5 million),partially offset by a reduction in (1) revenues from our existingfixed-site centers; and (2) revenues from the fixed-site centers we soldin fiscal 2005 and 2004 (approximately $1.3 million).  Revenues at our existing consolidatedfixed-site centers decreased approximately 3.1% because of (1) a decreasein procedure volume at the fixed-site centers as a result of the adversefactors affecting our fixed operations discussed above; and (2) a decreasein our average reimbursement from payors.

 

Revenues from our mobile operations increasedapproximately 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 was due to (1) revenuesfrom our existing mobile facilities (approximately $4.4 million); and (2) theCDL acquisition (approximately $1.9 million).  The increase in revenues from our existingmobile facilities was the result of higher PET and PET/CT revenues(approximately $5.8 million), partially offset by lower MRI and other revenues(approximately $1.4 million).  Theincrease in PET and PET/CT revenues was primarily due to an increase in thenumber of PET and PET/CT facilities in service. The decrease in MRI revenues was due to fewer MRI facilities in serviceand the loss of some high volume customer contracts.  The loss of high volume customers isprimarily the result of customers reaching sufficient patient volumes tofinance the cost of acquiring their own system. This has increased in recent years as equipment manufacturers haveoffered attractive financing 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 yearended June 30, 2005 were generated from patient services revenues.  Patient services revenues from fixedoperations and mobile operations represented approximately 99% and 1%,respectively, of total patient services revenues for the year ended June 30,2005.  Approximately 43% of our totalrevenues for the year ended June 30, 2005, were generated from contractservices revenues.  Contract servicesrevenues from fixed operations and mobile operations represented approximately13% and 87%, respectively, of total contract services revenues for the yearended June 30, 2005.

 

*Costs of Operations: *Costs of operations increased approximately 14.9% fromapproximately $233.4 million for the year ended June 30, 2004, toapproximately $268.2 million for the year ended June 30, 2005.  This increase was due primarily to (1) theCDL and 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.  The increase was due to (1) the CMIacquisition (approximately $22.4 million); (2) increased costs at thefixed-site centers we opened in fiscal 2005 and 2004 (approximately $1.4million); (3) a charge for the closure of a fixed-site center(approximately $0.5 million); (4) a charge for severance payments for aterminated employee (approximately $0.3 million); and (5) an increase incosts at our existing fixed-site centers, partially offset by reduced costsfrom the fixed-site centers we sold in fiscal 2005 and 2004 (approximately $1.3million).

 

27

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Costs of operations at our mobile operations increasedapproximately 12.6% from approximately $87.1 million for the year ended June 30,2004, to approximately $98.1 million for the year ended June 30,2005.  The increase was due to (1) theCDL acquisition (approximately $1.2 million); and (2) increased costs atour existing mobile facilities (approximately $9.8 million).  The increase in costs at our existing mobilefacilities was due primarily to (1) higher salaries and benefits,particularly technologists (approximately $4.5 million); (2) an increasein equipment lease costs (approximately $2.1 million); (3) an increase invehicle costs (approximately $0.2 million); and (4) an increase in medicalsupply costs (approximately $0.8 million). Our PET and PET/CT facilities, which have higher (1) medical supplycosts relating to the use of radiopharmaceuticals; (2) technologistsalaries relating to the shortage of PET technologists and the number oftechnologists needed to operate PET/CT facilities; and (3) vehicleoperation costs because PET and PET/CT facilities are moved more frequently,accounted for approximately $6.9 million of the increase in costs for ourmobile operations.  We believe that thesehigher costs will continue as we add additional PET/CT facilities.

 

*CorporateOperating Expenses*: Corporate operating expenses increased approximately 13.6% fromapproximately $16.2 million for the year ended June 30, 2004, toapproximately $18.4 million for the year ended June 30, 2005.  The increase was due primarily to (1) additionallegal and accounting costs primarily related to Sarbanes-Oxley implementation(approximately $0.9 million);  (2) consultingcosts (approximately $0.5 million); (3) higher salaries and benefits(approximately $0.5 million); and (4) a charge for severance payments fora terminated employee (approximately $0.8 million).  In 2005, we did not have any costs andexpenses related to a withdrawn public offering, which totaled approximately$1.7 million in 2004.

 

*Interest Expense, net:*  Interest expense, net increased approximately10.3% from approximately $40.7 million for the year ended June 30,2004, to approximately $44.9 million for the year ended June 30,2005.  The increase was due primarily toadditional indebtedness related to the CDL and CMI acquisitions and an increasein the interest 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 increased from approximately$2.0 million for the year ended June 30, 2004, to approximately$15.1 million for the year ended June 30, 2005.  As a result of our pre-tax loss for the yearended June 30, 2005 and anticipated future tax losses, we determined inthe fourth quarter that a valuation allowance was necessary due to theuncertainty of future realization of net operating loss carryforwards and otherassets.  This decision was based on ouranticipated future cumulative pre-tax losses, the main determination forrecording such an allowance.  Indetermining the net asset subject to a valuation allowance, we excluded adeferred tax liability related to an asset with an indefinite useful life thatis not expected to reverse in the foreseeable future.  This resulted in a net deferred tax liabilityof approximately $15.2 million after application of the valuationallowance.  This valuation allowance doesnot affect our cash flows or the timing of income taxes payable in the future.

 

***Years Ended June 30,2004 and 2003***

 

*Revenues:*Revenues increased approximately 22.3% from approximately $237.8 millionfor the year ended June 30, 2003, to approximately $290.9 million forthe year ended June 30, 2004. This increase was due to an increase inrevenues from our fixed operations (approximately $36.9 million) and anincrease in revenues from our mobile operations (approximately$16.2 million). Revenues for our fixed operations and mobile operationsrepresented approximately 61% and 39%, respectively, of our total revenues forthe year ended June 30, 2004.

 

Revenues from our fixedoperations increased approximately 26.4% from approximately $139.8 millionfor the year ended June 30, 2003, to approximately $176.8 million forthe year ended June 30, 2004.  Theincrease was due to (1) the Central Valley acquisition (approximately$20.0 million); (2) the CMI acquisition (approximately $10.3million); (3) revenues from the fixed-site centers we opened in fiscal2004 and 2003 (approximately $3.6 million); and (4) revenues from ourexisting fixed-site centers (approximately $4.3 million), partially offsetby a decrease in revenues from the sale of a fixed-site center in Hobart,Indiana in fiscal 2004 (approximately $1.2 million). The increase in ourrevenues from our existing fixed-site centers was the result of a 4% increasein utilization, partially offset by a 1% decrease in reimbursement fromthird-party payors.

 

28

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Revenues from our mobile operations increasedapproximately 16.5% from approximately $97.9 million for the year ended June 30,2003, to approximately $114.1 million for the year ended June 30,2004. The increase was due to the CDL acquisition (approximately$21.0 million), partially offset by (1) reduced revenues associatedwith our short-term rental activities (approximately $1.1 million) and (2) reducedrevenues from our existing mobile facilities (approximately$3.7 million).  The decrease inrevenues associated with our short-term rental activities is the result offewer upgrades or installations of MRI equipment at hospitals which utilize ourmobile facilities on a short-term or interim basis.  The decrease in revenues from our existingmobile facilities was the result of lower MRI and other revenues (approximately$5.9 million), partially offset by higher PET revenues (approximately $2.2million).  The increase in PET revenuesis primarily due to an increase in the number of PET facilities inservice.  The decrease in MRI revenueswas due to a decrease in the number of MRI facilities in service and the lossof high volume customer contracts, partially offset by an increase in procedurevolume at replacement accounts, which initially had lower procedurevolumes.  The loss of high volume customersis primarily the result of customers reaching sufficient patient volumes tofinance the cost of acquiring their own system. This has increased in recent years as equipment manufacturers haveoffered attractive financing to high volume customers.  We experienced losses of high volume customersacross our network and not just in any one region.

 

Approximately 56% of our total revenues for the yearended June 30, 2004 were generated from patient services revenues. Patientservices revenues for the fixed operations and mobile operations representedapproximately 99% and 1%, respectively, of total patient services revenues forthe year ended June 30, 2004. Approximately 44% of our total revenues for the year ended June 30,2004, were generated from contract services revenues. Contract servicesrevenues for the fixed operations and mobile operations representedapproximately 13% and 87%, respectively, of total contract services revenuesfor the year ended June 30, 2004.

 

*Costs of Operations:*Costsof operations increased approximately 29.6% from approximately $180.0 millionfor the year ended June 30, 2003, to approximately $233.4 million for theyear ended June 30, 2004. This increase was due primarily to (1) theCentral Valley, CDL and CMI acquisitions (approximately $15.2 million, $13.9million and $7.7 million, respectively); (2) costs at the fixed-sitecenters we opened in fiscal 2004 and 2003 (approximately $3.3 million); and (3) increasedcosts at our existing fixed-site centers and mobile facilities (approximately$14.3 million), partially offset by reduced costs from the sale of a fixed-sitecenter in Hobart, Indiana (approximately $1.0 million).  The increase in costs of operations is dueprimarily to (1) higher salaries and benefits (approximately $7.8million); (2) equipment maintenance costs (approximately $2.6 million); (3) insurance(approximately $1.0 million); and (4) depreciation expense (approximately$2.7 million), partially offset by reduced equipment lease costs (approximately$0.3 million) and provision for doubtful accounts (approximately $0.1 million).

 

Costs of operations at our fixed operations increasedapproximately 29.1% from approximately $99.8 million for the year ended June 30,2003, to approximately $128.8 million for the year ended June 30, 2004.The increase was due to (1) the Central Valley and CMI acquisitions(approximately $15.2 million and $7.7 million, respectively); (2) costs atthe fixed-site centers we opened in fiscal 2004 and 2003 (approximately $3.3million); and (3) increased costs at our existing fixed-site centers(approximately $3.8 million), partially offset by reduced costs from the saleof the fixed-site center discussed above (approximately $1.0 million).  The increase in costs of operations at ourexisting fixed-site centers was due primarily to (1) higher salaries andbenefits (approximately $3.8 million), particularly technologists andadditional senior regional management; (2) equipment maintenance costs(approximately $0.9 million); (3) insurance (approximately $0.6 million);and (4) depreciation expense (approximately $0.3 million), partiallyoffset by reduced provision for doubtful accounts (approximately $0.3 million).

 

Costs of operations at our mobile operations increasedapproximately 30.4% from approximately $66.8 million for the year ended June 30,2003, to approximately $87.1 million for the year ended June 30, 2004. Theincrease was due to (1) the CDL acquisition (approximately $13.9 million)and (2) increased costs at our existing mobile facilities (approximately$6.4 million).  The increase in costs atour existing mobile facilities was due to (1) higher salaries and benefits(approximately $2.9 million), particularly technologists and additional mobilesales personnel; (2)  equipment maintenance costs (approximately $1.0million); (3) an increase in vehicle costs due to the reduction of ourshort-term rental activities (approximately $2.2 million); (4) insurance(approximately $0.3 million); and (5) depreciation expense (approximately$1.9 million), partially offset by reduced equipment lease costs (approximately$1.0 million) and other costs (approximately $0.9 million).

 

29

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*Corporate Operating Expenses:*Corporate operating expenses increased approximately 17.9% from approximately$13.8 million for the year ended June 30, 2003, to approximately$16.2 million for the year ended June 30, 2004. The increase was dueprimarily to (1) higher salaries and benefits (approximately $0.2million); (2) additional costs to make IRIS conform with HIPAArequirements (approximately $0.1 million); (3) additional occupancy costs(approximately $0.1 million); and (4) costs and expenses incurred relatedto a withdrawn initial public offering (approximately $1.7 million), partiallyoffset by reduced consulting costs related to our acquisition and developmentactivities (approximately $0.3 million).

 

*Gain on Sale of Center:*In December 2003, we sold a fixed-site center located in Hobart, Indianafor approximately $5.4 million. We realized a gain of approximately$2.1 million on the sale.

 

*Interest Expense, net:*Interest expense, net increased approximately 8.5% from approximately$37.5 million for the year ended June 30, 2003, to approximately$40.7 million for the year ended June 30, 2004. The increase was dueprimarily to additional debt related to the Central Valley, CDL and CMIacquisitions, partially offset by principal payments on notes payable andcapital lease obligations.

 

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

 

**Financial Condition, Liquidity and Capital Resources**

 

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

 

*Liquidity: *We believe, based oncurrently available information, that future cash flows provided by operatingactivities will be adequate to meet our anticipated interest expense, federaland state cash tax expense, capital expenditures, working capital, scheduledprincipal payments and other debt repayments for the next twelve months.

 

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

 

•                  principal andinterest payments relating to our credit facility;

 

•                  interestpayments relating to our 9 7/8% unsecured senior subordinated notes;

 

•                  capitalexpenditures;

 

•                  working capitalrequirements to support business growth; and

 

•                  potentialacquisitions.

 

There are no scheduledprincipal repayments on our senior subordinated notes until 2011.

 

Cash and cash equivalentsas of June 30, 2005 were approximately $20.8 million.  Our primary source of liquidity is cashprovided by operating activities.  Ourability to generate cash flows from operating activities is based upon severalfactors including the following:

 

•                  the volume of patients at ourfixed-site centers;

 

•                  the demand for our mobile services;

 

•                  our ability to control expenses; and

 

•                  our ability to collect our tradeaccounts receivables from third-party payors, hospitals, physician groups,other healthcare providers and patients.

 

30

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

 
| ** **                                           | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                           | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net cash  provided by operating activities           |       | $                             | 60,864     |   | $ | 60,120 |   | $ | 61,756 |   |
| Net cash used in  investing activities               |       | (32,578                       | )          | (142,250 | ) | (102,705 | ) |
| Net cash (used  in) provided by financing activities |       | (37,859                       | )          | 92,988 |   | 42,720 |   |
| Increase  (decrease) in cash and cash equivalents    |       | $                             | (9,573     | ) | $ | 10,858 |   | $ | 1,771 |   |

 

Net cash provided byoperating activities was approximately $60.9 million for the year ended June 30,2005 and resulted primarily from (1) net income before depreciation,amortization and deferred taxes (approximately $53.6 million); (2) adecrease in trade accounts receivables, net (approximately $8.1 million);and (3) an increase in accounts payable and accrued expenses(approximately $0.7 million), partially offset by an increase in other currentassets (approximately $1.7 million).  The decrease in trade accounts receivables, net is due to increasedcollections on patient services revenues. The increase in other current assets is due primarily to the payment ofinsurance premiums.

 

Net cash used in investing activities wasapproximately $32.6 million for the year ended June 30, 2005.  Cash used in investing activities resultedprimarily from our purchase or upgrade of diagnostic imaging equipment at ourexisting fixed-site centers and mobile facilities (approximately$30.5 million) and net purchases of short-term investments (approximately$5.0 million), partially offset by proceeds from the sales of centers discussedabove (approximately $2.8 million).

 

Net cash used in financing activities wasapproximately $37.9 million for the year ended June 30, 2005. Cash used infinancing activities resulted from principal payments of notes payable andcapital lease obligations, including $30.0 million of voluntary prepayments onour credit facility.

 

The following table sets forth our earnings beforeinterest, taxes, depreciation and amortization, or EBITDA, for the years ended June 30,2005, 2004 and 2003.  EBITDA has beenincluded because we believe that it is a useful tool for us and our investorsto measure our ability to provide cash flows to meet debt service, capitalexpenditure and working capital requirements. EBITDA should not be considered an alternative to, or more meaningfulthan, income from company operations or other traditional indicators ofoperating performance and cash flow from operating activities determined inaccordance with accounting principles generally accepted in the United States. We present the discussion of EBITDA because covenants in the indenturegoverning our senior subordinated notes and the credit agreement relating toour credit facility contain ratios based on this measure.   While EBITDA is used as a measure ofoperations 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 to EBITDAis as follows (amounts in thousands):

 
| ** **                                     | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|
| ** **                                     | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                     | ** ** | **(unaudited)**               | ** ** |
| Net cash  provided by operating activities     |       | $                             | 60,864     |   | $ | 60,120 |   | $ | 61,756 |   |
| Provision for income taxes                     |       | 15,069                        |       | 1,950 |   | 3,266 |   |
| Interest expense, net                          |       | 44,860                        |       | 40,682 |   | 37,514 |   |
| (Loss) gain on sales of centers                |       | (170                          | )          | 2,129 |   | — |   |
| Net change in operating assets and liabilities |       | (7,086                        | )          | (592 | ) | (7,489 | ) |
| Net change in deferred income taxes            |       | (15,224                       | )          | — |   | — |   |
|                                           |       |                          |       |   |   |   |   |
| EBITDA                                         |       | $                             | 98,313     |   | $ | 104,289 |   | $ | 95,047 |   |
|                                                |            |                               |            |  |  |  |  |  |  |  |  |  |

 

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

 

EBITDA from our fixedoperations increased 1.0% from approximately $73.4 million for the year ended June 30,2004, to approximately $74.1 million for the year ended June 30,2005.  This increase was due primarily to(1) the CMI acquisition (approximately $11.1 million) and (2) thefixed-site centers we opened in fiscal 2005 (approximately $0.6 million),partially offset by (1) a decrease at our existing fixed-site centers(approximately $7.5 million), primarily related to decreased procedure volumeand reimbursement discussed above, (2) the elimination of the gain on saleof the fixed-site center 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).

 

EBITDA from our mobile operations decreasedapproximately 5.2% from approximately $56.3 million for the year ended June 30,2004, to approximately $53.4 million 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).

 

EBITDA increasedapproximately 9.7% from approximately $95.0 million for the year ended June 30,2003, to approximately $104.3 million for the year ended June 30,2004.  The increase was due primarily toincreases in EBITDA from our fixed operations (approximately $14.3 million) andour mobile operations (approximately $0.8 million), partially offset by anincrease in corporate operating expenses (approximately $2.4 million) and anincrease in salaries and benefits of our billing operations primarily relatedto the Central Valley and CMI acquisitions.

 

EBITDA from our fixedoperations increased approximately 24.2% from approximately $59.1 million forthe year ended June 30, 2003, to approximately $73.4 million for the yearended June 30, 2004.  This increasewas due primarily to (1) the Central Valley and CMI acquisitions(approximately $7.1 million and $3.8 million, respectively), (2) anincrease at our existing fixed-site centers (approximately $3.3 million) and (3) thefixed-site centers we opened in fiscal 2004 and 2003 (approximately $0.7million), partially offset by a reduction at the fixed-site center we sold in2004 (approximately $0.5 million).

 

EBITDA from our mobileoperations increased approximately 1.5% from approximately $55.5 million forthe year ended June 30, 2003, to approximately $56.3 million for the yearended June 30, 2004.  This increasewas due to the CDL acquisition (approximately $10.2 million), partially offsetby a reduction at our existing mobile facilities (approximately $9.4 million).

 

*Capital Expenditures: *In fiscal 2005, wepurchased or leased 11 MRI systems, four PET/CT facilities and eight CTsystems.   As of June 30, 2005, wehave committed to purchase or lease at an approximate aggregate cost of$11.2 million, six diagnostic imaging systems through February 2006.  We expect to use either internally generatedfunds 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 agreementsare renewed, acquisitions are completed, or new fixed-site centers and mobilefacilities are developed in accordance with our business strategy.

 

*Credit Facility and Unsecured SeniorSubordinated Notes: *Asof June 30, 2005, through InSight, we have a credit facility with Bank ofAmerica, N.A. and a syndicate of other lenders consisting of:  (1) a term loan with a principalbalance of approximately $217.8 million, (2) an additional term loan witha principal balance of approximately $19.8 million and (3) a$50.0 million revolving credit facility. Borrowings under the credit facility bear interest at LIBOR plus 3.75%to 4.0%.  As of June 30, 2005, therewas a letter of credit of approximately $1.8 million outstanding under ourcredit facility.  We are required to payan unused facility fee up to 0.625% per annum, payable quarterly, on unborrowedamounts on the revolving credit facility. As of June 30, 2005 and August 31, 2005 there were noborrowings under the revolving credit facility. The credit facility is secured by a first priority lien on substantiallyall of our assets.

 

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In addition to the indebtedness under our credit facility, throughInSight, we have outstanding $250 million of 9 7/8% unsecured seniorsubordinated notes.  The notes mature in November 2011,with interest payable semi-annually and are redeemable at our option, in wholeor in part, on or after November 1, 2006.

 

The credit facility contains various restrictive covenants whichprohibit us from prepaying other indebtedness, including the notes, and requireus to maintain specified financial ratios and satisfy financial conditiontests.  As of June 30, 2005, we werein compliance with these covenants.  Inaddition, the credit facility prohibits InSight from declaring or paying anydividends to us and prohibits us from making any payments with respect to thenotes if we fail to perform our obligations under, or we fail to meet theconditions of, the credit facility or if payment creates a default under thecredit facility.

 

*SubsequentEvent: *On September 16, 2005, we agreed to sell$300 million of senior secured floating rate notes due 2011 (New Notes).  The proceeds from this sale will be used torepay all borrowings under our credit facility, to repurchase approximately $55.5million aggregate principal amount of our unsecured senior subordinated notesin one or more privately negotiated transactions, and for general corporate purposes.  The private offering was made within the UnitedStates only to qualified institutional buyers, and outside the United Statesonly to non-U.S. investors under Regulation S of the Securities Act of1933.  These New Notes have not beenregistered under the Securities Act of 1933 or applicable state securitieslaws, and may not be offered or sold in the United States absent registrationor an applicable exemption from the registration requirements of the SecuritiesAct of 1933 and applicable state laws. This statement shall not constitute an offer to sell or a solicitationof an offer to buy the New Notes.

 

*ContractualCommitments: * Asdefined by SEC reporting regulations, our contractual obligations as of June 30,2005 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    |       | $          | 698,378    |                       | $          | 44,695 |   | $ | 262,181 |   | $ | 104,471 |   | $ | 287,031 |   |
| Capital lease  obligations     |       | 14,711     |       | 5,802                      |       | 8,583 |   | 326 |   | — |   |
| Operating lease  obligations   |       | 41,087     |       | 9,035                      |       | 15,594 |   | 8,566 |   | 7,892 |   |
| Purchase  commitments          |       | 11,180     |       | 11,180                     |       | — |   | — |   | — |   |
| Total  contractual obligations |       | $          | 765,356    |                       | $          | 70,712 |   | $ | 286,358 |   | $ | 113,363 |   | $ | 294,923 |   |
|                                |            |            |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The long-term debt obligations and capital lease obligations includeboth principal and interest commitments for the periods presented.  The interest commitment on our creditfacility is based on our weighted average interest rate at June 30, 2005(7.26%).

 

**Off-Balance Sheet Arrangements**

 

There are no off-balance sheet transactions, arrangements orobligations (including contingent obligations) that have, or are reasonablylikely to have a current or future material effect on our financial condition,changes in the financial condition, revenues or expenses, results ofoperations, liquidity, capital expenditures or capital resources.

 

**Critical Accounting Policies andEstimates**

 

Management’s discussion and analysis of financial condition and resultsof operations, as well as disclosures included elsewhere in this Form 10-Kare based upon our consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates. The preparation of these consolidated financial statements requiresmanagement to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues, expenses and related disclosure ofcontingencies. We believe the critical accounting policies that most impact theconsolidated financial statements are described below. A summary of our significantaccounting policies can be found in the notes to our consolidated financialstatements which are included elsewhere in this Form 10-K.

 

33

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*Revenue Recognition: *Revenues from patientservices and from contract services are recognized when services are provided.Patient services revenues are presented net of (1) related contractualadjustments, which represent the difference between our charge for a procedureand what we will ultimately receive from private health insurance programs,Medicare, Medicaid and other federal healthcare programs, and (2) paymentsdue to radiologists. We report payments made to radiologists on a net basisbecause (1) we are not the primary obligor for the provision of professionalservices, (2) the radiologists receive contractually agreed upon amountsfrom collections and (3) the radiologists bear the risk ofnon-collection.  Contract servicesrevenues are recognized over the applicable contract period.  Revenues collected in advance are recorded asunearned 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 involvingcustomers, which are financially unstable or materially fail to comply with thepayment terms of their contract and (2) other accounts based on ourhistorical collection experience, including payor mix and the aging of patientaccounts receivables balances. Receivables deemed to be uncollectible, either through a customerdefault on payment terms or after reasonable collection efforts have beenexhausted, are fully written off against their corresponding asset account,with a reduction to the allowance for doubtful accounts to the extent such anallowance was previously recorded.  Ourhistorical write-offs for uncollectible accounts receivables are notconcentrated in a specific payor class. While we have not in the past experienced material differences betweenthe amounts we have collected and our estimated allowances, the amounts werealize in the future could differ materially from the amounts assumed inarriving at the allowance for doubtful accounts 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 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.   Net other intangible assets are amortized ona straight-line basis over the estimated lives of the assets ranging from fiveto thirty years.

 

We evaluate the carryingvalue of goodwill and acquisition-related intangible assets, including therelated amortization period, 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 evaluating goodwill and intangible assetsnot subject to amortization, we complete the two-step goodwill impairment testas required by SFAS 142. In a business combination, goodwill is allocated toour two reporting units (fixed and mobile), which are the same as ourreportable operating segments, based on relative fair value of the assetsacquired and liabilities assumed.  In thefirst of a two-step impairment test, we determine the fair value of thesereporting units using a discounted cash flow valuation model or marketmultiples, as appropriate.  We comparethe fair value for the reporting unit to its carrying value.  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 carrying amount of thatgoodwill.  As of June 30, 2005, wedo not believe any impairment of goodwill or other intangible assets hasoccurred.

 

We assess the ongoingrecoverability of our intangible assets subject to amortization by determiningwhether the intangible asset balance can be recovered over the remainingamortization period through projected undiscounted future cash flows.  If projected future cash flows indicate thatthe unamortized intangible asset balances will not be recovered, an adjustment ismade to reduce the net intangible asset to an amount consistent with projectedfuture 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.

 

34

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*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 May 2005, theFinancial Accounting Standards Board, or FASB, issued Statement of FinancialAccounting Standards (SFAS) No. 154, “Accounting Changes and ErrorCorrections – 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 are required to adopt theseprovisions at the beginning of fiscal 2007. We do not expect the adoption of SFAS 154 to have a material impact on ourfinancial condition and results of operations.

 

In December 2004,the FASB issued SFAS No. 123R, “Share-Based Payment” (SFAS 123R).  SFAS 123R requires expensing of stock optionsand other share-based payments and supersedes FASB’s earlier rule (SFAS 123)that had allowed companies to choose between expensing stock options or showingpro-forma disclosure only.  We will berequired to implement SFAS 123R at the beginning of fiscal 2007.  We do not believe that the impact of adoptingSFAS 123R would be materially different than the pro-forma disclosures underSFAS 123 (Note 2) to the consolidated financial statements, which are a part ofthis Form 10-K.

 

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

 

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

 

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

 

**Interest Rate Risk**

 

In order to modify and manage the interestcharacteristics of our outstanding indebtedness and limit the effects ofinterest rates on our operations, we may use a variety of financialinstruments, including interest rate hedges, caps, floors and other interestrate exchange contracts. The use of these types of instruments to hedge ourexposure to changes in interest rates carries additional risks such ascounter-party credit risk and legal enforceability of hedging contracts. We donot enter into any transactions for speculative or trading purposes.

 

Our future earnings and cash flows and some of ourfair values relating to financial instruments are dependent upon prevailingmarket rates of interest, such as LIBOR. Based on interest rates and outstandingbalances as of June 30, 2005, a 1% change in interest rates on our $238.3million of floating rate indebtedness would affect annual future earnings andcash flows by approximately $2.4 million. The weighted average interest rate on our floating indebtedness as of June 30,2005 was 7.26%.

 

Through InSight, we also have outstanding $250 millionin senior subordinated notes which mature in November 2011 and bearinterest at 9 7/8%, payable semi-annually.  The fair value of our senior subordinated notesas of June 30, 2005 was approximately $198 million.

 

These amounts are determinedby considering the impact of hypothetical interest rates on our borrowing cost.These analyses do not consider the effects of the reduced level of overalleconomic activity that could exist in that environment. Further, in the eventof a change of this magnitude, we would consider taking actions to further

 

35

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mitigate our exposure to anysuch change. Due to the uncertainty of the specific actions that would be takenand their possible effects, however, this sensitivity analysis assumes nochanges in our capital structure.

 

**Inflation****Risk**

 

We donot believe that inflation has had a material adverse impact on our business oroperating results during the periods presented. We cannot assure you, however,that our business will not be affected by inflation in the future.

 

36

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

 

**INSIGHT HEALTH SERVICES HOLDINGS CORP. ANDSUBSIDIARIES**

Index to Consolidated Financial Statements

for the Years Ended June 30, 2005, 2004 and 2003

 
| 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 3-10of Regulation S-X, the consolidated financial statements of InSight HealthServices Holdings Corp. (Company) are included herein and separatefinancial statements of InSight Health Services Corp. (InSight), the Company’swholly owned subsidiary, and InSight’s subsidiary guarantors are notincluded.  Condensed financial data forInSight and its subsidiary guarantors is included in Note 19 to theconsolidated financial statements.

 

37

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**Report of Independent Registered Public Accounting Firm**

 

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

 

In our opinion, the consolidated financial statementslisted in the accompanying index present fairly, in all material respects, thefinancial position of InSight Health Services Holdings Corp. and itssubsidiaries (the “Company”) at June 30, 2005 and 2004 and the results of their operationsand their cash flows for each of the three years in the period then ended 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 onour audits. 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 financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 
| /s/ PRICEWATERHOUSECOOPERS LLP |   |
|--------------------------------|--------|

 

Orange County, California

 

September 22,2005

 

38

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**AS OF JUNE 30,2005 AND 2004**

(Amounts in thousands, exceptshare data)

 
| ** **                                                                                                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                                                                                                |       |     |       |     |       |
| CURRENT ASSETS:                                                                                                                       |       |     |       |     |       |
| Cash and cash equivalents                                                                                                             |       | $        | 20,839     |     | $          | 30,412 |   |
| Trade accounts receivables, net                                                                                                       |       | 46,450   |       | 55,010   |       |
| Short-term investments                                                                                                                |       | 5,000    |       | —   |       |
| Other current assets                                                                                                                  |       | 7,970    |       | 6,207    |       |
| Total current assets                                                                                                                  |       | 80,259   |       | 91,629   |       |
|                                                                                                                                  |       |     |       |     |       |
| PROPERTY AND  EQUIPMENT, net                                                                                                          |       | 209,461  |       | 242,336  |       |
| INVESTMENTS IN  PARTNERSHIPS                                                                                                          |       | 3,513    |       | 2,901    |       |
| OTHER ASSETS                                                                                                                          |       | 16,301   |       | 19,302   |       |
| OTHER INTANGIBLE  ASSETS, net                                                                                                         |       | 36,459   |       | 38,518   |       |
| GOODWILL                                                                                                                              |       | 278,530  |       | 280,945  |       |
|                                                                                                                                  |       | $        | 624,523    |     | $          | 675,631 |   |
|                                                                                                                                  |       |     |       |     |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                             |       |     |       |     |       |
| CURRENT  LIABILITIES:                                                                                                                 |       |     |       |     |       |
| Current portion of notes payable                                                                                                      |       | $        | 2,795      |     | $          | 2,716 |   |
| Current portion of capital lease obligations                                                                                          |       | 4,927    |       | 5,060    |       |
| Accounts payable and other accrued expenses                                                                                           |       | 36,469   |       | 35,737   |       |
| Total current liabilities                                                                                                             |       | 44,191   |       | 43,513   |       |
|                                                                                                                                  |       |     |       |     |       |
| LONG-TERM  LIABILITIES:                                                                                                               |       |     |       |     |       |
| Notes payable, less current portion                                                                                                   |       | 485,531  |       | 518,245  |       |
| Capital lease obligations, less current portion                                                                                       |       | 8,315    |       | 13,802   |       |
| Other long-term liabilities                                                                                                           |       | 3,538    |       | 5,130    |       |
| Deferred income taxes                                                                                                                 |       | 15,224   |       | —   |       |
| Total long-term liabilities                                                                                                           |       | 512,608  |       | 537,177  |       |
|                                                                                                                                  |       |     |       |     |       |
| 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, 2005 and  2004 |       | 5        |       | 5        |       |
| Additional paid-in capital                                                                                                            |       | 87,081   |       | 87,081   |       |
| Retained (deficit) earnings                                                                                                           |       | (19,362  | )          | 7,855    |       |
| Total stockholders’ equity                                                                                                       |       | 67,724   |       | 94,941   |       |
|                                                                                                                                  |       | $        | 624,523    |     | $          | 675,631 |   |
|                                                                                                                                       |            |          |            |          |            |  |  |  |  |  |  |

 

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

 

39

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003**

(Amountsin thousands)

 
| ** **                                         | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                         | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| REVENUES:                                          |       |                          |       |   |   |   |   |
| Contract services                                  |       | $                             | 136,537    |   | $ | 129,193 |   | $ | 111,921 |   |
| Patient services                                   |       | 180,336                       |       | 161,691 |   | 125,831 |   |
| Total revenues                                     |       | 316,873                       |       | 290,884 |   | 237,752 |   |
|                                               |       |                          |       |   |   |   |   |
| COSTS OF  OPERATIONS:                              |       |                          |       |   |   |   |   |
| Costs of services                                  |       | 194,507                       |       | 168,700 |   | 125,685 |   |
| Provision for doubtful accounts                    |       | 5,723                         |       | 4,998 |   | 4,154 |   |
| Equipment leases                                   |       | 2,326                         |       | 990 |   | 860 |   |
| Depreciation and amortization                      |       | 65,601                        |       | 58,733 |   | 49,345 |   |
| Total costs of operations                          |       | 268,157                       |       | 233,421 |   | 180,044 |   |
|                                               |       |                          |       |   |   |   |   |
| Gross profit                                       |       | 48,716                        |       | 57,463 |   | 57,708 |   |
|                                               |       |                          |       |   |   |   |   |
| CORPORATE  OPERATING EXPENSES                      |       | (18,447                       | )          | (16,217 | ) | (13,750 | ) |
|                                               |       |                          |       |   |   |   |   |
| (LOSS) GAIN ON  SALES OF CENTERS                   |       | (170                          | )          | 2,129 |   | — |   |
|                                               |       |                          |       |   |   |   |   |
| EQUITY IN  EARNINGS OF UNCONSOLIDATED PARTNERSHIPS |       | 2,613                         |       | 2,181 |   | 1,744 |   |
|                                               |       |                          |       |   |   |   |   |
| INTEREST  EXPENSE, net                             |       | (44,860                       | )          | (40,682 | ) | (37,514 | ) |
|                                               |       |                          |       |   |   |   |   |
| (Loss) income before income taxes                  |       | (12,148                       | )          | 4,874 |   | 8,188 |   |
|                                               |       |                          |       |   |   |   |   |
| PROVISION FOR  INCOME TAXES                        |       | 15,069                        |       | 1,950 |   | 3,266 |   |
|                                               |       |                          |       |   |   |   |   |
| Net (loss) income                                  |       | $                             | (27,217    | ) | $ | 2,924 |   | $ | 4,922 |   |

 

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

 

40

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

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003**

(Amountsin thousands, except share data)

 
| ** **                                                          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** **    | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|------------------|------------|-------------|------------|-------------------|------------|-----------------|------------|---------------|------------|------------|------------|
| ** **                                                          | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**    | ** ** | **Other**       | ** ** | **Retained**  | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Comprehensive** | ** ** | **Earnings**    | ** ** | ** **    | ** ** |
| ** **                                                          | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Gain (Loss)** | ** ** | **(Deficit)** | ** ** | **Total**  | ** ** |
| BALANCE AT JUNE 30,  2002                                      |       | 5,468,764        |       | $           | 5          |              | $          | 87,586          |       | $             | (224       | )          | $          | 9 |   | $ | 87,376 |   |
|                                                                |       |             |       |        |       |              |       |            |       |          |       |       |       |
| Stock options  exercised                                            |       | 50               |       | —      |       | 1                 |       | —          |       | —        |       | 1          |       |
|                                                                |       |             |       |        |       |              |       |            |       |          |       |       |       |
| Repurchase of  stock options                                        |       | —           |       | —      |       | (506              | )          | —          |       | —        |       | (506       | )          |
|                                                                |       |             |       |        |       |              |       |            |       |          |       |       |       |
| Net income                                                          |       | —           |       | —      |       | —            |       | —          |       | 4,922         |       | 4,922      |       |
|                                                                |       |             |       |        |       |              |       |            |       |          |       |       |       |
| Other  comprehensive loss:                                          |       |             |       |        |       |              |       |            |       |          |       |       |       |
| Unrealized loss attributable to change in fair value  of derivative |       | —           |       | —      |       | —            |       | (179            | )          | —        |       | (179       | )          |
| Comprehensive  income                                               |       |             |       |        |       |              |       |            |       |          |       | 4,743      |       |
| BALANCE AT JUNE 30,  2003                                      |       | 5,468,814        |       | 5           |       | 87,081            |       | (403            | )          | 4,931         |       | 91,614     |       |
|                                                                |       |             |       |        |       |              |       |            |       |          |       |       |       |
| Net income                                                          |       | —           |       | —      |       | —            |       | —          |       | 2,924         |       | 2,924      |       |
|                                                                |       |             |       |        |       |              |       |            |       |          |       |       |       |
| Other  comprehensive gain:                                          |       |             |       |        |       |              |       |            |       |          |       |       |       |
| Unrealized gain attributable to change in fair value  of derivative |       | —           |       | —      |       | —            |       | 403             |       | —        |       | 403        |       |
| Comprehensive  income                                               |       |             |       |        |       |              |       |            |       |          |       | 3,327      |       |
| BALANCE AT JUNE 30,  2004                                      |       | 5,468,814        |       | 5           |       | 87,081            |       | —          |       | 7,855         |       | 94,941     |       |
|                                                                |       |             |       |        |       |              |       |            |       |          |       |       |       |
| Net loss                                                            |       | —           |       | —      |       | —            |       | —          |       | (27,217       | )          | (27,217    | )          |
| BALANCE AT JUNE 30,  2005                                      |       | 5,468,814        |       | $           | 5          |              | $          | 87,081          |       | $             | —     |       | $          | (19,362 | ) | $ | 67,724 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

41

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**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THEYEARS ENDED JUNE 30, 2005, 2004 AND 2003**

(Amountsin thousands)

 
| ** **                                                                                | ** ** | **Years Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| OPERATING  ACTIVITIES:                                                                    |       |                          |       |   |   |   |   |
| Net (loss) income                                                                         |       | $                             | (27,217    | ) | $ | 2,924 |   | $ | 4,922 |   |
| 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                                                             |       | 65,601                        |       | 58,733 |   | 49,345 |   |
| Deferred income taxes                                                                     |       | 15,224                        |       | — |   | — |   |
| Changes in operating assets and liabilites:                                               |       |                          |       |   |   |   |   |
| Trade accounts receivables, net                                                           |       | 8,096                         |       | (8,455 | ) | (2,237 | ) |
| Other current assets                                                                      |       | (1,736                        | )          | 3,084 |   | 4,907 |   |
| Accounts payable and other accrued expenses                                               |       | 726                           |       | 5,963 |   | 4,819 |   |
| Net cash provided by operating activities                                                 |       | 60,864                        |       | 60,120 |   | 61,756 |   |
|                                                                                      |       |                          |       |   |   |   |   |
| INVESTING  ACTIVITIES:                                                                    |       |                          |       |   |   |   |   |
| Acquisition of fixed-site centers and mobile  facilities                                  |       | —                        |       | (101,334 | ) | (46,292 | ) |
| Proceeds from sales of centers                                                            |       | 2,810                         |       | 5,413 |   | — |   |
| Additions to property and equipment                                                       |       | (30,459                       | )          | (46,734 | ) | (56,967 | ) |
| Net purchases of short-term investments                                                   |       | (5,000                        | )          | — |   | — |   |
| Other                                                                                     |       | 71                            |       | 405 |   | 554 |   |
| Net cash used in investing activities                                                     |       | (32,578                       | )          | (142,250 | ) | (102,705 | ) |
|                                                                                      |       |                          |       |   |   |   |   |
| FINANCING  ACTIVITIES:                                                                    |       |                          |       |   |   |   |   |
| Proceeds from stock options and warrants exercised                                        |       | —                        |       | — |   | 1 |   |
| Purchase of stock options                                                                 |       | —                        |       | — |   | (506 | ) |
| Principal payments of notes payable and capital  lease obligations                        |       | (37,781                       | )          | (8,209 | ) | (7,500 | ) |
| Proceeds from issuance of debt                                                            |       | —                        |       | 101,125 |   | 50,000 |   |
| Other                                                                                     |       | (78                           | )          | 72 |   | 725 |   |
| Net cash (used in) provided by financing activities                                       |       | (37,859                       | )          | 92,988 |   | 42,720 |   |
|                                                                                      |       |                          |       |   |   |   |   |
| INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS:                                        |       | (9,573                        | )          | 10,858 |   | 1,771 |   |
| Cash, beginning of period                                                                 |       | 30,412                        |       | 19,554 |   | 17,783 |   |
| Cash, end of period                                                                       |       | $                             | 20,839     |   | $ | 30,412 |   | $ | 19,554 |   |
|                                                                                      |       |                          |       |   |   |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                        |       |                          |       |   |   |   |   |
| Interest paid                                                                             |       | $                             | 42,461     |   | $ | 38,939 |   | $ | 36,286 |   |
| Income taxes paid (refund received)                                                       |       | 202                           |       | 377 |   | (224 | ) |
| Equipment additions under capital leases                                                  |       | —                        |       | — |   | 25,455 |   |

 

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

 

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**INSIGHT HEALTH SERVICES HOLDINGS CORP. ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**JUNE 30, 2005**

 

**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., a Delawarecorporation and wholly owned subsidiary of InSight Health Services HoldingsCorp. and all entities and subsidiaries controlled by InSight Through InSightand its subsidiaries, we provide diagnostic imaging, treatment and relatedmanagement services in 34 states throughout the United States.   Our operations are primarily concentrated inCalifornia, Arizona, New England, the Carolinas, Florida and the Mid-Atlanticstates.  We have two reportablesegments:  fixed operations and mobileoperations.  Our services are providedthrough a network of 84 mobile magnetic resonance imaging, or MRI, facilities,15 mobile positron emission tomography, or PET, facilities, seven mobile PET/CTfacilities, four mobile lithotripsy facilities, four mobile computed tomography,or CT, facilities, one mobile catheterization lab (collectively, mobilefacilities), 77 MRI fixed-site centers, 40 multi-modality fixed-site centers,two PET fixed-site centers and one Leksell Stereotactic Gamma Knife fixed-sitetreatment center (collectively, fixed-site centers).

 

At our multi-modality fixed-site centers, we typically offer otherservices in addition to MRI, including PET, CT, x-ray, mammography, ultrasound,nuclear medicine and bone densitometry services.

 

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

 

a.         CONSOLIDATED FINANCIALSTATEMENTS

 

Ourconsolidated financial statements include our accounts and those of our whollyowned subsidiaries.  Our investmentinterests in partnerships or limited liability companies, or Partnerships, are accountedfor under the equity method of accounting when our ownership is 50% or less (Note14).  Our investment interests inPartnerships are consolidated when we own more than 50%.

 

Significantintercompany balances have been eliminated in consolidation.

 

b.        USE OF ESTIMATES

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make certainestimates and assumptions that affect the reported amounts of assets and liabilitiesat the date of the financial statements, disclosures of contingent assets andliabilities at the date of the financial statements, and the reported amountsof revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

c.         REVENUE RECOGNITION

 

Revenuesfrom contract services and from patient services are recognized when servicesare provided.  Patient services revenuesare presented net of (1) related contractual adjustments, which representthe difference between our charge for a procedure and what we will ultimatelyreceive from private health insurance programs, Medicare, Medicaid and otherfederal healthcare programs, and (2) payments due to radiologists.   We report payments made to radiologists on anet basis because (i) we are not the primary obligor for the provision ofprofessional services, (ii) the radiologists receive contractually agreedupon amounts from collections and (iii) the radiologists bear the risk ofnon-collection.  Contract services revenuesare recognized over the applicable contract period.  Revenues collected in advance are recorded asunearned revenue.

 

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d.        CASH EQUIVALENTS ANDSHORT-TERM INVESTMENTS

 

Cashequivalents are generally composed of liquid investments with originalmaturities of three months or less, such as certificates of deposit andcommercial paper.

 

e.         TRADE ACCOUNTSRECEIVABLES

 

We review ourtrade accounts receivables and our estimates of the allowance for doubtfulaccounts and contractual adjustments each period.  Contractual adjustments are manual estimatesbased upon an analysis of (i) historical experience of contractualpayments from payors and (ii) the outstanding accounts receivables frompayors.  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 arefinancially unstable or materially fail to comply with the payment terms oftheir contract and (2) other accounts based on our historical collectionexperience, including payor mix and the aging of patient accounts receivablesbalances.  Receivables deemed to beuncollectible, either through a customer default on payment terms or afterreasonable 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 previously recorded.

 

f.           LONG-LIVED ASSETS

 

*Property and Equipment*.  Property and equipment are depreciated andamortized on the straight-line method using the following estimated usefullives:

 
| 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 |

 

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

 

*Long-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.        DEFERRED FINANCING COSTS

 

Costs incurred in connection with financing activitiesare deferred and amortized using the effective interest method over the termsof the related debt agreements ranging from seven to ten years.  Amortization of these costs is charged tointerest expense in the accompanying consolidated statements ofoperations.  Total costs deferred andincluded in other assets in the accompanying consolidated balance sheets at June 30,2005 and 2004 were approximately $16.0 million and $19.0 million, respectively.

 

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h.        STOCK-BASED COMPENSATION

 

Aspermitted under Statement of Financial Accounting Standards, or SFAS, No. 123,“Accounting for Stock Based Compensation” (SFAS 123), we account for theoptions and warrants issued to employees in accordance with APB Opinion No. 25.  SFAS 123 requires that we present pro-formadisclosures of net income as if we had recognized compensation expense equal tothe fair value of options granted, as determined at the date of grant.  Our net (loss) income would have reflectedthe following pro-forma amounts (amounts in thousands):

 
| ** **          | ** **  | **Years Ended June 30,** | ** ** |
|---------------------|-------------|-------------------------------|------------|
| ** **          | ** **  | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net (loss)  income: | As reported |                          | $          | (27,217 | ) | $ | 2,924 |   | $ | 4,922 |   |
|                | Expense     |                          | (245       | ) | (377 | ) | (652 | ) |
|                | Pro-forma   |                          | $          | (27,462 | ) | $ | 2,547 |   | $ | 4,270 |   |

 

The fair value of each option grant and warrant issuedis estimated on the date of grant or issuance using the Black-Scholes pricingmodel with the following assumptions used for the grants and issuances in theyears ended June 30, 2005, 2004 and 2003, respectively:

 
| ** **                                                | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------|------------|
| **Assumptions**                                           | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Weighted average  estimated fair value per option granted |       | 6.80                          |       | 6.22 |   | 6.39 |   |
| Risk-free  interest rate                                  |       | 4.13-4.50%                    |       | 3.58-4.18% |   | 4.07-4.58% |   |
| Volatility                                                |       | 0.00%                         |       | 0.00% |   | 0.00% |   |
| Expected  dividend yield                                  |       | 0.00%                         |       | 0.00% |   | 0.00% |   |
| Estimated  contractual life                               |       | 10.00 years                   |       | 10.00 years |   | 10.00 years |   |

 

i.            GOODWILL AND OTHERINTANGIBLE ASSETS

 

*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 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.   Net other intangible assets are amortized ona straight-line basis over the estimated lives of the assets ranging from fiveto thirty years.

 

Weevaluate the carrying value of goodwill and acquisition-related intangibleassets, including the related amortization period, in the second quarter ofeach fiscal year.  Additionally, wereview the carrying amount of goodwill whenever events and circumstancesindicate that the carrying amount of goodwill may not be recoverable.Impairment indicators include, among other conditions, cash flow deficits, historicor anticipated declines in revenue or operating profit and adverse legal orregulatory developments.  In evaluatinggoodwill and intangible assets not subject to amortization, we complete thetwo-step goodwill impairment test as required by SFAS 142. In a businesscombination, goodwill is allocated to our two reporting units (fixed andmobile), which are the same as our reportable operating segments, based onrelative fair value of the assets acquired and liabilities assumed.  In the first of a two-step impairment test,we determine the fair value of these reporting units using a discounted cashflow valuation model or market multiples, as appropriate.  We compare the fair value for the reportingunit to its carrying value.  If the fairvalue of a reporting unit exceeds its carrying value, goodwill of the reportingunit is considered 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.

 

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Weassess the ongoing recoverability of our intangible assets subject toamortization by determining whether the intangible asset balance can berecovered over the remaining amortization period through projected undiscountedfuture cash flows.  If projected futurecash flows indicate that the unamortized intangible asset balances will not berecovered, an adjustment is made to reduce the net intangible asset to anamount consistent with projected future cash flows discounted at ourincremental borrowing rate.  Cash flowprojections, although subject to a degree of uncertainty, are based on trendsof historical performance and management’s estimate of future performance,giving consideration to existing and anticipated competitive and economicconditions.

 

As of June 30,2005, we do not believe any impairment of goodwill or other intangible assetshas occurred.

 

j.            INCOME TAXES

 

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

 

k.         COMPREHENSIVEINCOME

 

Components of comprehensive income are changes inequity other than those resulting from investments by owners and distributionsto owners. Net income (loss) is the primary component of comprehensive income.Our only component of comprehensive income other than net income (loss) is thechange in unrealized gain or loss on derivatives qualifying for hedge accounting,net of tax. The aggregate amount of such changes to equity that have not yetbeen recognized in net income are reported in the equity portion of theaccompanying consolidated balance sheets as accumulated other comprehensiveincome (loss).

 

l.            FAIR VALUE OFFINANCIAL INSTRUMENTS

 

Thefair value of financial instruments is estimated using available marketinformation and other valuation methodologies. The fair value of our financialinstruments is estimated to approximate the related book value, unlessotherwise indicated.

 

m.        NEW PRONOUNCEMENTS

 

InMay 2005, the Financial Accounting Standards Board, or FASB, issuedStatement of Financial Accounting Standards (SFAS) No. 154, “AccountingChanges and Error Corrections – a replacement of APB Opinion No. 20 andFASB Statement No. 3” (SFAS 154). SFAS 154 changes the requirements for the accounting for and reportingof a change in accounting principle. These requirements apply to all voluntary changes and changes requiredby an accounting pronouncement in the unusual instance that a pronouncementdoes not include specific transition provisions.  SFAS 154 is effective for fiscal yearsbeginning after December 15, 2005. As such, we are required to adopt these provisions at the beginning offiscal 2007.  We do not expect theadoption of SFAS 154 to have a material impact on our financial condition andresults of operations.

 

InDecember 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”(SFAS 123).  SFAS 123R requires expensingof stock options and other share-based payments and supersedes FASB’s earlier rule (SFAS123) that had allowed companies to choose between expensing stock options orshowing pro-forma disclosure only.  Wewill be required to implement SFAS 123R at the beginning of fiscal 2007.  We do not believe that the impact of adoptingSFAS 123R would be materially different than the pro-forma disclosures underSFAS 123.

 

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**3.****                                      ACQUISITIONS**

 

In August 2003, we acquired twenty-two (22)mobile facilities operating primarily in the Mid-Atlantic states.  Theacquisition consisted of certain tangible and intangible assets, includingdiagnostic imaging equipment, customer contracts and other agreements. The aggregate purchase price was approximately $49.9 million, which includedapproximately $28.1 million paid to the seller and approximately $21.8 millionfor the payment of debt and transaction costs.  The excess purchase pricepaid by us over our estimate of the fair value of the tangible and other intangibleassets as of the date of the acquisition was approximately $29.1 million and isreflected as goodwill in the accompanying consolidated balance sheets as of June 30,2005 and 2004.

 

In April 2004, we acquired twenty-one (21) fixed-site centers locatedin California, Arizona, Kansas, Texas, Pennsylvania and Virginia.  The acquisition consisted of certain tangibleand intangible assets, including diagnostic imaging equipment, real property,customer contracts and other agreements. The aggregate purchase price was approximately $48.6 million, whichincluded approximately $35.9 million paid to the seller, approximately $10.6million for the payment of debt and approximately $2.1 million of transactioncosts.  The excess purchase price paid byus over our estimate of the fair value of the tangible and other intangibleassets as of the date of the acquisition was approximately $30.2 million and isreflected as goodwill in the accompanying consolidated balance sheets as of June 30,2005 and 2004.

 

Our unaudited pro-forma combined results of operations, assuming ourtwo acquisitions had occurred as of July 1, 2003, are presentedbelow.  The pro-forma combined results ofoperations for the year ended June 30, 2004 include adjustments tointerest expense (approximately $1.8 million) and amortization of identifiedintangible assets (approximately $0.1 million). These combined results have been prepared for comparison purposes onlyand do not purport to be indicative of what operating results would have been,and may not be indicative of future operating results (amounts in thousands):

 
| ** **                                         | ** ** | **Year**          | ** ** |
|----------------------------------------------------|------------|-------------------|------------|
| ** **                                         | ** ** | **Ended**         | ** ** |
| ** **                                         | ** ** | **June 30,** | ** ** |
| ** **                                         | ** ** | **2004**          | ** ** |
| ** **                                         | ** ** | **(unaudited)**   | ** ** |
|                                               |       |              |       |
| Revenues                                           |       | $                 | 333,864    |   |
| Costs of  operations                               |       | 257,665           |       |
| Gross profit                                       |       | 76,199            |       |
| Corporate  operating expenses                      |       | (32,436           | )          |
| Gain on sale of  center                            |       | 2,129             |       |
| Equity in  earnings of unconsolidated partnerships |       | 2,181             |       |
| Impairment and  restructuring charges              |       | (1,142            | )          |
| Interest  expense, net                             |       | (43,429           | )          |
| Income before  income taxes                        |       | 3,502             |       |
| Provision for  income taxes                        |       | 1,400             |       |
| Net income                                         |       | $                 | 2,102      |   |

 

**4.****                                      TRADEACCOUNTS RECEIVABLES**

 

Trade accounts receivables, net are comprised of the following (amountsin thousands):

 
| ** **                       | ** **                              | **June 30,** | ** ** |
|----------------------------------|-----------------------------------------|-------------------|------------|
| ** **                       | ** **                              | **2005**          | ** ** | **2004** | ** ** |
| Trade accounts  receivables      |                                    | $                 | 96,646     |   | $ | 115,645 |   |
| Less:                            | Allowances for  contractual adjustments |              | 29,412     |   | 37,209 |   |
|                             | Allowances for  professional fees       |              | 11,897     |   | 15,329 |   |
|                             | Allowances for  doubtful accounts       |              | 8,887      |   | 8,097 |   |
| Trade accounts  receivables, net |                                    | $                 | 46,450     |   | $ | 55,010 |   |

 

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The allowances for doubtful accounts and contractual adjustmentsincludes management’s estimate of the amounts expected to be written off onspecific accounts and for write-offs on other unidentified accounts included inaccounts receivables.  In estimating thewrite-offs and adjustments on specific accounts, management relies on acombination of in-house analysis and a review of contractual payment rates fromprivate health insurance programs or under the federal Medicare program.  In estimating the allowance for unidentifiedwrite-offs and adjustments, management relies on historical experience.  The amounts we will ultimately realize coulddiffer materially in the near term from the amounts assumed in arriving at theallowances for doubtful accounts and contractual adjustments in theaccompanying consolidated financial statements at June 30, 2005.

 

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

 

**5.****                                      OTHERCURRENT ASSETS**

 

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

 
| ** **                                        | ** ** | **June 30,** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|
| ** **                                        | ** ** | **2005**          | ** ** | **2004** | ** ** |
| Prepaid expenses                                  |       | $                 | 6,965      |   | $ | 5,249 |   |
| Amounts due from  our unconsolidated partnerships |       | 1,005             |       | 958 |   |
|                                              |       | $                 | 7,970      |   | $ | 6,207 |   |

 

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

 

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

 
| ** **                                       | ** ** | **June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|
| ** **                                       | ** ** | **2005**          | ** ** | **2004** | ** ** |
| Vehicles                                         |       | $                 | 5,701      |   | $ | 4,570 |   |
| Land, building  and leasehold improvements       |       | 29,335            |       | 27,201 |   |
| Computer and  office equipment                   |       | 44,996            |       | 44,373 |   |
| Diagnostic and  related equipment                |       | 231,351           |       | 207,856 |   |
| Equipment and  vehicles under capital leases     |       | 74,862            |       | 77,460 |   |
|                                             |       | 386,245           |       | 361,460 |   |
| Less: Accumulated  depreciation and amortization |       | 176,784           |       | 119,124 |   |
| Property and  equipment, net                     |       | $                 | 209,461    |   | $ | 242,336 |   |

 

Depreciationexpense was approximately $61.6 million, $55.0 million and $45.9 million forthe years ended June 30, 2005, 2004 and 2003, respectively.

 

**7.****                                      GOODWILLAND OTHER INTANGIBLE ASSETS**

 

A reconciliation of goodwill for the year ended June 30, 2005 isas follows (amounts in thousands):

 
| ** **                    | ** ** | **Mobile** | ** ** | **Fixed** | ** ** | **Consolidated** | ** ** |
|-------------------------------|------------|------------|------------|-----------|------------|------------------|------------|
| Goodwill, June 30,  2004 |       | $          | 106,064    |      | $          | 174,881          |       | $ | 280,945 |   |
| Acquired in acquisitions      |       | —     |       | 747       |       | 747              |       |
| Sales of centers              |       | —     |       | (1,362    | )          | (1,362           | )          |
| Adjustments to goodwill       |       | (1,800     | )          | —    |       | (1,800           | )          |
| Goodwill, June 30,  2005 |       | $          | 104,264    |      | $          | 174,266          |       | $ | 278,530 |   |
|                               |            |            |            |           |            |                  |            |  |  |  |  |  |

 

Adjustments to goodwillresult from the allocation of amounts to other intangible assets and were basedon completed goodwill result from the allocation of amounts to other intangibleassets and were based on completed valuations of our August 2003 and April 2004acquisitions.

 

 

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

 
| ** **                                                                                                    | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                    | ** ** | **Gross**              | ** ** | ** **             | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                                                                                    | ** ** | **Carrying**           | ** ** | **Accumulated**        | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                                                                                                    | ** ** | **Value**              | ** ** | **Amortization**       | ** ** | **Value** | ** ** | **Amortization** | ** ** |
| Amortized  intangible assets:                                                                                 |       |                   |       |                   |       |   |   |   |   |
| Managed care contracts                                                                                        |       | $                      | 24,410     |                   | $          | 2,656 |   | $ | 24,410 |   | $ | 1,798 |   |
| Wholesale contracts                                                                                           |       | 15,380                 |       | 9,355                  |       | 13,580 |   | 6,354 |   |
|                                                                                                          |       | 39,790                 |       | 12,011                 |       | 37,990 |   | 8,152 |   |
|                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Unamortized  intangible assets:                                                                               |       |                   |       |                   |       |   |   |   |   |
| Trademark                                                                                                     |       | 8,680                  |       | —                 |       | 8,680 |   | — |   |
| Other intangible  assets                                                                                      |       | $                      | 48,470     |                   | $          | 12,011 |   | $ | 46,670 |   | $ | 8,152 |   |
|                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Other intangible  assets are amortized on a straight-line method using the following estimated  useful lives: |       |
|                                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Managed care contracts                                                                                        |       |                   |       | 30 years               |       |   |   |   |   |
| Wholesale contracts                                                                                           |       |                   |       | 5 to 7 years           |       |   |   |   |   |

 

Amortization ofintangible assets was approximately $3.8 million, $3.6 million and $3.0 millionfor the years ended June 30, 2005, 2004 and 2003, respectively.

 

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

 
|   | 2006 |   |   |   | $     | 3,827  |   |   |   |   |   |
|--------|------|--------|--------|--------|-------|--------|--------|--------|--------|--------|--------|
|   | 2007 |   |   |   | 2,336 |   |   |   |   |   |
|   | 2008 |   |   |   | 1,591 |   |   |   |   |   |
|   | 2009 |   |   |   | 1,591 |   |   |   |   |   |
|   | 2010 |   |   |   | 1,568 |   |   |   |   |   |

 

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

 

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

 
| ** **                         | ** ** | **June 30,** | ** ** |
|------------------------------------|------------|-------------------|------------|
| ** **                         | ** ** | **2005**          | ** ** | **2004** | ** ** |
| Accounts payable                   |       | $                 | 2,193      |   | $ | 2,968 |   |
| Accrued  equipment related costs   |       | 5,355             |       | 8,144 |   |
| Accrued payroll  and related costs |       | 11,677            |       | 8,905 |   |
| Accrued interest  expense          |       | 4,214             |       | 4,266 |   |
| Accrued  professional fees         |       | 2,365             |       | 2,539 |   |
| Accrued income  taxes              |       | 223               |       | 468 |   |
| Other accrued  expenses            |       | 10,442            |       | 8,447 |   |
|                               |       | $                 | 36,469     |   | $ | 35,737 |   |

 

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

 

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

 
| ** **                                                                                                                                                                                                                                                        | ** ** | **June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                                                                        | ** ** | **2005**          | ** ** | **2004** | ** ** |
|                                                                                                                                                                                                                                                              |       |              |       |   |   |
| Notes payable to bank (Credit Facility), bearing  interest at LIBOR plus 3.75% to 4.0% (7.26% at June 30, 2005), principal  and interest payable quarterly, maturing in October 2008. The notes are  collateralized by substantially all of our assets. |       | $                 | 237,608    |   | $ | 270,047 |   |
|                                                                                                                                                                                                                                                              |       |              |       |   |   |
| Unsecured senior subordinated notes payable (Notes),  bearing interest at 9.875%, interest payable semi-annually, principal due in November 2011.  At June 30, 2005, the fair value of the notes was approximately $198  million.                       |       | 250,000           |       | 250,000 |   |
|                                                                                                                                                                                                                                                              |       |              |       |   |   |
| Other notes payable                                                                                                                                                                                                                                               |       | 718               |       | 914 |   |
|                                                                                                                                                                                                                                                              |       |              |       |   |   |
| Total notes payable                                                                                                                                                                                                                                               |       | 488,326           |       | 520,961 |   |
| Less: Current portion                                                                                                                                                                                                                                             |       | 2,795             |       | 2,716 |   |
| Long-term notes payable                                                                                                                                                                                                                                           |       | $                 | 485,531    |   | $ | 518,245 |   |

 

Through InSight, we have a credit facility, or Credit Facility, withBank of America, N.A. and a syndicate of other lenders consisting of (1) aterm loan with a principal balance of approximately $217.8 million, (2) anadditional term loan with a principal balance of approximately $19.8 million,and (3) a $50.0 million revolving credit facility.   As of June 30, 2005, there were noborrowings under the revolving credit facility.   Borrowings under the Credit Facility bearinterest at LIBOR plus 3.75% to 4.0%.  Asof June 30, 2005, there was a letter of credit of approximately $1.8 millionoutstanding under our Credit Facility.  Weare required to pay an unused facility fee of up to 0.625% per annum, payablequarterly, on unborrowed amounts on the revolving credit facility.  We may use the revolving credit facility tofund our future working capital needs. See Note 18.

 

Through InSight, we also have outstanding $250 million in unsecuredsenior subordinated notes, or Notes.  The Notes mature in November 2011 and bear interest at 9.875%payable semi-annually.   The Notes areredeemable at our option, in whole or in part, on or after November 1,2006.

 

Scheduled maturities ofequipment and other notes payable at June 30, 2005, are as follows(amounts in thousands):

 
| 2006       |   | $       | 2,795   |   |
|------------|--------|---------|---------|--------|
| 2007       |   | 2,802   |    |
| 2008       |   | 179,557 |    |
| 2009       |   | 53,172  |    |
| 2010       |   | —  |    |
| Thereafter |   | 250,000 |    |
|       |   | $       | 488,326 |   |

 

The credit agreementrelated to the Credit Facility and the indenture related to the Notes containlimitations on additional borrowings, capital expenditures, dividend paymentsand certain financial covenants.  As of June 30,2005, we were in compliance with these covenants.

 

During 1998, InSight entered into an interest rate swap agreement witha bank to hedge against the effects of increases in the interest ratesassociated with floating rate debt on its bank financing.  The initial amount of the swap agreement was$40.0 million.  The swap agreementexpired in September 2004.

 

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

 

We lease diagnostic equipment, certain other equipmentand our office, imaging and treatment facilities under various capital andoperating leases.  Future minimumscheduled rental payments required under these noncancelable leases atJune 30, 2005 are as follows (amounts in thousands):

 
| ** **                                 | ** ** | **Capital** | ** ** | **Operating** | ** ** |
|--------------------------------------------|------------|-------------|------------|---------------|------------|
| 2006                                       |       | $           | 5,802      |          | $          | 9,035 |   |
| 2007                                       |       | 5,653       |       | 8,443         |       |
| 2008                                       |       | 2,930       |       | 7,151         |       |
| 2009                                       |       | 301         |       | 5,145         |       |
| 2010                                       |       | 25          |       | 3,421         |       |
| Thereafter                                 |       | —      |       | 7,892         |       |
| Total minimum lease payments               |       | 14,711      |       | $             | 41,087     |   |
| Less: Amounts representing interest        |       | 1,469       |       |          |       |
| Present value of capital lease obligations |       | 13,242      |       |          |       |
| Less: Current portion                      |       | 4,927       |       |          |       |
| Long-term capital lease obligations        |       | $           | 8,315      |          |       |   |

 

Accumulated depreciation on assets under capital leases was $10.6 and$8.4 million at June 30, 2005 and 2004, respectively.

 

Rental expense for diagnostic equipment and other equipment for theyears ended June 30, 2005, 2004 and 2003 was $2.3 million, $1.0 millionand $0.9 million, respectively.

 

We occupy facilitiesunder 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, 2005, 2004 and 2003 was $9.2million, $7.9 million and $6.5 million, respectively.

 

We are engaged from timeto time in the defense of lawsuits arising out of the ordinary course andconduct of our business, including claims for malpractice, and have insurancepolicies covering such potential insurable losses where such coverage iscost-effective.  Management believes thatthe outcome of any such lawsuits will not have a material adverse impact on ourbusiness, financial condition and results of operations.

 

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

 

STOCK OPTIONS:  We originally reserved 626,000 shares for thegranting of nonstatutory stock options to key employees.  Options are issued with an exercise price ofat least the fair market value, as determined by the board of directors, of ourcommon stock on the grant date. Subsequent to June 30, 2005, we increased the number of sharesreserved for such grants by 219,286 shares. Generally speaking, 50% of the options vest cumulatively over variousperiods up to five years from the grant date, and 50% vest cumulatively uponthe achievement of certain performance targets on an exit event.  The options are exercisable in whole or ininstallments, and expire ten years from the grant date.

 

We have one stock optionplan, which provided for the granting of nonstatutory stock options to four keyemployees (three of which employees are no longer with the Company), all ofwhich are fully vested.  Holders ofoptions for 175,990 shares of InSight common stock rolled over their optionsand received options for our common stock with the same terms under our stockoption plan.  In 2003, we purchasedvested stock options covering 56,000 shares of our common stock at a priceequal to the difference between $19.07 and the exercise price per share.

 

51

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As of June 30, 2005,we had 128,950 shares available for issuance. A summary of the status of our stock option plans at June 30, 2005,2004 and 2003 and changes during the periods is presented below:

 
| ** **                      | ** ** | ** ** | ** ** | **Weighted**       | ** ** |
|---------------------------------|------------|------------|------------|--------------------|------------|
| ** **                      | ** ** | ** ** | ** ** | **Average**        | ** ** |
| ** **                      | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
| Outstanding, June 30, 2002 |       | 772,990    |       | $                  | 15.81      |   |
| Granted                         |       | 25,500     |       | 19.01              |       |
| Exercised                       |       | (50        | )          | 18.00              |       |
| Repurchased                     |       | (56,000    | )          | 8.97               |       |
| Forfeited                       |       | (109,625   | )          | 18.00              |       |
| Outstanding, June 30, 2003 |       | 632,815    |       | 16.16              |       |
| Granted                         |       | 30,000     |       | 19.07              |       |
| Forfeited                       |       | (59,825    | )          | 18.27              |       |
| Outstanding, June 30, 2004 |       | 602,990    |       | 16.10              |       |
| Granted                         |       | 209,500    |       | 19.82              |       |
| Forfeited                       |       | (195,500   | )          | 18.07              |       |
| Outstanding, June 30, 2005 |       | 616,990    |       | $                  | 16.74      |   |
|                            |       |       |       |               |       |
| Exercisable at:                 |       |       |       |               |       |
| June 30,  2003             |       | 148,465    |       | $                  | 9.99       |   |
| June 30,  2004             |       | 168,790    |       | $                  | 10.96      |   |
| June 30,  2005             |       | 204,565    |       | $                  | 12.56      |   |

 

Of the optionsoutstanding at June 30, 2005, 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                   |       | 6.33 years |   |
| 18.00 - 19.82      |       | 18.83                |       | 81,075          |       | 493,500           |       | 8.49 years                |       |
|               |       |                 |       | 204,565         |       | 616,990           |       |                      |       |
|                    |            |                      |            |                 |            |                   |            |                           |            |  |  |

 

52

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**12.****          INCOMETAXES**

 

The provision for incometaxes includes income taxes currently payable and those deferred because oftemporary differences between the financial statements and tax bases of assetsand liabilities.  The provision forincome taxes for the years ended June 30, 2005, 2004 and 2003 is asfollows (amounts in thousands):

 
| ** **                                               | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                               | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current provision:                                       |       |                          |       |   |   |   |   |
| Federal                                                  |       | $                             | —     |   | $ | 1,640 |   | $ | 2,491 |   |
| State                                                    |       | (155                          | )          | 310 |   | 775 |   |
|                                                     |       | (155                          | )          | 1,950 |   | 3,266 |   |
| Deferred taxes arising from temporary differences:       |       |                          |       |   |   |   |   |
| State income  taxes                                      |       | (9                            | )          | 173 |   | (176 | ) |
| Accrued expenses                                         |       | (741                          | )          | (46 | ) | 163 |   |
| Reserves                                                 |       | (1,376                        | )          | 4,660 |   | 1,127 |   |
| Depreciation and  amortization                           |       | 8,971                         |       | 9,694 |   | 7,718 |   |
| Creation/utilization  of net operating losses            |       | (11,758                       | )          | (8,167 | ) | (9,491 | ) |
| Section 481  adjustment                             |       | 1,161                         |       | 1,161 |   | (2,343 | ) |
| Changes in  valuation allowance reducing goodwill        |       | —                        |       | (6,800 | ) | — |   |
| Changes in  valuation allowance                          |       | 20,694                        |       | — |   | 1,728 |   |
| Non-goodwill  intangible amortization                    |       | (1,001                        | )          | (1,399 | ) | 1,200 |   |
| Other                                                    |       | (717                          | )          | 724 |   | 74 |   |
| Total deferred  taxes arising from temporary differences |       | 15,224                        |       | — |   | — |   |
| Total provision for income taxes                         |       | $                             | 15,069     |   | $ | 1,950 |   | $ | 3,266 |   |

 

A reconciliation between thestatutory federal income tax rate and our effective income tax rate is asfollows:

 
| ** **                                                           | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                           | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Federal statutory tax rate                                           |       | 34.0                          | %          | 34.0 | % | 34.0 | % |
| State income taxes, net of federal benefit                           |       | (11.8                         | )          | 4.0 |   | 4.0 |   |
| Permanent items, including goodwill and non-deductible  merger costs |       | (1.5                          | )          | 2.0 |   | 1.0 |   |
| Changes in valuation allowance                                       |       | (138.9                        | )          | — |   | 1.0 |   |
| Other, net                                                           |       | (5.8                          | )          | — |   | — |   |
| Net effective tax rate                                               |       | (124.0                        | )%         | 40.0 | % | 40.0 | % |

 

53

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The components of our net deferred tax asset (including current andnon-current portions) as of June 30, 2005 and 2004, respectively, whicharise due to timing differences between financial and tax reporting and netoperating loss (NOL) carryforwards are as follows (amounts in thousands):

 
| ** **                           | ** ** | **June 30,** | ** ** |
|--------------------------------------|------------|-------------------|------------|
| ** **                           | ** ** | **2005**          | ** ** | **2004** | ** ** |
| Accrued expenses                     |       | $                 | 2,092      |   | $ | 1,351 |   |
| Depreciation and amortization        |       | (43,273           | )          | (34,302 | ) |
| Reserves                             |       | 2,191             |       | 816 |   |
| Section 481 adjustment          |       | —            |       | 1,161 |   |
| State income taxes                   |       | 12                |       | 3 |   |
| Non-goodwill intangible amortization |       | (7,436            | )          | (8,437 | ) |
| NOL carryforwards                    |       | 56,076            |       | 44,318 |   |
| Other                                |       | 73                |       | (645 | ) |
| Net deferred  asset                  |       | 9,735             |       | 4,265 |   |
| Valuation allowance                  |       | (24,959           | )          | (4,265 | ) |
|                                 |       | $                 | (15,224    | ) | $ | — |   |

 

As of June 30, 2005, we had federal NOL carryforwards ofapproximately $142.9 million and state NOL carryforwards of approximately$125.0 million, expiring on various dates between 2006 and 2025.  The charitable contribution carryforwards ofapproximately $0.1 million will begin to expire in 2006 if not utilized.

 

A valuation allowance is provided against the net deferred tax assetwhen it is more likely than not that the net deferred tax asset will not berealized.  Based upon our losses during2005 and the available evidence, management determined that is more likely thannot that the deferred tax assets related to certain net operating losscarryforwards and other assets as of June 30, 2005 will not berealized.  Consequently, we recorded avaluation allowance in the amount of $25.0 million as of June 30,2005.  This decision was based on ouranticipated future cumulative pre-tax losses, the main determination forrecording such a reserve.  Also, indetermining the net asset subject to a valuation allowance, we excluded adeferred tax liability related to an asset with an indefinite useful life thatis not expected to reverse in the foreseeable future resulting in a netdeferred tax liability of approximately $15.2 million after application of thevaluation allowance.  The valuationallowance may be reduced in the future if we forecast and realize futuretaxable income or other tax planning strategies are implemented.  Ultimate realization of the benefit of theNOLs is dependent upon our generating sufficient taxable income prior to theirexpiration.

 

**13.****          RETIREMENTSAVINGS PLANS**

 

InSight has a 401(k)profit sharing plan (Plan), which is available to all eligible employees,pursuant to which InSight matches a percentage of employee contributions to thePlan.  InSight contributions ofapproximately $1.3 million, $1.0 million and $0.8 million were made for theyears ended June 30, 2005, 2004 and 2003.

 

**14.****          INVESTMENTSIN AND TRANSACTIONS WITH PARTNERSHIPS**

 

We have direct ownershipin four Partnerships at June 30, 2005, three of which operate fixed-sitecenters and one of which operates a mobile PET facility.  We own between 33% and 50% of thesePartnerships, serve as the managing general partner and provide certain managementservices.  These Partnerships areaccounted for under the equity method.

 

54

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

 
| ** **                       | ** ** | **June 30,** | ** ** |
|----------------------------------|------------|-------------------|------------|
| ** **                       | ** ** | **2005**          | ** ** | **2004** | ** ** |
| Combined Financial Position:     |       |              |       |   |   |
| Current assets:                  |       |              |       |   |   |
| Cash                             |       | $                 | 3,534      |   | $ | 3,144 |   |
| Trade accounts  receivables, net |       | 3,038             |       | 2,606 |   |
| Other                            |       | 75                |       | 460 |   |
| Property and equipment, net      |       | 3,846             |       | 4,116 |   |
| Intangible assets, net           |       | 117               |       | 557 |   |
| Total assets                     |       | 10,610            |       | 10,883 |   |
| Current liabilities              |       | (2,286            | )          | (2,465 | ) |
| Due to the Company               |       | (912              | )          | (805 | ) |
| Long-term liabilities            |       | (674              | )          | (1,117 | ) |
| Net assets                       |       | $                 | 6,738      |   | $ | 6,496 |   |

 

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

 
| ** **                                        | ** ** | **Years Ended June 30,** | ** ** |
|---------------------------------------------------|------------|-------------------------------|------------|
| ** **                                        | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Operating Results:                                |       |                          |       |   |   |   |   |
| Revenues                                          |       | $                             | 25,935     |   | $ | 19,455 |   | $ | 19,291 |   |
| Expenses                                          |       | 19,558                        |       | 14,314 |   | 15,646 |   |
| Net income                                        |       | $                             | 6,377      |   | $ | 5,141 |   | $ | 3,645 |   |
|                                              |       |                          |       |   |   |   |   |
| Equity in earnings of unconsolidated partnerships |       | $                             | 2,613      |   | $ | 2,181 |   | $ | 1,744 |   |

 

**15.****          RELATEDPARTY TRANSACTIONS**

 

We have 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. provide business, managementand financial advisory services to InSight and the Company in consideration of (i) anannual fee of $240,000 to be paid to J.W. Childs Advisors II, L.P. and (ii) anannual fee of $60,000 to be paid to Halifax Genpar, L.P.  In addition, from August 2004 through December 2005,we have paid and will continue to pay J.W. Childs Advisors II, L.P. amonthly fee of $10,000 for the services of Michael N. Cannizzaro, our Chairmanof the Board.

 

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

#### ** **

We have two reportablesegments:  mobile operations and fixedoperations, which are business units defined primarily by the type of serviceprovided.    Mobile operations consistprimarily of mobile facilities while fixed operations consist primarily offixed-site centers, although both operations generate both contract servicesand patient services revenues.  We do notallocate corporate and billing related costs, depreciation related to ourbilling system, amortization related to other intangible assets and incometaxes to the two segments.    We managecash flows on a consolidated basis, and not by segment.

 

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

 

Year ended June 30,2005:

 
| ** **                                        | ** ** | **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 June 30, 2004:

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

 

Year ended June 30, 2003:

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

 

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

** **
| ** **         | ** ** | **First  Quarter**         | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Total** | ** ** |
|--------------------|------------|----------------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|-----------|------------|
| ** **         | ** ** | **(amounts in thousands)** | ** ** |
| 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   | )          |
|               |       |                       |       |                |       |               |       |                |       |      |       |
| 2004:              |       |                       |       |                |       |               |       |                |       |      |       |
| Revenues           |       | $                          | 68,772     |                | $          | 69,946             |       | $                   | 70,736     |      | $          | 81,430 |   | $ | 290,884 |   |
| Gross profit       |       | 15,550                     |       | 13,178              |       | 13,556             |       | 15,179              |       | 57,463    |       |
| Net income  (loss) |       | 1,610                      |       | 1,344               |       | 281                |       | (311                | )          | 2,924     |       |

 

**18.****          SUBSEQUENT EVENT**

 

OnSeptember 16, 2005, we agreed to sell $300 million of senior securedfloating rate notes due 2011 (New Notes). The proceeds from this sale will be used to repay all borrowings underour credit facility, to repurchase a portion of our unsecured seniorsubordinated notes, and for general corporate purposes.  The private offering was made within theUnited States only to qualified institutional buyers,and outside the United States only to non-U.S. investors under Regulation S ofthe Securities Act of 1933.  These NewNotes have not been registered under the Securities Act of 1933 or applicablestate securities laws, and may not be offered or sold in the United Statesabsent registration or an applicable exemption from the registrationrequirements of the Securities Act of 1933 and applicable state laws.  This statement shall not constitute an offerto sell or a solicitation of an offer to buy the New Notes.

 

**19.****          SUPPLEMENTALCONDENSED CONSOLIDATED FINANCIAL INFORMATION**

 

InSight Health Services Holdings Corp. and all of InSight HealthServices Corp.’s wholly owned subsidiaries, or guarantor subsidiaries,guarantee InSight Health Services Corp.’s payment obligations under the Notes(Note 9).  These guarantees are full,unconditional and joint and several.  Thefollowing condensed consolidating financial information has been prepared andpresented pursuant to SEC Regulation S-X Rule 3-10 “Financial statementsof guarantors and issuers of guaranteed securities registered or beingregistered.”  InSight Health ServicesHoldings Corp. accounts for its investment in InSight Health Services Corp. andits subsidiaries under the equity method of accounting.  Dividends from InSight Health Services Corp.to InSight Health Services Holdings Corp. are restricted under the CreditFacility.  This information is notintended to present the financial position, results of operations and cashflows of the individual companies or groups of companies in accordance withaccounting principles generally accepted in the United States.

 

57

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**SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET**

**JUNE 30, 2005**

**(Amounts in thousands)**

 
| ** **                                                         | ** ** | **PARENT**  | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------|------------|-------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                         | ** ** | **COMPANY** | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **NON-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                                          |       | 67,724      |       | (19,362     | )          | (19,362          | )          | 8,289             |       | 30,435           |       | 67,724           |       |
|                                                               |       | $           | 67,724     |        | $          | 468,466          |       | $                 | 617,627    |             | $          | 32,479           |       | $ | (561,773 | ) | $ | 624,523 |   |

 

58

----

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET**

**JUNE 30, 2004**

**(Amounts in thousands)**

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

 

59

----

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

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

**(Amounts in thousands)**

 
| ** **                                                                 | ** ** | **PARENT**  | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **      | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|------------------|------------|-------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                 | ** ** | **COMPANY** | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **NON-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 | ) |

 

60

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**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

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

**(Amounts in thousands)**

 
| ** **                                                          | ** ** | **PARENT**  | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **      | ** ** | ** **       | ** ** |
|---------------------------------------------------------------------|------------|-------------|------------|-------------|------------|------------------|------------|-------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                          | ** ** | **COMPANY** | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **NON-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          | )          |
| Income (loss)  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 |   |

 

61

----

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF****OPERATIONS**

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

**(Amounts in thousands)**

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

 

62

----

 

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

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

**(Amounts in thousands)**

 
| ** **                                                                                   | ** ** | **PARENT**  | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                   | ** ** | **COMPANY** | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **NON-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 (used in) operating activities: |       |        |       |        |       |             |       |              |       |             |       |             |       |
| Loss on sales of  centers                                                                    |       | —      |       | —      |       | 170              |       | —            |       | —           |       | 170              |       |
| Depreciation and amortization                                                                |       | —      |       | —      |       | 60,261           |       | 5,340             |       | —           |       | 65,601           |       |
| 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      |       | 26,240           |       | 2,405             |       | —           |       | 60,864           |       |
|                                                                                         |       |        |       |        |       |             |       |              |       |             |       |             |       |
| 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                                                                                        |       | —      |       | —      |       | 1,554            |       | (1,483            | )          | —           |       | 71               |       |
| Net cash used in  investing activities                                                       |       | —      |       | —      |       | (29,085          | )          | (3,493            | )          | —           |       | (32,578          | )          |
|                                                                                         |       |        |       |        |       |             |       |              |       |             |       |             |       |
| 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 |   |

 

63

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**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

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

**(Amounts in thousands)**

 
| ** **                                                                                   | ** ** | **PARENT**  | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                   | ** ** | **COMPANY** | ** ** | ** **  | ** ** | **GUARANTOR**    | ** ** | **NON-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           |       |
| 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     | )          | 151,888          |       | 5,288             |       | —           |       | 60,120           |       |
|                                                                                         |       |        |       |        |       |             |       |              |       |             |       |             |       |
| INVESTING ACTIVITIES:                                                                        |       |        |       |        |       |             |       |              |       |             |       |             |       |
| Acquisitions of  fixed-site centers and mobile facilities                                    |       | —      |       | —      |       | (101,334         | )          | —            |       | —           |       | (101,334         | )          |
| Proceeds from  sale of center                                                                |       | —      |       | —      |       | 5,413            |       | —            |       | —           |       | 5,413            |       |
| Additions to  property and equipment                                                         |       | —      |       | —      |       | (40,979          | )          | (5,755            | )          | —           |       | (46,734          | )          |
| Other                                                                                        |       | —      |       | —      |       | 405              |       | —            |       | —           |       | 405              |       |
| Net cash used in  investing activities                                                       |       | —      |       | —      |       | (136,495         | )          | (5,755            | )          | —           |       | (142,250         | )          |
|                                                                                         |       |        |       |        |       |             |       |              |       |             |       |             |       |
| FINANCING ACTIVITIES:                                                                        |       |        |       |        |       |             |       |              |       |             |       |             |       |
| Principal  payments of notes payable and capital lease obligations                           |       | —      |       | (2,201      | )          | (5,319           | )          | (689              | )          | —           |       | (8,209           | )          |
| Proceeds from  issuance of notes payable                                                     |       | —      |       | 100,000     |       | —           |       | 1,125             |       | —           |       | 101,125          |       |
| Other                                                                                        |       | —      |       | (743        | )          | (219             | )          | 1,034             |       | —           |       | 72               |       |
| Net cash provided  by (used in) financing activities                                         |       | —      |       | 97,056      |       | (5,538           | )          | 1,470             |       | —           |       | 92,988           |       |
|                                                                                         |       |        |       |        |       |             |       |              |       |             |       |             |       |
| INCREASE IN CASH  AND CASH EQUIVALENTS                                                       |       | —      |       | —      |       | 9,855            |       | 1,003             |       | —           |       | 10,858           |       |
| Cash, beginning  of year                                                                     |       | —      |       | —      |       | 15,965           |       | 3,589             |       | —           |       | 19,554           |       |
| Cash, end of year                                                                            |       | $           | —     |        | $          | —           |       | $                 | 25,820     |             | $          | 4,592            |       | $ | — |   | $ | 30,412 |   |

 

64

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**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

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

**(Amounts in thousands)**

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

 

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

 

None.

 

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

 

We carried out an evaluation, with theparticipation of our management, including our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures (pursuant to Rule 15d-15 under the Securities Exchange Act of1934) 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, 2005 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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

 

## **None.**

 

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## **PART III**

## ** **

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

 

The following table sets forth the names, ages andpositions of our directors and executive officers, including the executiveofficers of InSight who are deemed our executive officers (as defined under Rule 3b-7of the Securities Exchange Act of 1934), as of August 31, 2005:

 
| Michael N. Cannizzaro      |   | 56     |   | Chairman of the Board and  Director                                |
|----------------------------|--------|--------|--------|--------------------------------------------------------------------|
|                       |   |   |   |                                                               |
| Bret W. Jorgensen          |   | 46     |   | President and Chief  Executive Officer and Director                |
|                       |   |   |   |                                                               |
| Patricia R. Blank          |   | 55     |   | Executive Vice President –  Enterprise Operations of InSight  |
|                       |   |   |   |                                                               |
| Michael A. Boylan          |   | 49     |   | Executive Vice President –  Enterprise Development of InSight |
|                       |   |   |   |                                                               |
| Louis E. Hallman, III |   | 46     |   | Executive Vice President  and Chief Strategy Officer of InSight    |
|                       |   |   |   |                                                               |
| Mitch C. Hill              |   | 46     |   | Executive Vice President  and Chief Financial Officer              |
|                       |   |   |   |                                                               |
| Marilyn U. MacNiven-Young  |   | 54     |   | Executive Vice President,  General Counsel and Secretary           |
|                       |   |   |   |                                                               |
| Kenneth M. Doyle           |   | 40     |   | Director and Vice  President                                       |
|                       |   |   |   |                                                               |
| David W. Dupree            |   | 52     |   | Director                                                           |
|                       |   |   |   |                                                               |
| Steven G. Segal            |   | 45     |   | Director                                                           |
|                       |   |   |   |                                                               |
| Mark J. Tricolli           |   | 34     |   | Director and Vice  President                                       |
|                       |   |   |   |                                                               |
| Edward D. Yun              |   | 38     |   | Director and Vice  President                                       |

 

*Michael N. Cannizzaro* served as our President and ChiefExecutive Officer from August 9, 2004 until July 1, 2005.  Hebecame a member of our board of directors on October 17, 2001 and waselected chairman of the board on May 30, 2002. He has been an OperatingPartner of J.W. Childs Associates, L.P. since October 29, 2001. Prior to that, he was President and Chief Executive Officer of BeltoneElectronics Corporation from 1998 to 2000. Prior to that, he was President ofCaremark International’s Prescription Service Division from 1994 to 1997; VicePresident, Business Development of Caremark’s Nephrology Service Division from April 1994to September 1994; and President of Leica North America from 1993 to 1994.He held numerous positions in general management at Baxter HealthcareCorporation from 1976 to 1993, including the position of President of fourdifferent divisions. He currently serves as a director of Universal HospitalServices, Inc. and previously served on National Nephrology Associates, Inc.’sboard of directors from September 1999 to April 2004.

 

*Bret W.Jorgensen* was appointed to our board of directors and ourPresident and Chief Executive Officer on July 1, 2005. Prior to thisappointment, Mr. Jorgensen was the Chief Executive Officer of AdvoLife, aprovider of senior care services, from June 2004 until the sale of thecompany in October 2004.  Prior to AdvoLife he was Chairman and ChiefExecutive Officer of Directfit, a web-centric recruiting solutions provider,from April 1999 to October 2003.  In 1989, Jorgensen co-foundedTheraTx, which became a diversified healthcare servicescompany listed on NASDAQ.  While at TheraTx, he served on the boardof directors and held several executive leadership positions, includingPresident of TheraTx Health Services, and was instrumental in TheraTx’s initialpublic offering in 1994 and sale in April 1997.  He currently serveson the board of directors of AllianceCare, a provider of senior healthcareservices, rehabilitation therapy and home health services.

 

67

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*Patricia R. Blank*has been InSight’s Executive Vice President-EnterpriseOperations since October 22, 2004. She was InSight’s Executive Vice President and Chief Information Officerfrom September 1, 1999 to October 22, 2004. Prior to joining InSight,Ms. Blank was the principal of Blank & Company, a consulting firmspecializing in healthcare consulting. From 1995 to 1998, Ms. Blank servedas Executive Vice President and Chief Operating Officer of HealthHelp, Inc.,a Houston, Texas-based radiology services organization managing radiologyprovider networks in multiple states. From 1988 to 1995, she was corporatedirector of radiology of FHP, a California insurance company.

 

*Michael A. Boylan*has been InSight’s Executive Vice President-EnterpriseDevelopment since October 22, 2004. He was InSight’s Executive Vice President-Mobile Division and BusinessDevelopment from April 8, 2004 to October 22, 2004. From February 7,2002 to April 8, 2004, he was Executive Vice President and ChiefDevelopment Officer of InSight. He was Executive Vice President, Operations,Eastern Division of InSight from July 1, 2000 to February 7, 2002.From April 1998 to July 1, 2000, he was Executive Vice President andChief Development Officer. From February 1996 to April 1998, he wasSenior Vice President—Operations of InSight. Mr. Boylan was an ExecutiveVice President of Maxum Health Corp., or MHC, from March 1994 to February 1996.From 1992 to 1994, he served as a Regional Vice President of MHC’s principal operating subsidiary, MaxumHealth Services Corp. From 1991 to 1992, he served as an Executive Director ofcertain of MHC’s operations. From 1986 to 1991, Mr. Boylan served in variouscapacities as an officer or employee, including President and Chief OperatingOfficer, with American Medical Imaging Corporation.

 

*Louis E.Hallman, III,* was appointed InSight’s Executive Vice Presidentand Chief Strategy Officer on August 10, 2005.  Prior to thisappointment, Mr. Hallman was the President of Right Manufacturing LLC, aspecialty manufacturer, from January 2003 through January 2005. From January 2002 until January 2003, Mr. Hallman was a privateinvestor and reviewed various business opportunities.  From August 1999through January 2002, he was President and CEO of Homesquared Inc., asupplier of web-based software applications to production homebuilders. In July 1989, Mr. Hallman co-founded TheraTx, Inc., which becamea diversified healthcare services company listed onNASDAQ.  While at TheraTx, he served as Vice President CorporateDevelopment until its sale in April 1997.

 

*Mitch C.Hill* was appointed our Executive Vice President and Chief Financial Officeron January 10, 2005.  Prior to this appointment, Mr. Hill wasthe President and Chief Executive Officer of BMS Reimbursement Management, aprovider 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-category Internetsuperstore, Chief Financial Officer from November 1999 to February 2001and President from April 2000 to February 2001.

 

*Marilyn U. MacNiven-Young*has been our Executive Vice President,General Counsel and Corporate Secretary since February 11, 2002 andExecutive Vice President, General Counsel and Corporate Secretary of InSightsince August 1998.  From February 1996through July 1998, she was an independent consultant to InSight. From September 1994through June 1995, she was Senior Vice President and General Counsel ofAbbey Healthcare Group, Inc., a home healthcare company. From 1991 through1994, Ms. MacNiven-Young served as General Counsel of American HealthServices Corp.

 

*Kenneth M. Doyle*has been a member of our board ofdirectors and Vice President since June 13, 2001.  Mr. Doyle is a Managing Director of TheHalifax Group, L.L.C. Mr. Doyle joined TheHalifax Group, L.L.C. in January 2000. Prior to joining The Halifax Group,L.L.C. Mr. Doyle was an Industry Leader and Vice President at GE Equity,the private equity subsidiary of GE Capital. Prior to joining GE Equity, Mr. Doylespent four years in investment banking as a Senior Associate for theTelecommunications Corporate Finance Group at Merrill Lynch and as an Associatewith Chase Manhattan Bank in the Media and Telecommunications Group. Mr. Doylealso spent three years with Ernst & Young in the EntrepreneurialServices Group. Mr. Doyle currently serves on the board of directors ofNational Packaging Solutions Group, Inc., Soil Safe, Inc. and MaverickHealthcare Group, LLC.

 

*David W. Dupree*became a member of our board of directorson October 17, 2001.  Mr. Dupreeis a Managing Director of The Halifax Group, L.L.C. which he founded in January 1999.Prior to joining The Halifax Group, L.L.C., Mr. Dupree was a ManagingDirector and Partner with The Carlyle Group, a global investment firm locatedin Washington, D.C., where he was primarily responsible for investments inhealthcare and related sectors. Prior to joining The Carlyle Group in 1992, Mr. Dupreewas a Principal in Corporate Finance with Montgomery 

 

68

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Securities and prior to that, he was Co-Head of EquityPrivate Placements 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. andpreviously served on InSight’s board of directors, as a designee of The CarlyleGroup, from October 1997 to December 1999.

 

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

 

*Mark J. Tricolli*has been a member of our board ofdirectors and Vice 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.Prior to that, Mr. Tricolli was an Associate in the Merchant BankingDivision of Goldman, Sachs & Co. from August 1999 to June 2000.Prior to that, Mr. Tricolli was pursuing a degree in business school from1997 to 1999. During the summer of 1998, he worked at Donaldson, Lufkin &Jenrette. He is also a director of Equinox Holdings, Inc. and UniversalHospital Services, Inc.

 

*Edward D. Yun*became a member of our board of directorson June 13, 2001 and became a Vice President on 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 isalso a director of Jillian’s Entertainment Corp., Pan Am International FlightAcademy, Inc., Equinox Holdings, Inc., Chevys, Inc. andUniversal Hospital Services, Inc. Mr. Yun served on the board ofdirectors of National Nephrology Associates, Inc. from December 1998to April 2004 and on the board of directors of The Hartz MountainCorporation from December 2000 to June 2004.

 

*Audit Committee*.  Our board of directors has notestablished committees.  Instead, theInSight board of directors, which is identical to our board of directors,established an audit committee, which oversees our (1) accounting andfinancial reporting processes and audits of our annual financial statements, (2) internalcontrol over financial reporting, and (3) the independent registeredpublic accounting firm’s qualifications and independence.  The audit committee’s responsibilities arelimited to oversight. Our management is responsible for the preparation,presentation and integrity of our financial statements as well as our financialreporting process, accounting policiesand internal control over financialreporting.

 

InSight’s board of directorshas determined that it presently has no “audit committee financial expert” (asthat term is defined in the rules promulgated by the SEC pursuant to theSarbanes-Oxley Act of 2002) serving on the audit committee.  InSight’sboard of directors has determined that each of the members of the auditcommittee is financially literate and has accounting or related financialmanagement expertise, as such terms are interpreted byInSight’s board of directors.

 

*Code ofEthical Conduct.** *We have adopted a code of ethical conduct that applies to all of ourand our subsidiaries’ employees, including, our principal executive officer,principal financial 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.****               EXECUTIVECOMPENSATION**

 

The following table sets forth information concerningthe annual, long-term and all other compensation for services rendered in allcapacities to us and our subsidiaries for the years ended June 30, 2005,2004 and 2003 of the persons who served as (1) our chief executive officerduring the year ended June 30, 2005 and (2) the other four most highlycompensated executive officers for the year ended June 30, 2005. We referto the persons described in clause (2) above as the Other ExecutiveOfficers and we refer to persons discussed in clauses (1) and(2) above as the Named Executive Officers.

 

**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)**  | ** ** |
|                            |       |                    |       |             |       |          |       |          |       |              |       |          |       |
| Michael N. Cannizzaro (3)       |       | 2005                    |       | $                | —     |          | $          | —        |       | $                 | —     |          | 40,000     |   | $ | — |   |
| Chairman of the  Board of       |       | 2004                    |       | —           |       | —        |       | —        |       | —            |       | —        |       |
| Directors                       |       | 2003                    |       | —           |       | —        |       | —        |       | —            |       | —        |       |
|                            |       |                    |       |             |       |          |       |          |       |              |       |          |       |
| Steven T. Plochocki (4)         |       | 2005                    |       | $                | 45,200     |          | $          | —        |       | $                 | 1,500      |          | —     |   | $ | 13,536 |   |
| President and  Chief Executive  |       | 2004                    |       | 420,000          |       | 105,000       |       | 9,000         |       | —            |       | 30,344        |       |
| Officer                         |       | 2003                    |       | 350,000          |       | —        |       | 9,000         |       | —            |       | 6,418         |       |
|                            |       |                    |       |             |       |          |       |          |       |              |       |          |       |
| Michael A. Boylan (5)           |       | 2005                    |       | $                | 275,000    |          | $          | 97,000        |       | $                 | 9,000      |          | —     |   | $ | 29,872 |   |
| Executive Vice President  -     |       | 2004                    |       | 249,700          |       | 82,950        |       | 9,000         |       | —            |       | 25,692        |       |
| Enterprise  Development         |       | 2003                    |       | 237,000          |       | —        |       | 9,000         |       | —            |       | 7,150         |       |
|                            |       |                    |       |             |       |          |       |          |       |              |       |          |       |
| Patricia R. Blank (6)           |       | 2005                    |       | $                | 275,000    |          | $          | 97,000        |       | $                 | 9,000      |          | 30,000     |   | $ | 31,873 |   |
| Executive Vice  President -     |       | 2004                    |       | 224,700          |       | 42,000        |       | 9,000         |       | —            |       | 30,367        |       |
| Enterprise  Operations          |       | 2003                    |       | 210,000          |       | —        |       | 9,000         |       | —            |       | 7,682         |       |
|                            |       |                    |       |             |       |          |       |          |       |              |       |          |       |
| Marilyn U. MacNiven-Young       |       | 2005                    |       | $                | 275,000    |          | $          | 85,000        |       | $                 | 9,000      |          | 10,000     |   | $ | 14,087 |   |
| Executive Vice  President,      |       | 2004                    |       | 267,500          |       | 52,400        |       | 9,000         |       | —            |       | 12,644        |       |
| General Counsel  and Secretary  |       | 2003                    |       | 262,000          |       | —        |       | 9,000         |       | —            |       | 4,333         |       |
|                            |       |                    |       |             |       |          |       |          |       |              |       |          |       |
| Mitch C. Hill                   |       | 2005                    |       | $                | 121,600    |          | $          | 55,000        |       | $                 | 4,500      |          | 40,000     | (7 ) | $ | 10,199 |   |
| Executive Vice  President and   |       | 2004                    |       | —           |       | —        |       | —        |       | —            |       | —        |       |
| Chief Financial  Officer        |       | 2003                    |       | —           |       | —        |       | —        |       | —            |       | —        |       |

 

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

 

(2)   Amounts of OtherAnnual Compensation include perquisites (auto allowances and commissions forcontract awards and renewals) and amounts of All Other Compensation include (i) amountscontributed to InSight’s 401(k) profit sharing plan, (ii) specifiedpremiums on executive life insurance arrangements and (iii) specifiedpremiums on executive health insurance arrangements.

 

(3)   Mr. Cannizarroserved as President and Chief Executive Officer from August 9, 2004 until July 1,2005.

 

(4)   Mr. Plochocki served as President andChief Executive Officer until August 9, 2004.

 

(5)   Effective October 22,2004, Mr. Boylan’s title changed from Executive Vice President-MobileDivision and Business Development to Executive Vice President-EnterpriseDevelopment.

 

(6)   Effective October 22,2004, Ms. Blank’s title changed from Executive Vice President and ChiefInformation Officer to Executive Vice President-Enterprise Operations.

 

(7)   Mr. Hill alsoreceived a right to purchase 2,525 shares of our common stock at a price of$19.82 per share.  This right expires thirtydays after the filing of this Form 10-K.

 

70

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*Compensationof Directors.*We reimburse our non-employee directors for all out-of-pocket expenses incurredin the performance of their duties as directors. We do not pay fees todirectors for attendance at meetings or for their services as members of theboard of directors or committees thereof.

 

OPTIONGRANTS.  During theyear ended June 30, 2005, stock options were granted by us pursuant tostock option agreements to certain of the Named Executive Officers, as follows:

 
| ** **                | ** ** | **Individual  Grants** | ** ** | ** **         | ** ** |
|---------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                | ** ** | **Number  of**         | ** ** | **Percent  of**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Potential  Realizable Value** | ** ** |
| ** **                | ** ** | **Securities**         | ** ** | **Total  Options** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **at  Assumed Annual Rates** | ** ** |
| ** **                | ** ** | **Underlying**         | ** ** | **Granted  to**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **of Stock  Price Appreciation** | ** ** |
| ** **                | ** ** | **Options**            | ** ** | **Employees  in**  | ** ** | **Exercise  Price** | ** ** | **Market  Price on** | ** ** | **Expiration** | ** ** | **for  Option Term (2)** | ** ** |
| **Name**                  | ** ** | **Granted**            | ** ** | **Fiscal  Year**   | ** ** | **Per  Share (1)** | ** ** | **Grant  Date** | ** ** | **Date (3)** |   | **5%** | ** ** | **10%** |   |
|                      |       |                   |       |               |       |   |   |   |   |   |   |   |   |   |   |
| Michael N. Cannizzaro     |       | 20,000                 |       | 9.5                | %          | $ | 19.82 |   | $ | 19.82 |   | 8/12/2014 |   | $ | 249,294 |   | $ | 631,760 |   |
|                      |       | 20,000                 |       | 9.5                | %          | 19.82 |   | 19.82 |   | 4/8/2015 |   | 249,294 |   | 631,760 |   |
|                      |       |                   |       |               |       |   |   |   |   |   |   |   |   |   |   |
| Steven T. Plochocki       |       | —                 |       | —             |       | — |   | — |   | — |   | — |   | — |   |
|                      |       |                   |       |               |       |   |   |   |   |   |   |   |   |   |   |
| Michael A. Boylan         |       | —                 |       | —             |       | — |   | — |   | — |   | — |   | — |   |
|                      |       |                   |       |               |       |   |   |   |   |   |   |   |   |   |   |
| Patricia R. Blank         |       | 30,000                 |       | 14.3               | %          | 19.82 |   | 19.82 |   | 1/10/2015 |   | 373,941 |   | 947,640 |   |
|                      |       |                   |       |               |       |   |   |   |   |   |   |   |   |   |   |
| Marilyn U. MacNiven-Young |       | 10,000                 |       | 4.8                | %          | 19.82 |   | 19.82 |   | 1/10/2015 |   | 124,648 |   | 315,877 |   |
|                      |       |                   |       |               |       |   |   |   |   |   |   |   |   |   |   |
| Mitch C. Hill (4)         |       | 40,000                 |       | 19.1               | %          | 19.82 |   | 19.82 |   | 1/10/2015 |   | 498,587 |   | 1,263,519 |   |
|                           |            |                        |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)   The optionswere granted at an exercise price of $19.82 per share, the estimated price pershare determined by the board of directors.

 

(2)   Potentialrealizable value is determined by taking the exercise price per share andapplying the stated annual appreciation rate compounded annually for theremaining term of the option (ten years), subtracting the exercise price pershare at the end of the period and multiplying the remaining number by thenumber of options granted.  Actual gains,if any, on stock option exercises and the Company’s common stock holdings aredependent on the future performance of the common stock.

 

(3)   Except for Mr. Cannizzaro’soptions, which were fully exercisable on the date of grant, the other optionsare exercisable starting twelve months after the date of grant with 50% of theshares vesting annually on the following schedule:  (i) 10% of the shares becomingexercisable upon the anniversary of the grant date in each of the fiscal yearsending on June 30 in the years 2006-2010 and (ii) 50% of the sharesbecoming exercisable upon the attainment of certain performance targets on anexit event.  The options were granted fora term of ten years, subject to earlier termination in certain events relatedto termination of employment.

 

(4)   Mr. Hill alsoreceived a right to purchase 2,525 shares of our common stock at a price of$19.82 per share.  This right expires thirtydays after the filing of this Form 10-K.

 

71

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* *

*Option Exercises and Year-EndValues.* Duringthe year ended June 30, 2005, 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, 2005:

 
| ** **                | ** ** | **Number  of** | ** ** | ** **   | ** ** | ** **                         | ** ** | ** **                     | ** ** | ** **                | ** ** | ** **        | ** ** |
|---------------------------|------------|----------------|------------|--------------|------------|------------------------------------|------------|--------------------------------|------------|---------------------------|------------|-------------------|------------|
| ** **                | ** ** | **Shares**     | ** ** | ** **   | ** ** | ** **                         | ** ** | ** **                     | ** ** | **Value of  Unexercised** | ** ** |
| ** **                | ** ** | **Acquired**   | ** ** | ** **   | ** ** | **Number  of Unexercised Options** | ** ** | **In-the-Money  Options**      | ** ** |
| ** **                | ** ** | **on**         | ** ** | **Value**    | ** ** | **at  June 30, 2005**         | ** ** | **at  June 30, 2005 (1)** | ** ** |
| **Name**                  | ** ** | **Exercise**   | ** ** | **Realized** | ** ** | **Exercisable**                    | ** ** | **Unexercisable**              | ** ** | **Exercisable**           | ** ** | **Unexercisable** | ** ** |
|                      |       |           |       |         |       |                               |       |                           |       |                      |       |              |       |
| Michael N. Cannizzaro     |       | —         |       | $            | —     |                               | 40,000     |                           | —     |                      | $          | —            |       | $ | — |   |
|                      |       |           |       |         |       |                               |       |                           |       |                      |       |              |       |
| Steven T. Plochocki       |       | —         |       | —       |       | 52,500                             |       | —                         |       | 601,125                   |       | —            |       |
|                      |       |           |       |         |       |                               |       |                           |       |                      |       |              |       |
| Michael A. Boylan         |       | —         |       | —       |       | 57,490                             |       | 59,500                         |       | 557,146                   |       | 108,290           |       |
|                      |       |           |       |         |       |                               |       |                           |       |                      |       |              |       |
| Patricia R. Blank         |       | —         |       | —       |       | 4,500                              |       | 55,500                         |       | 8,190                     |       | 46,410            |       |
|                      |       |           |       |         |       |                               |       |                           |       |                      |       |              |       |
| Marilyn U. MacNiven-Young |       | —         |       | —       |       | 4,500                              |       | 35,500                         |       | 8,190                     |       | 46,410            |       |
|                      |       |           |       |         |       |                               |       |                           |       |                      |       |              |       |
| Mitch C. Hill             |       | —         |       | —       |       | —                             |       | 40,000                         |       | —                    |       | —            |       |
|                           |            |                |            |              |            |                                    |            |                                |            |                           |            |                   |            |  |  |  |

 

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(1)   Based on the price at whichthe common stock was valued on that date of $19.82 per share.

 

*Cancellation of Options in ourAcquisition of InSight.* On the consummation of our acquisition of InSight on October 17,2001, each holder of an option to purchase shares of common stock of InSightoutstanding under any of InSight’s stock option plans, whether or not vested, receivedthe difference between $18.00 and the exercise price of each share of commonstock the holder could have acquired pursuant to the terms of the stock optionagreements (less applicable tax withholding), and the options were terminated;except that Messrs. Plochocki, Boylan and two former officers rolled overcertain of their InSight stock options into fully vested options to purchaseour common stock under our 2001 Stock Option Plan.

 

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

 

*EmploymentAgreements. *Inconnection with our acquisition of InSight, Messrs. Plochocki and Boylanand Ms. Blank entered into employment agreements with us.  Ms. MacNiven-Young entered into anemployment agreement with us in December 2001.  In January 2005, we entered into a newemployment 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 and Hallman in January, July andAugust of 2005, respectively. Effective as August 9, 2004, Mr. Plochocki was no longeremployed by us.  We entered into aresignation agreement with him that was consistent with the terms of hisemployment agreement.  The material termsof the resignation agreement are set forth in “Item 13. Certain Relationshipsand Related Transactions—Severance Arrangement.”

 

The employment agreementwith Mr. Plochocki was for an initial term of three years, and thereaftera term of twelve months on a continuing basis subject to certain terminationrights. The employment agreement provided that Mr. Plochocki would receivean annual base salary as well as a discretionary bonus of up to 75% of hisannual base salary if InSight achieved its budgetary goals and a discretionarybonus of an additional 25% of his annual base salary upon the achievement ofother goals mutually agreed upon by Mr. Plochocki and InSight’s board ofdirectors. Mr. Plochocki’s employment agreement also provided for a lifeinsurance policy of three times the amount of his annual base salary andentitled him to participate during the term of his employment in InSight’s lifeinsurance, medical, health and accident and disability plan or program, pensionplan or other similar benefit plan and our stock option plans. Mr. Plochockialso was subject to a noncompetition covenant and nonsolicitation provisions(relating

 

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to InSight’s employeesand customers) during the term of his employment agreement and continuing for aperiod of 24 months after the termination of his employment. In addition,InSight was required to maintain at its expense until the earlier of24 months after the date of termination or commencement of Mr. Plochocki’sbenefits pursuant to full time employment with a new employer under suchemployer’s standard benefits program, all life insurance, medical, health andaccident and disability plans or programs in which Mr. Plochocki wasentitled to participate immediately prior to the date of termination.

 

Each of the employment agreements with the Other Executive Officers andMessrs. Jorgensen and Hallman 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 whosegoals shall 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) uponInSight’s 30 days’ written notice to the executive of the termination ofthe executive’s employment without cause (as defined in the respectiveemployment agreement); (3) if the executive terminates his or her employmentwith InSight for good reason (as defined in the respective employmentagreement); and (4) if the executive’s employment is terminated by InSightwithout cause or he or she terminates his or her employment for good reasonwithin 12 months of a change in control (as defined in the respectiveemployment agreement). In addition, InSight will maintain at its expense untilthe earlier of 12 months after the date of termination or commencement ofthe executive’s benefits pursuant to full time employment with a new employerunder such employer’s standard benefits program, all life insurance, medical,health and accident and disability plans or programs, in which the executivewas entitled to participate immediately prior to the date of termination. Eachexecutive’s employment will immediately terminate upon his or her death and theexecutors or administrators of his or her estate or his or her heirs orlegatees (as the case may be) will be entitled to all accrued and unpaidcompensation up to the date of his or her death. The executive’s employmentwill terminate and the executive will not be entitled to receive any monetarycompensation or benefit upon (1) the termination of his or her respectiveemployment by InSight for cause, or (2) his or her voluntary terminationof his or her respective employment with InSight without good reason.

 

Under his employment agreement, Mr. Hill is entitled to a bonusequal to 40% of his annual salary prorated for the fiscal year ended June 30,2005.  Mr. Hill may purchase 2,525shares of our common stock at a price equal to $19.82 per share, within thirtydays of our filing this Form 10-K with the SEC.  Under his employment agreement, Mr. Jorgensenis entitled to a bonus equal to 50% of his annual salary for the fiscal yearending June 30, 2006.  Mr. Jorgensenmay purchase 50,454 shares of our common stock at a price equal to $19.82 pershare, on or before September 29, 2005. Under his employment agreement, Mr. Hallmanis eligible to receive a bonus of 40% of his annual salary for the fiscal yearending June 30, 2006 (50% of this bonus is guaranteed).

 

*CompensationCommittee Interlocks and Insider Participation*.  The InSight board of directors, which isidentical to our board of directors, established a compensation committee to actwith regard to compensation and other matters for us.  During the year ended June 30, 2005,InSight’s compensation committee consisted of Messrs. Cannizzaro(chairman), Dupree, Segal and Plochocki. Mr. Plochocki served on the committee until he ceased to be InSight’sPresident and Chief Executive Officer on August 9, 2004.  Neither Mr. Plochocki nor Mr. Cannizzaroparticipated in decisions relating to his own compensation or award of stockoptions.

 

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**ITEM 12.**               **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT**

 

The following table sets forth certain informationregarding beneficial ownership of our common stock as of August 31, 2005,by:  (i) each person or entity known to us owning beneficially 5% ormore of our common stock; (ii) each member of our board of directors; (iii) eachof the Named Executive Officers; and (iv) all directors and executiveofficers (as defined by Rule 3b-7), as a group.  At August 31,2005, our outstanding securities consisted of approximately 5,468,814 shares ofcommon stock and options to purchase 204,565 shares of common stock which areimmediately exercisable.  Beneficial ownership of the securities listed inthe table has been determined in accordance with the applicable rules andregulations promulgated 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                                             |       | —                |       | —           |       |
|                                                                |       |                  |       |             |       |
| Steven T. Plochocki (11)(12)                                        |       |                  |       |             |       |
| 26250 Enterprise  Court, Suite 100                             |       |                  |       |             |       |
| Lake Forest, CA  92630                                              |       | 52,500                |       | 1.0              | %          |
|                                                                |       |                  |       |             |       |
| Bret W. Jorgensen (13)                                              |       |                  |       |             |       |
| 26250 Enterprise  Court, Suite 100                             |       |                  |       |             |       |
| Lake Forest, CA  92630                                              |       | 50,454                |       |             | *          |
|                                                                |       |                  |       |             |       |
| Michael A. Boylan (14)                                              |       |                  |       |             |       |
| 110 Gibraltar  Road                                                 |       |                  |       |             |       |
| Horsham, PA  18901                                                  |       | 64,490                |       | 1.2              | %          |
|                                                                |       |                  |       |             |       |
| Mitch C. Hill (15)                                                  |       |                  |       |             |       |
| 26250 Enterprise  Court, Suite 100                             |       |                  |       |             |       |
| Lake Forest, CA  92630                                              |       | 2,525                 |       |             | *          |
|                                                                |       |                  |       |             |       |
| Marilyn U. MacNiven-Young (16)                                      |       |                  |       |             |       |
| 26250 Enterprise  Court, Suite 100                             |       |                  |       |             |       |
| Lake Forest, CA  92630                                              |       | 7,500                 |       |             | *          |
|                                                                |       |                  |       |             |       |
| Patricia R. Blank (17)                                              |       |                  |       |             |       |
| 26250 Enterprise  Court, Suite 100                             |       |                  |       |             |       |
| Lake Forest, CA  92630                                              |       | 7,500                 |       |             | *          |
|                                                                |       |                  |       |             |       |
| All directors and executive officers, as a group (12  persons) (18) |       | 176,561               |       | 3.1              | %          |

 

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(1)   For purposes of this table, a person is deemed to have“beneficial ownership” of any security that such person has the right toacquire within 60 days after August 31, 2005.

 

(2)   Includes 4,011,758 shares of our common stock owneddirectly by J.W. Childs Equity Partners II, L.P. and 338,532 shares of ourcommon stock owned directly by JWC-InSight Co-invest LLC, an affiliate of J.W.Childs Equity Partners II, L.P.  Thegeneral partner of J.W. Childs Equity Partners II, L.P. is J.W. Childs AdvisorsII, L.P., a Delaware limited partnership. The general partner of J.W. Childs Advisors II, L.P. is J.W. ChildsAssociates, L.P., a Delaware limited partnership.  The general partner of J.W. ChildsAssociates, 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, DanaL. 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 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 LLC is a Delaware limitedliability company and affiliate of J.W. Childs Equity Partners II, L.P.  J.W. Childs Associates, Inc. is themanaging member of JWC-InSight Co-invest LLC. As the managing member, J.W. Childs Associates, Inc. owns the338,532 shares of our common stock to be held directly by JWC-InSight Co-investLLC.  John W. Childs, Glenn A.Hopkins, Dana L. Schmaltz, Adam L. Suttin, William E. Watts, James Rhee andJeffrey Teschke, as well 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 voting and investment control over, and therefore may bedeemed to beneficially own, the shares of common stock held by these entities.

 

(4)   Includes 1,107,020 shares of our common stock owneddirectly by Halifax Capital Partners, L.P. and 4,092 shares of our common stockowned directly by Mr. Dupree, a Managing Director of The Halifax Group,L.L.C.  The general partner of HalifaxCapital Partners, L.P. is Halifax Genpar, L.P., a Delaware limitedpartnership.  The general partner ofHalifax Genpar, L.P. is The Halifax Group, L.L.C. a Delaware limited liabilitycompany.  Halifax Genpar, L.P. and TheHalifax Group, L.L.C. may be deemed to beneficially own the 1,111,112 shares ofour common stock held by Halifax Capital 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 andKenneth M. Doyle (as indicated in footnotes 9 and 10, respectively) sharevoting and investment control over, and therefore may be deemed to beneficiallyown, the shares of common stock held by these entities.

 

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

 

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

 

(7)   As an Operating Partner of J.W. Childs Associates,L.P., which manages J.W. Childs Equity Partners II, L.P. and a member ofJWC-InSight Co-invest LLC, Mr. Cannizzaro may be deemed to beneficiallyown the 4,011,758 shares of our common stock owned by J.W. Childs EquityPartners II, L.P. and the 338,532 shares of our common stock held directly byJWC-InSight Co-invest LLC.  Mr. Cannizzarodisclaims beneficial ownership of such shares. Includes options to purchase 40,000 shares of our common stock at anexercise price of $19.82 per share, which are fully vested and immediatelyexercisable.

 

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(8)   As a Vice President at J.W. Childs Associates, L.P.,which manages J.W. Childs Equity Partners II, L.P. and a member of JWC-InSightCo-invest LLC, Mr. Tricolli may be deemed to beneficially own the4,011,758 shares of our common stock owned by J.W. Childs Equity Partners II,L.P. and the 338,532 shares of our common stock held directly by JWC-InSightCo-invest LLC.  Mr. Tricollidisclaims beneficial ownership of such shares.

 

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

 

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

 

(11)Includes an option to purchase 52,500 shares of ourcommon stock at an exercise price of $8.37 per share which option was grantedupon the consummation of the Acquisition and is fully vested and immediatelyexercisable.

 

(12)Effective August 9, 2004, Mr. Plochockiwas no longer employed by us. See “Item 13. Certain Relationships and RelatedTransactions—SeveranceArrangement.’’

 

(13)Includes a right to purchase 50,454 shares ofour common stock at a price of $19.82 per share which expires on September 29,2005.  Does not include an option topurchase 248,236 shares of our common stock at an exercise price of $19.82 pershare, which is not currently exercisable.

 

(14)Includes (i) an option to purchase 46,990 sharesof our common stock at an exercise price of $8.37 per share which option wasgranted upon the consummation of the Acquisition and is fully vested andimmediately exercisable and (ii) an option to purchase 17,500 shares ofour common stock at an exercise price of $18.00 per share.  Does not include an option to purchase 52,500shares of our common stock at an exercise price of $18.00 per share, which isnot currently exercisable.

 

(15)Includes a right to purchase 2,525 shares ofour common stock at a price of $19.82 per share within 30 days of the filing ofthis Form 10-K with the SEC.  Does not include an option to purchase 40,000 sharesof our common stock at an exercise price of $19.82 per share, which is notcurrently exercisable.

 

(16)Includes an option to purchase 7,500 shares of ourcommon stock at an exercise price of $18.00 per share.  Does not include (i) an option topurchase 22,500 shares of our common stock at an exercise price of $18.00 pershare and (ii) an option to purchase 10,000 shares of our common stock atan exercise price of $19.82 per share, which are not currently exercisable.

 

(17)Includes an option to purchase 7,500 shares of ourcommon stock at an exercise price of $18.00 per share.  Does not include (i) an option topurchase 22,500 shares of our common stock at an exercise price of $18.00 pershare and (ii) an option to purchase 30,000 shares of our common stock atan exercise price of $19.82 per share, which are not currently exercisable.

 

(18)Mr. Plochocki is not included in the groupbecause he was not an executive officer as of August 31, 2005.

 

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—StockholdersAgreement.”

 

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EQUITY COMPENSATION PLANINFORMATION.  The following tableprovides information as of June 30, 2005, with respect to compensationplans under which our common stock is authorized for issuance.  These compensation plans include:  (i) the 2001 Stock Option Plan; and (ii) stockoptions granted pursuant to stock option agreements.  Our stockholders approved the 2001 StockOption Plan and the issuance of options to purchase up to 626,000 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 |       | 616,990                     |       | $                       | 16.74      |                         | 128,950    |   |
|                                                     |            |                             |            |                         |            |                              |            |  |

 

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

 

MANAGEMENTAGREEMENT.  Upon the completion of theAcquisition, we entered into a management agreement with J.W. Childs AdvisorsII, L.P., the general partner of J.W. Childs Equity Partners II, L.P. andHalifax Genpar, L.P., the general partner of Halifax Capital Partners,L.P.  J.W. Childs Advisors II, L.P. andHalifax Genpar, L.P. will provide business, management and financial advisoryservices to us in consideration of (i) an annual fee of $240,000 to bepaid to J.W. Childs Advisors II, L.P. and (ii) an annual fee of $60,000 tobe paid to Halifax Genpar, L.P.  From August 2004through December 2005, we have paid and will continue to payJ.W. Childs Advisors II, L.P. a monthly fee of $10,000 for the services ofMichael N. Cannizzaro, our Chairman of the Board.  We will also reimburse such entities for alltravel and other out-of-pocket expenses incurred by such entities in connectionwith their performance of the advisory services under the agreement.  The management agreement has an initial termof five years, which term will automatically renew for one year periodsthereafter and is subject to earlier termination by our board ofdirectors.  Furthermore, we and InSighthave agreed to indemnify and hold harmless J.W. Childs Advisors II, L.P. andHalifax Genpar, L.P. and their affiliates, from and against any and all claims,losses, damages and expenses arising out of the Acquisition or the performanceby J.W. Childs Advisors II, L.P. and Halifax Genpar, L.P. of their obligationsunder 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 or stockoptions have entered into a stockholders agreement.  Under the stockholders agreement, we and eachof our stockholders have a right of first refusal to purchase any stockproposed to be sold by all other stockholders, except J.W. Childs EquityPartners II, L.P. and JWC-InSight Co-invest LLC.  Additionally, the stockholders agreement affords:(1) stockholders, other than J.W. Childs Equity Partners II, L.P. andJWC-InSight Co-invest LLC, so-called “tag-along rights”, which give thesestockholders the right to participate with respect to proposed sales of ourcapital stock by J.W. Childs Equity Partners II, L.P. and JWC - InSightCo-invest LLC; (2) J.W. Childs Equity Partners II, L.P. and JWC-InSightCo-invest LLC “drag-along rights”, which gives these stockholders the right torequire other stockholders to participate in proposed sales of a majority ofour capital stock; and (3) all stockholders certain registration rightswith respect to our capital stock. Furthermore, the stockholders agreement contains put and call featureson capital stock and stock options held by InSight management which aretriggered upon termination of such individual’s employment with InSight;however, these put and call features are inapplicable to Mr. Jorgensen’scapital stock and stock options.  Thestockholders agreement also obligates us and our stockholders to take allnecessary action to appoint, as our directors, up to eight nominees designatedby J.W. Childs Equity Partners II, L.P. (as would constitute a majority of ourentire board of directors) and two nominees designated by Halifax CapitalPartners, L.P.****

 

SEVERANCEARRANGEMENT.  Pursuant to the terms of aresignation agreement with us, Steven T. Plochocki, our former President andChief Executive Officer, will receive severance equal to 24 months salary athis level of compensation as of August 9, 2004, which was $420,000 peryear and benefits in accordance with the terms of his employmentagreement.  All of Mr. Plochocki’sunvested stock options were cancelled.  Mr. Plochocki’svested stock options under the 2001 Stock Option Plan remain outstanding inaccordance with their terms.

 

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**ITEM 14.****               PRINCIPALACCOUNTANT FEES AND SERVICES**

 

***Independent Registered Public Accounting Firm***

 

The following table presents information about feesthat PricewaterhouseCoopers LLP charged us (1) to audit our annualconsolidated financial statements for the years ended June 30, 2005 and2004, and (2) for other services rendered in those years.

 
| ** **                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
|                                |       |     |       |     |       |
| Audit Fees (1)                      |       | $        | 249,000    |     | $          | 638,000 |   |
|                                |       |     |       |     |       |
| Audit-related Fees (2)              |       | —   |       | 203,000  |       |
|                                |       |     |       |     |       |
| Tax Fees (3)                        |       | 84,000   |       | 70,000   |       |
|                                |       |     |       |     |       |
| Subtotal                            |       | $        | 333,000    |     | $          | 911,000 |   |
|                                |       |     |       |     |       |
| All Other Fees                      |       | —   |       | —   |       |
|                                |       |     |       |     |       |
| Total Audit and Other Services Fees |       | $        | 333,000    |     | $          | 911,000 |   |

 

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(1)   Audit Fees – fees for auditing our annual consolidatedfinancial statements, reviewing the condensed consolidated financial statementsincluded in our quarterly reports on Form 10-Q, the $25 million of 9 7/8% senior subordinated notes, the withdrawninitial public offering and other SEC filings.

 

(2)   Audit-related Fees – fees for duediligence and related services with regard to the acquisitions completed during2004.

 

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

 

All audit and non-auditservices performed by our independent registered public accounting firm must bespecifically pre-approved by InSight’s audit committee.  Consistent with this policy, for the yearended June 30, 2005 all audit and non-audit services initiated by PricewaterhouseCoopersLLP were pre-approved by InSight’s audit committee.

 

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**PART IV**

 

**ITEM 15.****               EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

 
| ITEM 15 (a) (1).   FINANCIAL STATEMENTS          |
|-----------------------------------------------------------------|
|                                                            |
| Included in Part II of this report:                        |
|                                                            |
| 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                     |
|                                                            |
| ITEM 15 (a) (2).   FINANCIAL STATEMENT SCHEDULES |
|                                                            |
| Schedule II  - Valuation and Qualifying Accounts           |

 

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

 

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ITEM 15 (a) (3).    EXHIBITS

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

 

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| *4.1   |   | Indenture with  respect to 9 7/8% Senior Subordinated Notes due 2011 with State Street Bank  and Trust Company, N.A., as Trustee, dated October 30, 2001, 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 the Company’s Annual Report on Form 10-K, filed  on September 26, 2003.                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *4.4   |   | Third  Supplemental Indenture, dated as of March 8, 2004, with respect to $25  million of 9 7/8% Senior Subordinated Notes due 2011, previously filed and  incorporated herein by reference from the Company’s Quarterly Report on  Form 10-Q, filed on May 13, 2004.                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *4.5   |   | Fourth  Supplemental Indenture, dated as of June 8, 2004, with respect to adding  additional Subsidiary Guarantors (named therein), previously filed and  incorporated herein by reference from the Company’s Annual Report on  Form 10-K, filed on September 24, 2004.                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.1  |   | Credit  Agreement, dated October 17, 2001, by and among InSight, the Company,  the Subsidiary Guarantors (named therein), Banc of America Securities LLC and  First Union Securities, LLC, previously filed and incorporated herein by  reference from InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.2  |   | First Amendment  to Credit Agreement, Waiver and Consent, dated as of January 24, 2003,  by and among InSight, the Company, the Subsidiary Guarantors (named therein),  the Lenders from time to time party thereto, Bank of America, N.A. as  Administrative Agent, Wachovia Bank, N.A. as Syndication Agent and The CIT  Group/Business Credit, Inc. as Documentation Agent, previously filed and  incorporated herein by reference from the Company’s Quarterly Report on  Form 10-Q, filed on May 15, 2003.  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.3  |   | Second Amendment  to Credit Agreement, Waiver and Consent, dated as of July 11, 2003, by  and among InSight, the Company, the Subsidiary Guarantors (named therein),  the Lenders from time to time party thereto, Bank of America, N.A. as Administrative  Agent, Wachovia Bank, N.A. as Syndication Agent and The CIT Group/Business  Credit, Inc. as Documentation Agent, previously filed and incorporated  herein by reference from the Company’s Annual Report on Form 10-K, filed  on September 26, 2003. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.4  |   | The Company’s 2001 Stock Option Plan, previously  filed and incorporated herein by reference from InSight’s Registration  Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.5  |   | The Company’s 2001 Stock Option Plan Stock Option  Agreement, dated June 29, 2001, by and between the Company and Steven T.  Plochocki, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.6  |   | The Company’s 2001 Stock Option Plan Stock Option  Agreement, dated June 29, 2001, by and between the Company and Michael  A. Boylan, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                                                                                     |

 

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| *10.7  |   | First Amendment to Executive Employment Agreement,  dated September 4, 2003, by and between InSight and Steven T. Plochocki,  previously filed and incorporated herein by reference from the Company’s  Registration Statement on Form S-1, filed on June 23, 2004.                                                                                                                                                                                                                                                    |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.8  |   | Executive Employment Agreement, dated June 29,  2001, among InSight, the Company and Steven T. Plochocki, previously filed  and incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.9  |   | Executive  Employment Agreement, dated July 1, 2005, among InSight, the Company and  Bret W. Jorgensen, previously filed and incorporated herein by reference from  the Company’s Current Report on Form 8-K, filed on July 8, 2005.                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.10 |   | Executive Employment Agreement, dated  October 22, 2004, among InSight, the Company and Patricia R. Blank,  previously filed and incorporated herein by reference from the Company’s  Current Report on Form 8-K, filed on January 26, 2005.                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.11 |   | Executive Employment Agreement, dated June 29,  2001, among InSight, the Company and Michael A. Boylan, previously filed and  incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.12 |   | Executive  Employment Agreement, dated January 10, 2005, among InSight, the Company  and Mitch C. Hill, previously filed and incorporated herein by reference from  the Company’s Current Report on Form 8-K, filed on January 14,  2005.                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.13 |   | Executive  Employment Agreement, dated August 10, 2005, among InSight, the Company  and Louis E. Hallman, previously filed and incorporated herein by reference  from the Company’s Current Report on Form 8-K, filed on August 15,  2005.                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.14 |   | Executive Employment Agreement, dated  December 27, 2001, among InSight, the Company 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.                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.15 |   | Form of the Company Performance Based Option  Agreement, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.16 |   | Management  Agreement, dated as of October 17, 2001, by and among J.W. Childs  Advisors II, L.P., Halifax Genpar, L.P., the Company and InSight, previously  filed and incorporated herein by reference from InSight’s Registration  Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.17 |   | Third Amendment  to Credit Agreement, Waiver and Consent, dated as of February 26, 2004,  by and among InSight, the Company, the Subsidiary Guarantors (named therein),  the Lenders party thereto, Bank of America, N.A., as Administrative Agent,  Wachovia Bank, National Association, as Syndication Agent, and The CIT  Group/Business Credit, Inc. as Documentation Agent, previously filed and  incorporated herein by reference from the Company’s Quarterly Report on  Form 10-Q, filed on May 13, 2004. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.18 |   | Resignation  Agreement, dated August 9, 2004, by and among InSight, the Company and  Steven T. Plochocki, previously filed and incorporated herein by reference  from the Company’s Registration Statement on Form S-4, filed on  November 3, 2004.                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.19 |   | Stock Option  Agreement, dated August 12, 2004, by and between the Company and Michael  N. Cannizzaro, previously filed and incorporated by reference from the  Company’s Quarterly Report on Form 10-Q, filed on November 10,  2004.                                                                                                                                                                                                                                                                                  |

 

83

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| *10.20 |   | Fourth Amendment to Credit Agreement, dated as of  February 22, 2005, by and among InSight, the Company, the Subsidiary  Guarantors (named therein), the Lenders party thereto, Bank of America, N.A.,  as Administrative Agent, Wachovia Bank, National Association, as Syndication  Agent, and The CIT Group/Business Credit, Inc., as Documentation Agent,  previously filed and incorporated by reference from the Company’s Quarterly  Report on Form 10-Q, filed on May 9, 2005. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| *10.21 |   | 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 the Company’s Current Report on Form 8-K, filed on  July 8, 2005.                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.22  |   | Stock Option  Agreement, dated April 8, 2005, by and between the Company and Michael  N. Cannizzaro, filed herewith.                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.23  |   | Form of  Amended and Restated Indemnification Agreement, filed herewith.                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 21.1   |   | Subsidiaries of the Company, filed herewith.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.1   |   | Certification of Bret W. Jorgensen, the Company’s  Chief Executive Officer, pursuant to Rule 15d-14 of the Securities  Exchange Act of 1934, filed herewith.                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2   |   | Certification of Mitch C. Hill, the Company’s Chief  Financial Officer, pursuant to Rule 15d-14 of the Securities Exchange  Act of 1934, filed herewith.                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.1   |   | Certification of Bret W. Jorgensen, the Company’s  Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed  herewith.                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.2   |   | Certification of Mitch C. Hill, the Company’s Chief  Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                                                                                                                                               |

 

----

| * |   | Previously filed. |
|---|--------|-------------------|

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

 

84

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15 (d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|   | INSIGHT HEALTH  SERVICES HOLDINGS CORP. |
|--------|-----------------------------------------|
|   |                                    |
|   | By                                      | /s/ Bret W.  Jorgensen |   |
|   |                                    |   Bret  W. Jorgensen, President and |
|   |                                    |        Chief  Executive Officer |
|   |                                    |   |
|   | Date: September 22,  2005          |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated.

 
| **Signature**              | ** ** | **Title**                     | ** ** | **Date**           |
|----------------------------|------------|-------------------------------|------------|--------------------|
|                       |       |                          |       |               |
| /s/ Bret W.  Jorgensen     |       | President                     |       | September 22, 2005 |
| Bret W.  Jorgensen         |       | and Chief Executive Officer   |       |               |
|                       |       | and Director                  |       |               |
|                       |       | (Principal Executive Officer) |       |               |
|                       |       |                          |       |               |
|                       |       |                          |       |               |
| /s/ Mitch C.  Hill         |       | Executive Vice President      |       | September 22, 2005 |
| Mitch C. Hill              |       | and Chief Financial Officer   |       |               |
|                       |       | (Principal Financial and      |       |               |
|                       |       | Accounting Officer)           |       |               |
|                       |       |                          |       |               |
|                       |       |                          |       |               |
| /s/ Michael N.  Cannizzaro |       | Chairman of the Board and     |       | September 22, 2005 |
| Michael N.  Cannizzaro     |       | Director                      |       |               |
|                       |       |                          |       |               |
|                       |       |                          |       |               |
| /s/ Kenneth M.  Doyle      |       | Director                      |       | September 22, 2005 |
| Kenneth M. Doyle           |       |                          |       |               |
|                       |       |                          |       |               |
|                       |       |                          |       |               |
| /s/ David W.  Dupree       |       | Director                      |       | September 22, 2005 |
| David W. Dupree            |       |                          |       |               |
|                       |       |                          |       |               |
|                       |       |                          |       |               |
| /s/ Steven G.  Segal       |       | Director                      |       | September 22, 2005 |
| Steven G. Segal            |       |                          |       |               |
|                       |       |                          |       |               |
|                       |       |                          |       |               |
| /s/ Mark J.  Tricolli      |       | Director                      |       | September 22, 2005 |
| Mark J. Tricolli           |       |                          |       |               |
|                       |       |                          |       |               |
|                       |       |                          |       |               |
| /s/ Edward D.  Yun         |       | Director                      |       | September 22, 2005 |
| Edward D. Yun              |       |                          |       |               |

 

85

----

 

**SCHEDULE II**

**INSIGHTHEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES**

**VALUATION AND QUALIFYING ACCOUNTS**

**FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003**

(amountsin thousands)

 
| ** **                             | ** ** | **Balance at**   | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** | **Balance at** | ** ** |
|----------------------------------------|------------|------------------|------------|----------------|------------|----------------|------------|------------|------------|----------------|------------|
| ** **                             | ** ** | **Beginning of** | ** ** | **Charges to** | ** ** | **Charges to** | ** ** | ** ** | ** ** | **End of**     | ** ** |
| ** **                             | ** ** | **Year**         | ** ** | **Expenses**   | ** ** | **Revenues**   | ** ** | **Other**  | ** ** | **Year**       | ** ** |
| June 30, 2003:                    |       |             |       |           |       |           |       |       |       |           |       |
| Allowance for  doubtful accounts       |       | $                | 7,980      |           | $          | 4,154          |       | $          | —     |           | $          | (4,230 | )(A) | $ | 7,904 |   |
| Allowance for  contractual adjustments |       | 18,510           |       | —         |       | 122,101        |       | (112,242   | )(B)       | 28,369         |       |
|                                   |       | $                | 26,490     |           | $          | 4,154          |       | $          | 122,101    |           | $          | (116,472 | ) | $ | 36,273 |   |
|                                   |       |             |       |           |       |           |       |       |       |           |       |
| June 30, 2004:                    |       |             |       |           |       |           |       |       |       |           |       |
| Allowance for  doubtful accounts       |       | $                | 7,904      |           | $          | 4,998          |       | $          | —     |           | $          | (4,805 | )(A) | $ | 8,097 |   |
| Allowance for  contractual adjustments |       | 28,369           |       | —         |       | 176,172        |       | (167,332   | )(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 |   |

 

----

(A) Write-offof uncollectible accounts.

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

 

86

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

 

87

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| *4.1   |   | Indenture with  respect to 9 7/8% Senior Subordinated Notes due 2011 with State Street Bank and  Trust Company, N.A., as Trustee, dated October 30, 2001, 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 the Company’s Annual Report on Form 10-K, filed  on September 26, 2003.                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *4.4   |   | Third  Supplemental Indenture, dated as of March 8, 2004, with respect to $25  million of 9 7/8% Senior Subordinated Notes due 2011, previously filed and  incorporated herein by reference from the Company’s Quarterly Report on  Form 10-Q, filed on May 13, 2004.                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *4.5   |   | Fourth Supplemental  Indenture, dated as of June 8, 2004, with respect to adding additional  Subsidiary Guarantors (named therein), previously filed and incorporated  herein by reference from the Company’s Annual Report on Form 10-K, filed  on September 24, 2004.                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.1  |   | Credit  Agreement, dated October 17, 2001, by and among InSight, the Company,  the Subsidiary Guarantors (named therein), Banc of America Securities LLC and  First Union Securities, LLC, previously filed and incorporated herein by  reference from InSight’s Registration Statement on Form S-4, filed on  December 27, 2001.                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.2  |   | First Amendment  to Credit Agreement, Waiver and Consent, dated as of January 24, 2003,  by and among InSight, the Company, the Subsidiary Guarantors (named therein),  the Lenders from time to time party thereto, Bank of America, N.A. as  Administrative Agent, Wachovia Bank, N.A. as Syndication Agent and The CIT  Group/Business Credit, Inc. as Documentation Agent, previously filed and  incorporated herein by reference from the Company’s Quarterly Report on  Form 10-Q, filed on May 15, 2003.  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.3  |   | Second Amendment  to Credit Agreement, Waiver and Consent, dated as of July 11, 2003, by  and among InSight, the Company, the Subsidiary Guarantors (named therein),  the Lenders from time to time party thereto, Bank of America, N.A. as  Administrative Agent, Wachovia Bank, N.A. as Syndication Agent and The CIT  Group/Business Credit, Inc. as Documentation Agent, previously filed and  incorporated herein by reference from the Company’s Annual Report on  Form 10-K, filed on September 26, 2003. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.4  |   | The Company’s 2001 Stock Option Plan, previously  filed and incorporated herein by reference from InSight’s Registration  Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.5  |   | The Company’s 2001 Stock Option Plan Stock Option  Agreement, dated June 29, 2001, by and between the Company and Steven T.  Plochocki, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *10.6  |   | The Company’s 2001 Stock Option Plan Stock Option  Agreement, dated June 29, 2001, by and between the Company and Michael  A. Boylan, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                                                                                     |

 

88

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| *10.7  |   | First Amendment to Executive Employment Agreement,  dated September 4, 2003, by and between InSight and Steven T. Plochocki,  previously filed and incorporated herein by reference from the Company’s  Registration Statement on Form S-1, filed on June 23, 2004.                                                                                                                                                                                                                                                    |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.8  |   | Executive Employment Agreement, dated June 29,  2001, among InSight, the Company and Steven T. Plochocki, previously filed  and incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.9  |   | Executive  Employment Agreement, dated July 1, 2005, among InSight, the Company and  Bret W. Jorgensen, previously filed and incorporated herein by reference from  the Company’s Current Report on Form 8-K, filed on July 8, 2005.                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.10 |   | Executive Employment Agreement, dated  October 22, 2004, among InSight, the Company and Patricia R. Blank,  previously filed and incorporated herein by reference from the Company’s  Current Report on Form 8-K, filed on January 26, 2005.                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.11 |   | Executive Employment Agreement, dated June 29,  2001, among InSight, the Company and Michael A. Boylan, previously filed and  incorporated herein by reference from InSight’s Registration Statement on  Form S-4, filed on December 27, 2001.                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.12 |   | Executive  Employment Agreement, dated January 10, 2005, among InSight, the Company  and Mitch C. Hill, previously filed and incorporated herein by reference from  the Company’s Current Report on Form 8-K, filed on January 14,  2005.                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.13 |   | Executive  Employment Agreement, dated August 10, 2005, among InSight, the Company  and Louis E. Hallman, previously filed and incorporated herein by reference  from the Company’s Current Report on Form 8-K, filed on August 15,  2005.                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.14 |   | Executive Employment Agreement, dated  December 27, 2001, among 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.                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.15 |   | Form of the Company Performance Based Option  Agreement, previously filed and incorporated herein by reference from  InSight’s Registration Statement on Form S-4, filed on December 27,  2001.                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.16 |   | Management  Agreement, dated as of October 17, 2001, by and among J.W. Childs  Advisors II, L.P., Halifax Genpar, L.P., the Company and InSight, previously  filed and incorporated herein by reference from InSight’s Registration  Statement on Form S-4, filed on December 27, 2001.                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.17 |   | Third Amendment  to Credit Agreement, Waiver and Consent, dated as of February 26, 2004,  by and among InSight, the Company, the Subsidiary Guarantors (named therein),  the Lenders party thereto, Bank of America, N.A., as Administrative Agent,  Wachovia Bank, National Association, as Syndication Agent, and The CIT  Group/Business Credit, Inc. as Documentation Agent, previously filed and  incorporated herein by reference from the Company’s Quarterly Report on  Form 10-Q, filed on May 13, 2004. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.18 |   | Resignation  Agreement, dated August 9, 2004, by and among InSight, the Company and  Steven T. Plochocki, previously filed and incorporated herein by reference  from the Company’s Registration Statement on Form S-4, filed on  November 3, 2004.                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.19 |   | Stock Option  Agreement, dated August 12, 2004, by and between the Company and Michael  N. Cannizzaro, previously filed and incorporated by reference from the  Company’s Quarterly Report on Form 10-Q, filed on November 10,  2004.                                                                                                                                                                                                                                                                                  |

 

89

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| *10.20 |   | Fourth Amendment to Credit Agreement, dated as of  February 22, 2005, by and among InSight, the Company, the Subsidiary  Guarantors (named therein), the Lenders party thereto, Bank of America, N.A.,  as Administrative Agent, Wachovia Bank, National Association, as Syndication  Agent, and The CIT Group/Business Credit, Inc., as Documentation Agent,  previously filed and incorporated by reference from the Company’s Quarterly  Report on Form 10-Q, filed on May 9, 2005. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| *10.21 |   | 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 the Company’s Current Report on Form 8-K, filed  on July 8, 2005.                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.22  |   | Stock Option  Agreement, dated April 8, 2005, by and between the Company and Michael  N. Cannizzaro, filed herewith.                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.23  |   | Form of  Amended and Restated Indemnification Agreement, filed herewith.                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 21.1   |   | Subsidiaries of the Company, filed herewith.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.1   |   | Certification of Bret W. Jorgensen, the Company’s  Chief Executive Officer, pursuant to Rule 15d-14 of the Securities  Exchange Act of 1934, filed herewith.                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2   |   | Certification of Mitch C. Hill, the Company’s Chief  Financial Officer, pursuant to Rule 15d-14 of the Securities Exchange  Act of 1934, filed herewith.                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.1   |   | Certification of Bret W. Jorgensen, the Company’s  Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed  herewith.                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.2   |   | Certification of Mitch C. Hill, the Company’s Chief  Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed  herewith.                                                                                                                                                                                                                                                                                              |

 

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*              Previouslyfiled.

 

90

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