INSIGHT HEALTH SERVICES HOLDINGS CORP - 10-Q Quarterly Report

Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(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 of incorporation or organization)	(I.R.S. Employer Identification No.)

26250 Enterprise Court, Suite 100, Lake Forest, CA 92630

(Address of principal executive offices) (Zip code)

(949) 282-6000

(Registrant’s telephone number including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes o No ý

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 5,468,814 shares of Common Stock as of May 2, 2005.

The number of pages in this Form 10-Q is 45.

INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2005 and June 30, 2004

	Unaudited Condensed Consolidated Statements of Operations for the nine months ended March 31, 2005 and 2004

	Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004

	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2005 and 2004

	Notes to Unaudited Condensed Consolidated Financial Statements

In accordance with SEC Rule 3-10 of Regulation S-X, the unaudited condensed consolidated financial statements of InSight Health Services Holdings Corp. (Company) are included herein and separate financial statements of InSight Health Services Corp. (InSight), the Company’s wholly owned subsidiary, and InSight’s subsidiary guarantors are not included. Condensed financial data for InSight and its subsidiary guarantors is included in Note 10 to the Unaudited Condensed Consolidated Financial Statements.

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4.	CONTROLS AND PROCEDURES

PART II. OTHER INFORMATION

ITEM 6.	EXHIBITS

SIGNATURES

ITEM 1. FINANCIAL STATEMENTS

INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

	March 31, 2005		June 30, 2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	36,437	$	30,412
Trade accounts receivables, net	46,860		55,010
Other current assets	10,355		6,207
Total current assets	93,652		91,629

PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $162,706 and $119,124, respectively	219,844		242,336

INVESTMENTS IN PARTNERSHIPS	3,881		2,901
OTHER ASSETS	17,138		19,302
OTHER INTANGIBLE ASSETS, net	37,422		38,518
GOODWILL	279,363		280,945
	$	651,300	$	675,631

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of notes payable	$	2,811	$	2,716
Current portion of capital lease obligations	4,863		5,060
Accounts payable and other accrued expenses	43,229		35,737
Total current liabilities	50,903		43,513

LONG-TERM LIABILITIES:
Notes payable, less current portion	496,227		518,245
Capital lease obligations, less current portion	9,560		13,802
Other long-term liabilities	3,600		5,130
Total long-term liabilities	509,387		537,177

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY:
Common stock, $.001 par value, 10,000,000 shares authorized, 5,468,814 shares issued and outstanding at March 31, 2005 and June 30, 2004	5		5
Additional paid-in capital	87,081		87,081
Retained earnings	3,924		7,855
Total stockholders’ equity	91,010		94,941
	$	651,300	$	675,631

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands)

	Nine Months Ended March 31,
	2005			2004

REVENUES:
Contract services	$	101,761		$	95,682
Patient services	135,420			113,772
Total revenues	237,181			209,454

COSTS OF OPERATIONS:
Costs of services	143,613			120,412
Provision for doubtful accounts	4,532			3,333
Equipment leases	1,633			624
Depreciation and amortization	49,133			42,801
Total costs of operations	198,911			167,170

Gross profit	38,270			42,284

CORPORATE OPERATING EXPENSES	(13,399		)	(10,550		)

GAIN ON SALES OF CENTERS	123			2,129

EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS	1,862			1,705

INTEREST EXPENSE, net	(33,409		)	(30,175		)

(Loss) income before income taxes	(6,553		)	5,393

(BENEFIT) PROVISION FOR INCOME TAXES	(2,622		)	2,158

Net (loss) income	$	(3,931	)	$	3,235

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands)

	Three Months Ended March 31,
	2005			2004
REVENUES:
Contract services	$	34,029		$	32,816
Patient services	44,183			37,920
Total revenues	78,212			70,736

COSTS OF OPERATIONS:
Costs of services	47,977			41,328
Provision for doubtful accounts	1,455			1,098
Equipment leases	905			198
Depreciation and amortization	16,373			14,556
Total costs of operations	66,710			57,180

Gross profit	11,502			13,556

CORPORATE OPERATING EXPENSES	(4,436		)	(3,555		)

GAIN ON SALE OF CENTER	123			—

EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS	658			453

INTEREST EXPENSE, net	(11,200		)	(9,985		)

(Loss) income before income taxes	(3,353		)	469

(BENEFIT) PROVISION FOR INCOME TAXES	(1,342		)	188

Net (loss) income	$	(2,011	)	$	281

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

	Nine Months Ended March 31,
	2005			2004
OPERATING ACTIVITIES:
Net (loss) income	$	(3,931	)	$	3,235
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Gain on sales of centers	(123		)	(2,129		)
Depreciation and amortization	49,133			42,801
Cash provided by (used in) changes in operating assets and liabilities:
Trade accounts receivables, net	7,829			(3,225		)
Other current assets	(4,121		)	2,660
Accounts payable and other accrued expenses	7,485			5,092
Net cash provided by operating activities	56,272			48,434

INVESTING ACTIVITIES:
Acquisition of fixed-site centers and mobile facilities	—			(52,834		)
Proceeds from sales of centers	1,360			5,413
Additions to property and equipment	(24,763		)	(28,307		)
Other	(940		)	(854		)
Net cash used in investing activities	(24,343		)	(76,582		)

FINANCING ACTIVITIES:
Principal payments of notes payable and capital lease obligations	(25,888		)	(6,174		)
Proceeds from issuance of notes payable	—			76,125
Other	(16		)	(248		)
Net cash provided by (used in) financing activities	(25,904		)	69,703

INCREASE IN CASH AND CASH EQUIVALENTS	6,025			41,555
Cash, beginning of period	30,412			19,554
Cash, end of period	$	36,437		$	61,109

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	25,644		$	22,680
Income taxes paid	206			145

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS

All references to “we,” “us,” “our,” “our company,” “the Company” or “InSight Holdings” in this quarterly report on Form 10-Q mean InSight Health Services Holdings Corp., a Delaware corporation and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to “InSight” in this quarterly report on Form 10-Q mean InSight Health Services Corp., a Delaware corporation and wholly owned subsidiary of InSight Health Services Holdings Corp. Through InSight and its subsidiaries, we provide diagnostic imaging, treatment and related management services in 35 states throughout the United States. Our operations are primarily concentrated in California, Arizona, New England, the Carolinas, Florida and the Mid-Atlantic states. We have two reportable segments: mobile operations and fixed operations. Our services are provided through a network of 84 mobile magnetic resonance imaging, or MRI, facilities, 16 mobile positron emission tomography, or PET, facilities, five mobile PET/CT facilities, four mobile lithotripsy facilities, three mobile computed tomography, or CT, facilities, one mobile catheterization lab (collectively, mobile facilities), 82 MRI fixed-site centers, 40 multi-modality fixed-site centers, two PET fixed-site centers, one Leksell Stereotactic Gamma Knife fixed-site treatment center and one radiation oncology fixed-site center (collectively, fixed-site centers).

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

2. INTERIM FINANCIAL STATEMENTS

The unaudited condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and do not include all of the information and disclosures required by accounting principles generally accepted in the United States for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included as part of our annual report on Form 10-K for the period ended June 30, 2004 filed with the Securities and Exchange Commission, or SEC, on September 24, 2004. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for fair statement of results for the period have been included. The results of operations for the nine months ended March 31, 2005 are not necessarily indicative of the results to be achieved for the full fiscal year.

3. INVESTMENTS IN AND TRANSACTIONS WITH PARTNERSHIPS

The unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly owned subsidiaries. Our investment interests in partnerships or limited liability companies, or Partnerships, are accounted for under the equity method of accounting when we own 50 percent or less. Our investment interests in Partnerships are consolidated when we own more than 50 percent.

4. ACQUISITIONS

In August 2003, we acquired 22 mobile facilities operating primarily in the Mid-Atlantic states. The acquisition consisted of certain tangible and intangible assets, including diagnostic imaging equipment, customer contracts and other agreements. The aggregate purchase price was approximately $49.9 million, which included approximately $28.1 million paid to the seller and approximately $21.8 million for the payment of debt and transaction costs. The excess purchase price paid by us over our estimate of the fair value of the tangible and other intangible assets as of the date of the acquisition was approximately $27.3 million and is reflected as goodwill in the accompanying unaudited condensed consolidated balance sheets as of March 31, 2005.

In April 2004, we acquired 21 fixed-site centers located in California, Arizona, Kansas, Texas, Pennsylvania and Virginia. The acquisition consisted of certain tangible and intangible assets, including diagnostic imaging equipment, real property, customer contracts and other agreements. The aggregate purchase price was approximately $49.0 million, which included approximately $35.9 million paid to the seller, approximately $10.6 million for the payment of debt and approximately $2.5 million of transaction costs. The excess purchase price paid

by us over our estimate of the fair value of the tangible and other intangible assets as of the date of the acquisition was approximately $30.6 million and is reflected as goodwill in the accompanying unaudited condensed consolidated balance sheets as of March 31, 2005.

Our unaudited pro-forma combined results of operations for the nine and three months ended March 31, 2004, assuming our two acquisitions had occurred as of July 1, 2003, are presented below along with our unaudited results of operations for the nine and three months ended March 31, 2005. The pro-forma combined results of operations for the nine and three months ended March 31, 2004, include adjustments to interest expense (approximately $1.8 million and $0.5 million, respectively) and amortization of identified intangible assets (less than $0.1 million). These combined results have been prepared for comparison purposes only and 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):

	Nine Months Ended March 31,						Three Months Ended March 31,
	2005			2004			2005			2004
	(unaudited)						(unaudited)

Revenues	$	237,181		$	252,434		$	78,212		$	83,511
Costs of operations	198,911			191,414			66,710			63,433
Gross profit	38,270			61,020			11,502			20,078
Corporate operating expenses	(13,399		)	(26,770		)	(4,436		)	(9,684		)
Gain on sales of centers	123			2,129			123			—
Equity in earnings of unconsolidated partnerships	1,862			1,705			658			453
Impairment and restructuring charges	—			(1,142		)	—			8
Interest expense, net	(33,409		)	(32,921		)	(11,200		)	(10,711		)
(Loss) income before income taxes	(6,553		)	4,021			(3,353		)	144
(Benefit) provision for income taxes	(2,622		)	1,608			(1,342		)	56
Net (loss) income	$	(3,931	)	$	2,413		$	(2,011	)	$	88

5. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess purchase price we paid over the fair value of the tangible and intangible assets and liabilities acquired in acquisitions. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, the goodwill and indefinite-lived intangible asset balances are not being amortized, but instead are subject to an annual assessment of impairment by applying a fair-value based test. Net other intangible assets are amortized on a straight-line basis over the estimated lives of the assets ranging from five to thirty years.

A reconciliation of goodwill for the nine months ended March 31, 2005 is as follows (in thousands):

	Mobile				Fixed-Site		Consolidated
	(unaudited)

Goodwill, June 30, 2004	$		106,064		$	174,881	$	280,945
Adjustments to goodwill	(1,792			)	210		(1,582		)
Goodwill, March 31, 2005	$	104,272			$	175,091	$	279,363

We evaluate the carrying value of goodwill and identified intangibles not subject to amortization in the second quarter of each fiscal year. As part of the evaluation, we compare the carrying value of each intangible asset with its fair value to determine whether there has been impairment. We assess the ongoing recoverability of our intangible assets subject to amortization by determining whether the intangible asset balance can be recovered over the remaining amortization period through projected undiscounted future cash flows. If projected future cash flows indicate that the unamortized intangible asset balances will not be recovered, an adjustment is made to reduce the net intangible asset to an amount consistent with projected future cash flows discounted at our incremental borrowing rate. Cash flow projections, although subject to a degree of uncertainty, are based on trends of historical performance and management’s estimate of future performance, giving consideration to existing and anticipated

competitive and economic conditions. Adjustments to goodwill result from the allocation of amounts to other intangible assets and were based on completed valuations of our August 2003 and April 2004 acquisitions. As of March 31, 2005, we do not believe any impairment of goodwill or other intangible assets has occurred.

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

	March 31, 2005				June 30, 2004
	Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
	(unaudited)
Amortized intangible assets:
Managed care contracts	$	24,495	$	2,490	$	24,410	$	1,798
Wholesale contracts	15,380		8,643		13,580		6,354
	39,875		11,133		37,990		8,152

Unamortized intangible assets:
Trademark	8,680		—		8,680		—
Other intangible assets	$	48,555	$	11,133	$	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		5-7 years

Amortization of intangible assets was approximately $2.9 million and $2.6 million for the nine months ended March 31, 2005 and 2004, respectively.

6. NOTES PAYABLE

Through InSight, we have a credit facility, or Credit Facility, with Bank of America, N.A. and a syndicate of other lenders consisting of (1) a term loan with a principal balance of approximately $218.3 million, (2) an additional term loan with a principal balance of approximately $29.9 million, and (3) a $50.0 million revolving credit facility. As of March 31, 2005, there were no borrowings under the revolving credit facility. Borrowings under the Credit Facility bear interest at LIBOR plus 3.75% to 4.0%. We are required to pay an unused facility fee of up to 0.625% per annum, payable quarterly, on unborrowed amounts on the revolving credit facility. We may use the revolving credit facility to fund our future working capital needs.

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

The credit agreement related to the Credit Facility and the indenture related to the Notes contain limitations on additional borrowings, capital expenditures, dividend payments and certain financial covenants. As of March 31, 2005, we were in compliance with these covenants.

7. CAPITAL STOCK

As permitted under SFAS No. 123, “Accounting for Stock Based Compensation”, we account for the options issued to employees in accordance with APB Opinion No. 25. SFAS 123 requires that we present pro-forma disclosures of net (loss) income as if we had recognized compensation expense equal to the fair value of options granted, as determined at the date of grant. Our net (loss) income would have reflected the following pro-forma amounts (amounts in thousands):

		Nine Months Ended March 31,						Three Months Ended March 31,
		2005			2004			2005			2004
		(unaudited)						(unaudited)

Net (loss) income:	As reported	$	(3,931	)	$	3,235		$	(2,011	)	$	281
	Expense	(239		)	(300		)	(105		)	(100		)
	Pro-forma	$	(4,170	)	$	2,935		$	(2,116	)	$	181

Options for 111,500 shares were granted during the nine months ended March 31, 2005. The pro-forma amounts were estimated using the Black-Scholes options-pricing model under the minimum-value method with the following assumptions:

Expected term (years)	10
Volatility	0.00		%
Annual dividend per share	$	0.00
Risk-free interest rate	4.29		%
Weighted-average fair value of options granted	$	6.82

8. SEGMENT INFORMATION

We have two reportable segments: mobile operations and fixed operations, which are business units defined primarily by the type of service provided. Mobile operations consist primarily of mobile facilities while fixed operations consist primarily of fixed-site centers, although both operations generate both contract services and patient services revenues. We do not allocate corporate and billing related costs, depreciation related to our billing system, amortization related to other intangible assets and income taxes to the two segments. We manage cash flows on a consolidated basis, and not by segment.

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

Nine months ended March 31, 2005:

	Mobile			Fixed			Other			Consolidated
Contract services revenues	$	88,487		$	13,274		$	—		$	101,761
Patient services revenues	1,096			134,324			—			135,420
Total revenues	89,583			147,598			—			237,181
Depreciation and amortization	23,337			19,017			6,779			49,133
Total costs of operations	72,398			111,525			14,988			198,911
Corporate operating expenses	—			—			(13,399		)	(13,399		)
Gain on sale of center	—			123			—			123
Equity in earnings of unconsolidated partnerships	—			1,862			—			1,862
Interest expense, net	(6,670		)	(5,417		)	(21,322		)	(33,409		)
(Loss) income before income taxes	10,515			32,641			(49,709		)	(6,553		)

Additions to property and equipment	11,545			11,141			2,077			24,763

Nine months ended March 31, 2004:
	Mobile			Fixed			Other			Consolidated
Contract services revenues	$	82,983		$	12,699		$	—		$	95,682
Patient services revenues	1,454			112,318			—			113,772
Total revenues	84,437			125,017			—			209,454
Depreciation and amortization	21,836			14,955			6,010			42,801
Total costs of operations	63,713			90,879			12,578			167,170
Corporate operating expenses	—			—			(10,550		)	(10,550		)
Gain on sale of center	—			2,129			—			2,129
Equity in earnings of unconsolidated partnerships	—			1,705			—			1,705
Interest expense, net	(8,795		)	(5,183		)	(16,197		)	(30,175		)
(Loss) income before income taxes	11,929			32,789			(39,325		)	5,393

Additions to property and equipment	15,949			9,350			3,008			28,307

Three months ended March 31, 2005:
	Mobile			Fixed			Other			Consolidated
Contract services revenues	$	29,430		$	4,599		$	—		$	34,029
Patient services revenues	422			43,761			—			44,183
Total revenues	29,852			48,360			—			78,212
Depreciation and amortization	7,832			6,318			2,223			16,373
Total costs of operations	24,670			37,143			4,897			66,710
Corporate operating expenses	—			—			(4,436		)	(4,436		)
Gain on sale of center	—			123			—			123
Equity in earnings of unconsolidated partnerships	—			658			—			658
Interest expense, net	(2,082		)	(1,767		)	(7,351		)	(11,200		)
(Loss) income before income taxes	3,100			10,230			(16,683		)	(3,353		)

Additions to property and equipment	5,592			1,738			1,255			8,585

Three months ended March 31, 2004:
	Mobile			Fixed			Other			Consolidated
Contract services revenues	$	28,513		$	4,303		$	—		$	32,816
Patient services revenues	514			37,406			—			37,920
Total revenues	29,027			41,709			—			70,736
Depreciation and amortization	7,710			4,885			1,961			14,556
Total costs of operations	22,618			30,098			4,464			57,180
Corporate operating expenses	—			—			(3,555		)	(3,555		)
Equity in earnings of unconsolidated partnerships	—			453			—			453
Interest expense, net	(2,881		)	(1,587		)	(5,517		)	(9,985		)
(Loss) income before income taxes	3,528			10,477			(13,536		)	469

Additions to property and equipment	2,923			2,659			1,149			6,731

9. NEW PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS 123R, “Share-Based Payment”. SFAS 123R requires expensing of stock options and other share-based payments and supersedes FASB’s earlier rule (SFAS 123) that had allowed companies to choose between expensing stock options or showing pro-forma disclosure only. We will be required to implement SFAS 123R beginning in the fiscal year ending June 30, 2007. We do not believe that the impact of adopting SFAS 123R would be materially different than the pro-forma disclosures under SFAS 123 (Note 7).

10. SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING FINANCIAL INFORMATION

We and all of InSight’s wholly owned subsidiaries, or guarantor subsidiaries, guarantee InSight’s payment obligations under the Notes (Note 6). These guarantees are full, unconditional and joint and several. The following unaudited condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 “Financial statements of guarantors and affiliates whose securities collateralize an issue registered or being registered.” We account for our investment in InSight and its subsidiaries under the equity method of accounting. Dividends from InSight to us are restricted under the Credit Facility. This information is not intended to present the financial position, results of operations and cash flows of the individual companies or groups of companies in accordance with accounting principles generally accepted in the United States.

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET

MARCH 31, 2005

(Amounts in thousands)

	PARENT COMPANY ONLY		INSIGHT		GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES		ELIMINATIONS			CONSOLIDATED
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	—	$	33,339		$	3,098	$	—		$	36,437
Trade accounts receivables, net	—		—		40,654			6,206		—			46,860
Other current assets	—		—		10,100			255		—			10,355
Intercompany accounts receivable	87,086		498,476		17,983			—		(603,545		)	—
Total current assets	87,086		498,476		102,076			9,559		(603,545		)	93,652
Property and equipment, net	—		—		200,681			19,163		—			219,844
Investments in partnerships	—		—		3,881			—		—			3,881
Investments in consolidated subsidiaries	3,924		3,924		8,301			—		(16,149		)	—
Other assets	—		—		17,101			37		—			17,138
Goodwill and other intangible assets, net	—		—		312,282			4,503		—			316,785
	$	91,010	$	502,400	$	644,322		$	33,262	$	(619,694	)	$	651,300

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of notes payable and capital lease obligations	$	—	$	2,565	$	4,649		$	460	$	—		$	7,674
Accounts payable and other accrued expenses	—		—		41,636			1,593		—			43,229
Intercompany accounts payable	—		—		585,563			17,982		(603,545		)	—
Total current liabilities	—		2,565		631,848			20,035		(603,545		)	50,903
Notes payable and capital lease obligations, less current portion	—		495,684		8,692			1,411		—			505,787
Other long-term liabilities	—		227		(142		)	3,515		—			3,600
Stockholders’ equity	91,010		3,924		3,924			8,301		(16,149		)	91,010
	$	91,010	$	502,400	$	644,322		$	33,262	$	(619,694	)	$	651,300

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET

JUNE 30, 2004

(Amounts in thousands)

	PARENT COMPANY ONLY		INSIGHT		GUARANTOR SUBSIDIARIES			NON-GUARANTOR 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

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED MARCH 31, 2005

(Amounts in thousands)

	PARENT COMPANY ONLY			INSIGHT			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATION		CONSOLIDATED

Revenues	$	—		$	—		$	205,716		$	31,465		$	—	$	237,181
Costs of operations	—			—			170,891			28,020			—		198,911
Gross profit	—			—			34,825			3,445			—		38,270

Corporate operating expenses	—			—			(13,399		)	—			—		(13,399		)

Gain on sale of center	—			—			123			—			—		123

Equity in earnings of unconsolidated partnerships	—			—			1,862			—			—		1,862

Interest expense, net	—			—			(32,459		)	(950		)	—		(33,409		)
(Loss) income before income taxes	—			—			(9,048		)	2,495			—		(6,553		)

Benefit for income taxes	—			—			(2,622		)	—			—		(2,622		)

(Loss) Income before equity in (loss) income of consolidated subsidiaries	—			—			(6,426		)	2,495			—		(3,931		)

Equity in (loss) income of consolidated subsidiaries	(3,931		)	(3,931		)	2,495			—			5,367		—
Net (loss) income	$	(3,931	)	$	(3,931	)	$	(3,931	)	$	2,495		$	5,367	$	(3,931	)

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF INCOME

FOR THE NINE MONTHS ENDED MARCH 31, 2004

(Amounts in thousands)

	PARENT COMPANY ONLY		INSIGHT		GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATION			CONSOLIDATED

Revenues	$	—	$	—	$	173,214		$	36,240		$	—		$	209,454
Costs of operations	—		—		135,600			31,570			—			167,170
Gross profit	—		—		37,614			4,670			—			42,284

Corporate operating expenses	—		—		(10,550		)	—			—			(10,550		)

Gain on sale of center	—		—		2,129			—			—			2,129

Equity in earnings of unconsolidated partnerships	—		—		1,705			—			—			1,705

Interest expense, net	—		—		(28,993		)	(1,182		)	—			(30,175		)
Income before income taxes	—		—		1,905			3,488			—			5,393

Provision for income taxes	—		—		2,158			—			—			2,158
Income (loss) before equity in income of consolidated subsidiaries	—		—		(253		)	3,488			—			3,235
Equity in income of consolidated subsidiaries	3,235		3,235		3,488			—			(9,958		)	—
Net income	$	3,235	$	3,235	$	3,235		$	3,488		$	(9,958	)	$	3,235

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2005

(Amounts in thousands)

	PARENT COMPANY ONLY			INSIGHT			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATION		CONSOLIDATED

Revenues	$	—		$	—		$	68,496		$	9,716		$	—	$	78,212
Costs of operations	—			—			57,781			8,929			—		66,710
Gross profit	—			—			10,715			787			—		11,502

Corporate operating expenses	—			—			(4,436		)	—			—		(4,436		)

Gain on sale of center	—			—			123			—			—		123

Equity in earnings of unconsolidated partnerships	—			—			658			—			—		658

Interest expense, net	—			—			(10,946		)	(254		)	—		(11,200		)
(Loss) income before income taxes	—			—			(3,886		)	533			—		(3,353		)

Benefit for income taxes	—			—			(1,342		)	—			—		(1,342		)
(Loss) income before equity in (loss) income of consolidated subsidiaries	—			—			(2,544		)	533			—		(2,011		)

Equity in (loss) income of consolidated subsidiaries	(2,011		)	(2,011		)	533			—			3,489		—
Net (loss) income	$	(2,011	)	$	(2,011	)	$	(2,011	)	$	533		$	3,489	$	(2,011	)

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2004

(Amounts in thousands)

	PARENT COMPANY ONLY		INSIGHT		GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATION			CONSOLIDATED

Revenues	$	—	$	—	$	58,394		$	12,342		$	—		$	70,736
Costs of operations	—		—		46,547			10,633			—			57,180
Gross profit	—		—		11,847			1,709			—			13,556

Corporate operating expenses	—		—		(3,555		)	—			—			(3,555		)

Equity in earnings of unconsolidated partnerships	—		—		453			—			—			453

Interest expense, net	—		—		(9,619		)	(366		)	—			(9,985		)
Income (loss) before income taxes	—		—		(874		)	1,343			—			469

Provision for income taxes	—		—		188			—			—			188
Income (loss) before equity in income of consolidated subsidiaries	—		—		(1,062		)	1,343			—			281

Equity in income of consolidated subsidiaries	281		281		1,343			—			(1,905		)	—
Net income	$	281	$	281	$	281		$	1,343		$	(1,905	)	$	281

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED MARCH 31, 2005

(Amounts in thousands)

	PARENT COMPANY ONLY			INSIGHT			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

OPERATING ACTIVITIES:
Net (loss) income	$	(3,931	)	$	(3,931	)	$	(3,931	)	$	2,495		$	5,367		$	(3,931	)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Gain on sale of center							(123		)							(123		)
Depreciation and amortization	—			—			45,062			4,071			—			49,133
Equity in (loss) income of consolidated subsidiaries	3,931			3,931			(2,495		)	—			(5,367		)	—
Cash provided by (used in) changes in operating assets and liabilities:
Trade accounts receivables , net	—			—			6,394			1,435			—			7,829
Intercompany receivables, net	—			21,814			(18,853		)	(2,961		)	—			—
Other current assets	—			—			(4,010		)	(111		)	—			(4,121		)
Accounts payable and other accrued expenses	—			—			7,259			226			—			7,485
Net cash provided by operating activities	—			21,814			29,303			5,155			—			56,272

INVESTING ACTIVITIES:
Proceeds from sale of center							1,360									1,360
Additions to property and equipment	—			—			(23,267		)	(1,496		)	—			(24,763		)
Other	—			—			3,420			(4,360		)	—			(940		)
Net cash used in investing activities	—			—			(18,487		)	(5,856		)	—			(24,343		)

FINANCING ACTIVITIES:
Principal payments of notes payable and capital lease obligations	—			(21,798		)	(3,297		)	(793		)	—			(25,888		)
Other	—			(16		)	—			—			—			(16		)
Net cash used in financing activities	—			(21,814		)	(3,297		)	(793		)	—			(25,904		)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	—			—			7,519			(1,494		)	—			6,025
Cash, beginning of period	—			—			25,820			4,592			—			30,412
Cash, end of period	$	—		$	—		$	33,339		$	3,098		$	—		$	36,437

SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED MARCH 31, 2004

(Amounts in thousands)

	PARENT COMPANY ONLY			INSIGHT			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

OPERATING ACTIVITIES:
Net income	$	3,235		$	3,235		$	3,235		$	3,488		$	(9,958	)	$	3,235
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	—			—			38,680			4,121			—			42,801
Equity in income of consolidated subsidiaries	(3,235		)	(3,235		)	(3,488		)	—			9,958			—
Cash provided by (used in) changes in operating assets and liabilities:
Trade accounts receivables, net	—			—			(3,002		)	(223		)	—			(3,225		)
Intercompany receivables, net	—			(72,627		)	80,725			(8,098		)	—			—
Other current assets	—			—			2,443			217			—			2,660
Accounts payable and other accrued expenses	—			—			4,795			297			—			5,092
Net cash provided by (used in) operating activities	—			(72,627		)	121,259			(198		)	—			48,434

INVESTING ACTIVITIES:
Acquisitions of Fixed Facilities and Mobile Facilities	—			—			(52,834		)	—			—			(52,834		)
Proceeds from sale of center	—			—			5,413			—			—			5,413
Additions to property and equipment	—			—			(27,553		)	(754		)	—			(28,307		)
Other	—			—			(854		)	—			—			(854		)
Net cash used in investing activities	—			—			(75,828		)	(754		)	—			(76,582		)

FINANCING ACTIVITIES:
Principal payments of notes payable and capital lease obligations	—			(1,635		)	(4,028		)	(511		)	—			(6,174		)
Proceeds from issuance of notes payable	—			75,000			—			1,125			—			76,125
Other	—			(738		)	(73		)	563			—			(248		)
Net cash provided by (used in) financing activities	—			72,627			(4,101		)	1,177			—			69,703

INCREASE IN CASH AND CASH EQUIVALENTS	—			—			41,330			225			—			41,555
Cash, beginning of period	—			—			15,965			3,589			—			19,554
Cash, end of period	$	—		$	—		$	57,295		$	3,814		$	—		$	61,109

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report on Form 10-Q includes “forward-looking statements.” Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, competitive strengths and weaknesses, business strategy and the trends that we anticipate in the industry and economies in which we operate and other information that is not historical information. When used in this report the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable 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 our actual results to differ materially from the forward-looking statements contained in this report. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this report are set forth in this report, including the factors described in the section entitled “Risk Factors,” and the following:

• limitations and delays in reimbursement by third-party payors;

• contract renewals and financial stability of customers;

• conditions within the healthcare environment;

• adverse utilization trends for certain diagnostic imaging procedures;

• our ability to successfully integrate acquisitions;

• market competition;

• the potential for rapid and significant changes in technology and their effect on our operations;

• operating, legal, governmental and regulatory risks; and

• economic, political and competitive forces affecting our business.

If any of these risks or uncertainties materializes, or if any of our underlying assumptions is incorrect, our actual results may differ significantly from the results that we express in or imply by any of our forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances.

OVERVIEW

All references to “we,” “us,” “our,” “our company,” “the Company” or “InSight Holdings” in this report mean InSight Health Services Holdings Corp., a Delaware corporation, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to “InSight” in this report mean InSight Health Services Corp., a Delaware corporation and wholly owned subsidiary of InSight Health Services Holdings Corp.

We are a provider of diagnostic imaging services. We provide our services through an integrated network of fixed-site centers and mobile facilities focused in targeted regions throughout the United States. Our services include magnetic resonance imaging, or MRI, positron emission tomography, or PET, computed tomography, or CT, and other technologies. These services are noninvasive techniques that generate representations of internal anatomy on film or digital media which are used by physicians for the diagnosis and assessment of diseases and disorders.

We serve a diverse portfolio of customers, including healthcare providers, such as hospitals and physicians, and payors, such as managed care organizations, Medicare, Medicaid and insurance companies. We operate in 35 states and are primarily concentrated in California, Arizona, New England, the Carolinas, Florida and the Mid-Atlantic states. While we generated approximately 72% of our total revenues from MRI services during the nine months ended March 31, 2005, we provide a comprehensive offering of diagnostic imaging and treatment services, including PET, PET/CT, CT, mammography, bone densitometry, diagnostic ultrasound, lithotripsy and x-ray. We have developed and continue to develop strong regional networks of diagnostic imaging centers and facilities, enabling us to effectively serve our customers and maximize utilization of our imaging equipment.

As of March 31, 2005, our network consists of 126 fixed-site centers and 113 mobile facilities. This combination allows us to provide a full continuum of imaging services to better meet the needs of our customers, including healthcare providers, such as hospitals and physicians, and payors such as managed care organizations, Medicare, Medicaid and insurance companies. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. Physicians refer patients to our fixed-site centers based on our service reputation, equipment, breadth of managed care contracts and convenient locations. Our mobile facilities provide hospitals and physician groups access to imaging technologies when they lack either the resources or patient volume to provide their own imaging services or require incremental capacity. We enter into agreements with radiologists to provide professional services, which include supervision and interpretation of radiological procedures and quality assurance. We do not engage in the practice of medicine. Our operations consist of two reportable segments, mobile operations and fixed operations. Our mobile operations include 31 parked mobile facilities, each of which serves a single customer. Our fixed operations include four mobile facilities as part of our fixed operations in Maine. Certain financial information regarding our reportable segments is included in Note 8 to our unaudited condensed consolidated financial statements, which are a part of this report.

Given our size and expertise, we believe we are well positioned to capitalize on the ongoing growth in the diagnostic imaging industry. Growth in the diagnostic imaging industry has been and will continue to be driven by (1) an aging population, (2) the increasing acceptance of diagnostic imaging, particularly PET and PET/CT, and the expansion of reimbursement coverage for PET and PET/CT from Medicare and other third-party payors, (3) expanding applications of CT, MRI and PET technologies and (4) a currently stable reimbursement environment.

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 is www.insighthealth.com. www.insighthealth.com is a textual reference only, meaning that the information contained on the website is not part of this report and is not incorporated by reference in this report or in any other filings we make with the Securities and Exchange Commission, or SEC.

Recent Developments

On March 31, 2005, we sold our joint venture interest in a fixed-site center in Marina Del Rey, California. The sale resulted in a one-time gain on sale of approximately $0.1 million. In April 2004, we opened a fixed-site center in Simi Valley, California. In February 2004, we acquired the remaining joint venture interest in a fixed-site center in Henderson, Nevada. In February 2004, through a joint venture we opened a fixed-site center in Columbus, Ohio. In August 2003, we acquired a joint venture interest in a fixed-site center located in Hammonton, New Jersey. All of these acquisitions and new centers were financed with internally generated funds. In December 2003, we sold a fixed-site center located in Hobart, Indiana, which resulted in a one-time gain on sale of approximately $2.1 million.

On April 1, 2004, we acquired the stock of Comprehensive Medical Imaging, Inc., or CMI, a subsidiary of Cardinal Health, Inc., from Cardinal Health, Inc., which owned and operated 21 fixed-site centers located in California, Arizona, Texas, Kansas, Pennsylvania and Virginia. The aggregate purchase price for these centers was approximately $49.0 million. We refer to this acquisition as the CMI acquisition.

On August 1, 2003, we acquired 22 mobile facilities primarily operating in the Mid-Atlantic states from CDL Medical Technologies, Inc. The aggregate purchase price for these facilities was approximately $49.9 million. We refer to this acquisition as the CDL acquisition.

RESULTS OF OPERATIONS

Segments

We have two reportable segments, fixed operations and mobile operations:

Fixed Operations: Generally, our fixed operations consist of freestanding imaging centers which we refer to as fixed-site centers. However, our fixed operations also include four mobile facilities as part of our fixed operations in Maine. Revenues at our fixed-site centers are primarily generated from services billed, on a fee-for-service basis, directly to patients or third-party payors such as managed care organizations, Medicare, Medicaid, commercial insurance carriers and workers’ compensation funds, which we generally refer to as our patient services revenues and management fees. Revenues from our fixed operations are dependent on our ability to:

• attract patient referrals from physician groups and hospitals;

• increase procedure volume to maximize equipment utilization;

• maintain our existing contracts and enter into new ones with managed care organizations and commercial insurance carriers; and

• develop new fixed-site centers.

Revenues from our fixed operations have been and will continue to be driven by the growth in the diagnostic imaging industry discussed above. These positive trends have been and will continue to be adversely affected by:

• attractive financing arrangements by original equipment manufacturers have increased competition in our targeted regions, including physician owned imaging facilities;

• industry-wide increases in salaries and benefits for technologists;

• increases in deductibles and co-payment charges to patients;

• increases in the preauthorization requirements applicable to diagnostic imaging services by certain managed care organizations and state Medicaid programs; and

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

Mobile Operations: Our mobile operations consist of mobile facilities, which provide services to hospitals, physician groups and other healthcare providers. Our mobile operations include 31 parked mobile facilities, each of which serves a single customer. Revenues from our mobile operations are primarily generated from fee-for-service arrangements and fixed fee contracts billed directly to our hospital, physician group and other healthcare provider customers, which we generally refer to as contract services revenues. Our mobile operations revenues are dependent on our ability to:

• establish new mobile customers within our targeted regions;

• structure efficient mobile routes that maximize equipment utilization; and

• renew existing mobile contracts with our hospital, physician group and other healthcare provider customers.

Revenues from our mobile operations have been and will continue to be driven by the growth in the diagnostic imaging industry as discussed above. These positive trends have been and will continue to be adversely affected by:

• increases in competition in our targeted regions from other mobile service providers;

• industry-wide increases in salaries and benefits for technologists;

• attractive financing arrangements by original equipment manufacturers which cause some of our customers to invest in their own diagnostic imaging equipment; and

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

Revenues from both our fixed and mobile operations could also be affected by the timing of holidays, patient and referring physician vacation schedules and inclement weather.

Reimbursement

Medicare: The Medicare program provides reimbursement for hospitalization, physician, diagnostic and certain other services to eligible persons 65 years of age and over and certain others. Providers are paid by the federal government in accordance with regulations promulgated by the Department of Health and Human Services and generally accept the payment with nominal deductible and co-insurance amounts required to be paid by the service recipient, as payment in full. Since 1983, hospital inpatient services have been reimbursed under a prospective payment system. Hospitals receive a specific prospective payment for inpatient treatment services based upon the diagnosis of the patient.

In 2000, the Centers for Medicare and Medicaid Services (CMS) initiated a prospective payment system for hospital outpatient services (OPPS). Under OPPS, Medicare reimburses hospitals for outpatient services on a rate per service basis that varies according to the ambulatory payment classification (APC) group the service is assigned rather than on a hospital’s costs. Due to OPPS’ anticipated adverse economic effect on hospitals, Congress provided for outlier payments for especially costly cases, as well as transitional payments for new technologies and innovative medical devices, drugs and biologics. While most of the transitional payments expired in 2003, CMS continues to make payments for new technology until sufficient data is collected to assign the new technology to an APC. Each year CMS publishes new APC rates that are determined in accordance with the promulgated methodology. The overall effect of OPPS has been to decrease reimbursement rates from those paid under the prior cost-based system. Multi-modality and certain fixed-site centers which are freestanding are not directly affected by OPPS, which applies only to hospital-based facilities.

In November 2004, CMS announced a 21% reduction in hospital reimbursement rates for PET, effective January 1, 2005. Although the effect of this rate reduction is unclear, this could have a significant negative impact on our PET and PET/CT revenues. Because unfavorable reimbursement policies may constrict the profit margins of the mobile customers we bill directly, we have and may continue to lower our fees to retain existing PET and PET/CT clients and attract new ones; however, CMS recently announced that it will reimburse for additional PET procedures, including Alzheimer’s disease and cervical cancer.

Services provided in non-hospital freestanding facilities are paid under the Part B fee schedule. CMS has indicated that it will continue to evaluate diagnostic imaging technical component reimbursement. Accordingly, Medicare payment for diagnostic imaging services under the Part B fee schedule may be reduced in the future, which would have a material adverse effect on our financial condition and results of operations.

All of the congressional and regulatory actions described above reflect industry-wide cost-containment pressures that we believe will continue to affect healthcare providers for the foreseeable future.

Medicaid: The Medicaid program is a jointly-funded federal and state program providing coverage for low-income persons. In addition to federally-mandated basic services, the services offered and reimbursement methods vary from state to state. In many states, Medicaid reimbursement is patterned after the Medicare program; however, an increasing number of states have established or are establishing payment methodologies intended to provide healthcare services to Medicaid patients through managed care arrangements.

Managed Care: Health Maintenance Organizations, or HMOs, Preferred Provider Organizations, or PPOs, and other managed care organizations attempt to control the cost of healthcare services by a variety of measures, including, imposing lower payment rates, preauthorization requirements, limiting services or mandating less costly treatment alternatives. Managed care contracting has become very competitive and reimbursement schedules are at or below Medicare reimbursement levels. The development and expansion of HMOs, PPOs and other managed care organizations within our targeted regional networks could have a negative impact on utilization of our services in

certain markets and/or affect the revenues per procedure which we can collect, since such organizations will exert greater control over patients’ access to diagnostic imaging services, the selection of the provider of such services and the reimbursement thereof.

Some states have adopted or expanded laws or regulations restricting the assumption of financial risk by healthcare providers which contract with health plans. While we are not currently subject to such regulation, we or our customers may in the future be restricted in our ability to assume financial risk, or may be subjected to reporting requirements if we do so. Any such restrictions or reporting requirements could negatively affect our contracting relationships with health plans.

Private Insurance: Private health insurance programs generally have authorized payment for our services on satisfactory terms. However, if Medicare reimbursement is reduced, we believe that private health insurance programs will also reduce reimbursement in response to reductions in government reimbursement, which could have an adverse impact on our business, financial condition and results of operations.

Revenues

We receive revenues by providing services to patients, hospitals and other healthcare providers. Our patient services revenues are billed, on a fee-for-service basis, directly to patients or third-party payors such as managed care organizations, Medicare, Medicaid, commercial insurance carriers and worker’s compensation funds (collectively, “payors”). Patient services revenues also includes balances due from patients, which are primarily collected at the time the procedure is performed. Our charge for a procedure is comprised of charges for both the technical and professional components of the service. Patient services revenues are presented net of (1) related contractual adjustments, which represent the difference between our charge for a procedure and what we will ultimately receive from the payors and (2) payments due to radiologists for interpreting the results of the diagnostic imaging procedures. Our billing system does not generate contractual adjustments. Contractual adjustments are manual estimates based upon an analysis of (1) historical experience of contractual payments from payors and (2) the outstanding accounts receivables from payors. Contractual adjustments are written off against their corresponding asset account at the time payment is received from a payor, with a reduction to the allowance for contractual adjustments to the extent such an allowance was previously recorded. We report payments to radiologists on a net basis because (1) InSight is not the primary obligor for the provision of professional services, (2) the radiologists receive contractually agreed upon amounts from collections and (3) the radiologists bear the risk of non-collection. Our collection policy is to obtain 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 require preauthorization before an MRI or PET procedure is performed on a patient.

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

The provision for doubtful accounts related to revenues is reflected as an operating expense rather than a reduction of revenues and represents our estimate of amounts that will be uncollectible from patients, payors, hospitals and other healthcare providers. The provision for doubtful accounts includes amounts to be written off with respect to (1) specific accounts involving customers which are financially unstable or materially fail to comply with the payment terms of their contract and (2) other accounts based on our historical collection experience, including payor mix and the aging of patient accounts receivables balances. Estimates of uncollectible amounts are revised each period, and changes are recorded in the period they become known. Receivables deemed to be uncollectible, either through a customer default on payment terms or after reasonable collection efforts have been exhausted, are fully written off against their corresponding asset account, with a reduction to the allowance for doubtful accounts to the extent such an allowance was previously recorded. Our historical write-offs for uncollectible accounts are not concentrated in a specific payor class.

The following illustrates our payor mix based on revenues for the nine months ended March 31, 2005 (unaudited):

Payor	Percent of Total Revenues

Hospitals, physician groups, and other healthcare providers (1)	44	%
Managed care and insurance	37	%
Medicare/Medicaid	14	%
Workers’ compensation	4	%
Other, including self-pay patients	1	%

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

As of March 31, 2005, our days sales outstanding for trade accounts receivables, net was 57 days. We calculate days sales outstanding by dividing accounts receivable, net of allowances, by the three-month average revenue per day.

The aging of our gross trade accounts receivables as of March 31, 2005 is as follows (amounts in thousands):

	Current		30 days		60 days		90 days		120 days and older		Total
	(unaudited)
Hospitals, physicians groups and other healthcare providers	$	11,897	$	5,386	$	1,081	$	378	$	1,006	$	19,748
Managed care and insurance	22,592		9,894		4,861		2,756		10,720		50,823
Medicare/Medicaid	8,280		2,366		1,406		1,164		3,893		17,109
Workers’ compensation	2,386		1,768		1,011		422		2,621		8,208
Other, including self-pay patients	226		188		59		205		201		879
	$	45,381	$	19,602	$	8,418	$	4,925	$	18,441	$	96,767

Operating Expenses

We operate in a capital intensive industry that requires significant amounts of capital to fund operations. As a result, a high percentage of our total operating expenses are fixed. Our fixed costs include debt service and capital lease payments, rent and operating lease payments, salaries and benefit obligations, equipment maintenance expenses, and insurance and vehicle operation costs. We expect that our costs for the salaries and benefits of technologists will continue to increase for the foreseeable future because of the industry’s competitive demand for their particular services. Due to the increase in mobile PET and PET/CT facilities, which are moved more frequently, our vehicle operation costs will continue to increase until we can maximize geographic operating efficiencies. Because a large portion of our operating expenses are fixed, any increase in our procedure volume disproportionately increases our operating cash flow. Conversely, any decrease in our procedure volume disproportionately decreases our operating cash flow. Our variable costs, which comprise only a small portion of our total operating expenses, include the cost of service supplies such as film, contrast media and radiopharmaceuticals used in PET and PET/CT procedures.

Results of Operations

The following table sets forth certain condensed historical financial data expressed as a percentage of revenues for each of the periods indicated:

	Nine Months Ended March 31,				Three Months Ended March 31,
	2005		2004		2005		2004
	(unaudited)				(unaudited)

REVENUES	100.0	%	100.0	%	100.0	%	100.0	%

COSTS OF OPERATIONS:
Costs of services	60.6		57.5		61.3		58.4
Provision for doubtful accounts	1.9		1.6		1.9		1.5
Equipment leases	0.7		0.3		1.2		0.3
Depreciation and amortization	20.7		20.5		20.9		20.6
Total costs of operations	83.9		79.9		85.3		80.8

Gross profit	16.1		20.1		14.7		19.2

CORPORATE OPERATING EXPENSES	(5.6	)	(5.0	)	(5.7	)	(5.0	)

GAIN ON SALES OF CENTERS	0.1		1.0		0.2		—

EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS	0.8		0.8		0.8		0.6

INTEREST EXPENSE, net	(14.1	)	(14.4	)	(14.3	)	(14.1	)

(Loss) income before income taxes	(2.7	)	2.5		(4.3	)	0.7

(BENEFIT) PROVISION FOR INCOME TAXES	(1.1	)	1.0		(1.7	)	0.3

Net (loss) income	(1.6	)%	1.5	%	(2.6	)%	0.4	%

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

	Nine Months Ended March 31,				Three Months Ended March 31,
	2005		2004		2005		2004
	(unaudited)				(unaudited)

Fixed	$	147,598	$	125,017	$	48,360	$	41,709
Mobile	89,583		84,437		29,852		29,027
Total	$	237,181	$	209,454	$	78,212	$	70,736

Nine Months Ended March 31, 2005 and 2004

Revenues: Revenues increased approximately 13.2% from approximately $209.5 million for the nine months ended March 31, 2004, to approximately $237.2 million for the nine months ended March 31, 2005. This increase was due to higher revenues from our fixed operations (approximately $22.6 million) and our mobile operations (approximately $5.1 million). Revenues for our fixed operations and mobile operations represented approximately 62% and 38%, respectively, of our total revenues for the nine months ended March 31, 2005.

Revenues from our fixed operations increased approximately 18.1% from approximately $125.0 million for the nine months ended March 31, 2004, to approximately $147.6 million for the nine months ended March 31, 2005. The increase was due primarily to (1) the CMI acquisition (approximately $29.7 million) and (2) revenues from the fixed-site centers we opened in 2004 and 2003 (approximately $1.8 million), partially offset by a reduction in (1) revenues from our existing fixed-site centers and (2) revenues from the fixed-site center we sold in 2003 (approximately $1.0 million). Revenues at our existing fixed-site centers decreased approximately 3.8% because of (1) a decrease in procedure volume at the fixed-site centers (approximately 2%) as a result of the adverse factors affecting our fixed operations discussed above and (2) a decrease in our average reimbursement from payors (approximately 2%).

Revenues from our mobile operations increased approximately 6.2% from approximately $84.4 million for the nine months ended March 31, 2004, to approximately $89.6 million for the nine months ended March 31, 2005. The increase was due to (1) revenues from our existing mobile facilities (approximately $3.3 million) and (2) the CDL acquisition (approximately $1.9 million). The increase in revenues from our existing mobile facilities was the result of higher PET and PET/CT revenues (approximately $4.4 million), partially offset by lower MRI and other revenues

(approximately $1.1 million). The increase in PET and PET/CT revenues was primarily due to an increase in the number of PET and PET/CT facilities in service. The decrease in MRI revenues was due to fewer MRI facilities in service.

Approximately 57% of our total revenues for the nine months ended March 31, 2005 were generated from patient services revenues. Patient services revenues for the fixed operations and mobile operations represented approximately 99% and 1%, respectively, of total patient services revenues for the nine months ended March 31, 2005. Approximately 43% of our total revenues for the nine months ended March 31, 2005, were generated from contract services revenues. Contract services revenues for the fixed operations and mobile operations represented approximately 13% and 87%, respectively, of total contract services revenues for the nine months ended March 31, 2005.

Costs of Operations: Costs of operations increased approximately 19.0% from approximately $167.2 million for the nine months ended March 31, 2004, to approximately $198.9 million for the nine months ended March 31, 2005. This increase was due primarily to (1) the CDL and CMI acquisitions (approximately $1.2 million and $22.4 million, respectively), (2) increased costs at our existing mobile facilities (approximately $7.5 million), (3) costs at the fixed-site centers we opened in 2004 and 2003 (approximately $1.7 million), (4) an increase in salaries and benefits at our billing operations primarily related to the CMI acquisition (approximately $0.7 million) and (5) a charge for one-time severance payments for terminated employees (approximately $0.3 million), partially offset by reduced costs from the fixed-site center we sold in 2003 (approximately $1.1 million).

Costs of operations at our fixed operations increased approximately 22.7% from approximately $90.9 million for the nine months ended March 31, 2004, to approximately $111.5 million for the nine months ended March 31, 2005. The increase was due to (1) the CMI acquisition (approximately $22.4 million), (2) costs at the fixed-site centers we opened in 2004 and 2003 (approximately $1.7 million), (3) a charge for one-time severance payments for terminated employees (approximately $0.3 million) and (4) an increase in costs at our existing fixed-site centers, partially offset by reduced costs from the fixed-site center we sold in 2003 (approximately $1.1 million).

Costs of operations at our mobile operations increased approximately 13.7% from approximately $63.7 million for the nine months ended March 31, 2004, to approximately $72.4 million for the nine months ended March 31, 2005. The increase was due to (1) the CDL acquisition (approximately $1.2 million) and (2) increased costs at our existing mobile facilities (approximately $7.5 million). The increase in costs at our existing mobile facilities was due primarily to (1) higher salaries and benefits, particularly technologists (approximately $3.1 million), (2) an increase in equipment lease costs (approximately $1.3 million), (3) an increase in vehicle costs (approximately $0.4 million), (4) an increase in medical supply costs (approximately $0.7 million) and (5) an increase in the provision for doubtful accounts (approximately $0.5 million). Our PET and PET/CT facilities which have higher (1) medical supply costs relating to the use of radiopharmaceuticals, (2) technologist salaries relating to the shortage of PET technologists and the increase in the number of technologists needed to operate PET/CT facilities and (3) vehicle operation costs because PET and PET/CT facilities are moved more frequently, accounted for approximately $5.0 million of the increase in costs for our mobile operations. We believe that these higher costs will continue as we add additional PET and PET/CT facilities.

Corporate Operating Expenses: Corporate operating expenses increased approximately 26.4% from approximately $10.6 million for the nine months ended March 31, 2004, to approximately $13.4 million for the nine months ended March 31, 2005. During the nine months ended March 31, 2005, we recorded a charge for one-time severance payments for a terminated employee (approximately $0.8 million). The remaining increase was due primarily to (1) consulting costs (approximately $0.8 million) and (2) additional legal and accounting costs primarily related to Sarbanes-Oxley implementation (approximately $0.7 million).

Gain on Sale of Center: In March 2005, we sold our joint venture interest in a fixed-site center located in Marina Del Rey, California for approximately $1.4 million. We realized a gain of approximately $0.1 million on the sale. In December 2003, we sold a fixed-site center located in Hobart, Indiana for approximately $5.4 million. We realized a gain of approximately $2.1 million on the sale.

Interest Expense, net: Interest expense, net increased approximately 10.6% from approximately $30.2 million for the nine months ended March 31, 2004, to approximately $33.4 million for the nine months ended March 31, 2005. The increase was due primarily to additional debt related to the CDL and CMI acquisitions, partially offset by a reduction due to principal payments on notes payable and capital lease obligations.

(Benefit) Provision for Income Taxes: (Benefit) provision for income taxes decreased from a provision of $2.2 million for the nine months ended March 31, 2004, to a benefit of approximately $2.6 million for the nine months ended March 31, 2005, due to the pretax loss for the nine months ended March 31, 2005. We have recorded a tax (benefit) provision at an effective rate of 40% for the nine months ended March 31, 2005 and 2004. We expect our effective tax rate will be approximately 40% in the future.

Three Months Ended March 31, 2005 and 2004

Revenues: Revenues increased approximately 10.6% from approximately $70.7 million for the three months ended March 31, 2004, to approximately $78.2 million for the three months ended March 31, 2005. This increase was due to higher revenues from our fixed operations (approximately $6.7 million) and our mobile operations (approximately $0.8 million). Revenues for our fixed operations and mobile operations represented approximately 62% and 38%, respectively, of our total revenues for the three months ended March 31, 2005.

Revenues from our fixed operations increased approximately 16.1% from approximately $41.7 million for the three months ended March 31, 2004, to approximately $48.4 million for the three months ended March 31, 2005. The increase was due to (1) the CMI acquisition (approximately $10.0 million) and (2) revenues from the fixed-site centers we opened in 2004 (approximately $0.4 million), partially offset by a reduction in revenues from our existing fixed-site centers. Revenues at our existing fixed-site centers decreased approximately 4.9% because of (1) a decrease in procedure volume at the fixed-site centers (approximately 4%) as a result of the adverse factors affecting our fixed operations discussed above and (2) a decrease in our average reimbursement from payors (approximately 1%).

Revenues from our mobile operations increased approximately 2.8% from approximately $29.0 million for the three months ended March 31, 2004, to approximately $29.8 million for the three months ended March 31, 2005. The increase in revenues from our existing mobile facilities (approximately $0.8 million) was the result of higher PET and PET/CT revenues (approximately $1.5 million), partially offset by lower MRI and other revenues (approximately $0.7 million). The increase in PET and PET/CT revenues was primarily due to an increase in the number of PET and PET/CT facilities in service. The decrease in MRI revenues was due to a decrease in the number of MRI facilities in service.

Approximately 56% of our total revenues for the three months ended March 31, 2005 were generated from patient services revenues. Patient services revenues for the fixed operations and mobile operations represented approximately 99% and 1%, respectively, of total patient services revenues for the three months ended March 31, 2005. Approximately 44% of our total revenues for the three months ended March 31, 2005, were generated from contract services revenues. Contract services revenues for the fixed operations and mobile operations represented approximately 14% and 86%, respectively, of total contract services revenues for the three months ended March 31, 2005.

Costs of Operations: Costs of operations increased approximately 16.6% from approximately $57.2 million for the three months ended March 31, 2004, to approximately $66.7 million for the three months ended March 31, 2005. This increase was due primarily to (1) the CMI acquisition (approximately $7.8 million), (2) increased costs at our existing mobile facilities (approximately $2.0 million) and (3) costs at the fixed-site centers we opened in 2004 (approximately $0.4 million).

Costs of operations at our fixed operations increased approximately 23.3% from approximately $30.1 million for the three months ended March 31, 2004, to approximately $37.1 million for the three months ended March 31, 2005. The increase was due primarily to (1) the CMI acquisition (approximately $7.8 million) and (2) costs at the fixed-site centers we opened in 2004 (approximately $0.3 million).

Costs of operations at our mobile operations increased approximately 9.3% from approximately $22.6 million for the three months ended March 31, 2004, to approximately $24.7 million for the three months ended March 31, 2005. The increased costs at our existing mobile facilities (approximately $2.1 million) was due primarily to (1) higher salaries and benefits, particularly technologists (approximately $0.9 million), (2) higher equipment lease expense (approximately $0.7 million) and (3) higher medical supply costs (approximately $0.3 million). The increase in costs of operations at our existing mobile facilities results primarily from an increase in costs to operate our PET and PET/CT facilities which have higher (1) medical supply costs relating to the use of radiopharmaceuticals, (2) technologist salaries relating to the shortage of PET technologists and the increase in the number of technologists needed to operate PET/CT facilities and (3) vehicle operation costs because PET and PET/CT facilities are moved more frequently, accounted for approximately $1.6 million of the increase in costs for our mobile operations. We believe that these higher costs will continue as we add additional PET and PET/CT facilities.

Corporate Operating Expenses: Corporate operating expenses increased approximately 22.2% from approximately $3.6 million for the three months ended March 31, 2004, to approximately $4.4 million for the three months ended March 31, 2005. The increase was due primarily to higher consulting costs (approximately $0.5 million) and legal and accounting expenses related to Sarbanes-Oxley implementation (approximately $0.2 million).

Interest Expense, net: Interest expense, net increased approximately 12.0% from approximately $10.0 million for the three months ended March 31, 2004, to approximately $11.2 million for the three months ended March 31, 2005. The increase was due primarily to additional debt related to the CMI acquisition, partially offset by a reduction due to principal payments on notes payable and capital lease obligations.

(Benefit) Provision for Income Taxes: (Benefit) provision for income taxes decreased from a provision of $0.2 million for the three months ended March 31, 2004, to a benefit of approximately $1.3 million for the three months ended March 31, 2005, due to the pretax loss for the three months ended March 31, 2005. We have recorded a tax (benefit) provision at an effective rate of 40% for the three months ended March 31, 2005 and 2004. We expect our effective tax rate will be approximately 40% in the future.

Financial Condition, Liquidity and Capital Resources

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

Liquidity: We believe, based on currently available information, that future cash flows provided by operating activities will be adequate to meet our anticipated interest expense, federal and state cash tax expense, capital expenditures, working capital, scheduled principal payments and other debt repayments while meeting all covenant requirements under our credit facility for the next twelve months.

Our short-term and long-term liquidity needs will arise primarily from:

• principal and interest payments relating to our credit facility;

• interest payments relating to our 9.875% senior subordinated notes;

• capital expenditures;

• working capital requirements to support business growth; and

• potential acquisitions.

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

Cash and cash equivalents as of March 31, 2005 were approximately $36.4 million. Our primary source of liquidity is cash provided by operating activities. Our ability to generate cash flows from operating activities is based upon several factors including the following:

• the volume of patients at our fixed-site centers;

• the demand for our mobile services;

• our ability to control expenses; and

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

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

	Nine Months Ended March 31,						Three Months Ended March 31,
	2005			2004			2005			2004
	(unaudited)						(unaudited)

Net cash provided by operating activities	$	56,272		$	48,434		$	24,397		$	18,186
Net cash used in investing activities	(24,373		)	(76,582		)	(6,968		)	(7,484		)
Net cash provided by (used in) financing activities	(25,904		)	69,703			(11,917		)	22,710

Net cash provided by operating activities was approximately $56.3 million for the nine months ended March 31, 2005 and resulted primarily from (1) net income before depreciation and amortization and the gain on sale of a fixed-site center (approximately $45.1 million), (2) a decrease in trade accounts receivables, net (approximately $7.8 million) and (3) an increase in accounts payable and accrued expenses (approximately $7.5 million) due primarily to an increase in accrued interest on our unsecured senior subordinated notes (approximately $6.2 million), partially offset by an increase in other current assets (approximately $4.1 million). The decrease in trade accounts receivables, net is due to increased collections on patient services revenues. The increase in other current assets is due primarily to (1) a benefit for income taxes for the nine months ended March 31, 2005 (approximately $2.6 million) and (2) the payment of insurance premiums in December 2004 (approximately $0.7 million).

Net cash used in investing activities was approximately $24.3 million for the nine months ended March 31, 2005. Cash used in investing activities resulted primarily from our purchase or upgrade of diagnostic imaging equipment at our existing fixed-site centers and mobile facilities (approximately $24.8 million), partially offset by proceeds from the sale of center discussed above (approximately $1.4 million).

Net cash used in financing activities was approximately $25.9 million for the nine months ended March 31, 2005. Cash used in financing activities resulted from principal payments of notes payable and capital lease obligations which includes prepayments on our credit facility (approximtely $20.0 million).

The following table sets forth our earnings before interest, taxes, depreciation and amortization, or EBITDA, for the nine and three months ended March 31, 2005 and 2004. EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to meet debt service, capital expenditure and working capital requirements. EBITDA should not be considered an alternative to, or more meaningful than, income from company operations or other traditional indicators of operating performance and cash flow from operating activities determined in accordance with accounting principles generally accepted in the United States. While EBITDA is used as a measure of operations and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculations. We present the

discussion of EBITDA because covenants in the indenture governing our unsecured senior subordinated notes and the credit agreement governing our credit facility contain ratios based on this measure. Our reconciliation of EBITDA to net cash provided by operating activities is as follows (amounts in thousands):

	Nine Months Ended March 31,						Three Months Ended March 31,
	2005			2004			2005			2004
	(unaudited)						(unaudited)
Net cash provided by operating activities	$	56,272		$	48,434		$	24,397		$	18,186
(Benefit) provision for income taxes	(2,622		)	2,158			1,342			188
Interest expense, net	33,409			30,175			11,200			9,985
Gain on sales of centers	123			2,129			123			—
Net change in operating assets and liabilities	(11,193		)	(4,527		)	(10,158		)	(3,349		)

EBITDA	$	75,989		$	78,369		$	24,220		$	25,010

EBITDA decreased approximately 3.1% from approximately $78.4 million for the nine months ended March 31, 2004, to approximately $76.0 million for the nine months ended March 31, 2005. This decrease was due primarily to (1) an increase in corporate operating expenses (approximately $2.8 million), (2) an increase in salaries and benefits (approximately $1.0 million), (3) an increase in salaries and benefits at our billing operations primarily related to the CMI acquisition (approximately $0.7 million) and (4) a decrease in EBITDA from our mobile operations (approximately $2.1 million), partially offset by an increase in EBITDA from our fixed operations (approximately $4.2 million).

EBITDA for our fixed operations increased 7.9% from approximately $52.9 million for the nine months ended March 31, 2004, to approximately $57.1 million for the nine months ended March 31, 2005. This increase was due primarily to (1) the CMI acquisition (approximately $11.1 million) and (2) the fixed-site centers we opened in 2004 and 2003 (approximately $0.4 million), partially offset by (1) a decrease at our existing fixed-site centers (approximately $4.7 million), (2) the difference between the gain on sales of the fixed-site centers we sold in 2005 and 2003 (approximately $2.0 million), (3) the elimination of EBITDA at the fixed-site center we sold in 2003 (approximately $0.3 million) and (4) a charge for one-time severance of terminated employees (approximately $0.3 million).

EBITDA for our mobile operations decreased approximately 4.9% from approximately $42.6 million for the nine months ended March 31, 2004, to approximately $40.5 million for the nine months ended March 31, 2005. This decrease was due primarily to a reduction at our existing mobile facilities (approximately $3.2 million) primarily related to the increase in costs discussed above, partially offset by the CDL acquisition (approximately $1.1 million).

EBITDA decreased approximately 3.2% from approximately $25.0 million for the three months ended March 31, 2004, to approximately $24.2 million for the three months ended March 31, 2005. This decrease was due primarily to (1) a decrease in EBITDA from our existing mobile operations (approximately $1.1 million) and (2) an increase in corporate operating expenses (approximately $0.9 million), partially offset by an increase in EBITDA at our fixed operations (approximately $1.4 million).

EBITDA for our fixed operations increased approximately 8.3% from approximately $16.9 million for the three months ended March 31, 2004, to approximately $18.3 million for the three months ended March 31, 2005. This increase was due primarily to (1) the CMI acquisition (approximately $3.8 million), (2) the fixed-site centers we opened in 2004 (approximately $0.2 million) and (3) the gain on sale of the fixed-site center we sold in 2005 (approximately $0.1 million), partially offset by a decrease at our existing fixed-site centers (approximately $2.7 million).

EBITDA for our mobile operations decreased approximately 7.8% from approximately $14.1 million for the three months ended March 31, 2004, to approximately $13.0 million for the three months ended March 31, 2005, primarily related to the increase in costs discussed above.

Capital Expenditures: In 2005, we purchased or leased six MRI facilities, two PET/CT facilities and four CT systems. As of March 31, 2005, we have committed to purchase or lease at an approximate aggregate cost of $7.1 million, five diagnostic

imaging systems through July 2005. We expect to use either internally generated funds or leases to finance the purchase of such equipment. We may purchase, lease or upgrade other diagnostic imaging systems as opportunities arise to place new equipment into service when new contract services agreements are signed, existing agreements are renewed, acquisitions are completed, or new fixed-site centers and mobile facilities are developed in accordance with our business strategy.

In addition, in connection with the implementation of the electronic transactions, security and privacy standards mandated by the Health Insurance Portability and Accountability Act of 1996, we have spent approximately $2.2 million as of March 31, 2005, to make necessary software upgrades to our proprietary information system to make it conform with the privacy and electronic standards. We expect to spend an additional $0.2 million to conform with the security standards, effective April 20, 2005, and for additional training costs.

Credit Facility and Senior Subordinated Notes: As of March 31, 2005, through InSight, we have a credit facility with Bank of America, N.A. and a syndicate of other lenders consisting of: (1) a term loan with a principal balance of approximately $218.3 million, (2) an additional term loan with a principal balance of approximately $29.9 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%. We are required to pay an unused facility fee up to 0.625% per annum, payable quarterly, on unborrowed amounts on the revolving credit facility. As of March 31, 2005 and May 2, 2005 there were no borrowings under the revolving credit facility.

In addition to the indebtedness under our credit facility, through InSight, we have outstanding $250 million of 9.875% unsecured senior subordinated notes. The notes mature in November 2011, with interest payable semi-annually and are redeemable at our option, in whole or in part, on or after November 1, 2006.

The credit facility contains various restrictive covenants which prohibit us from prepaying other indebtedness, including the notes, and require us to maintain specified financial ratios and satisfy financial condition tests. As of March 31, 2005, we were in compliance with these covenants. In addition, the credit facility prohibits InSight from declaring or paying any dividends to us and prohibits us from making any payments with respect to the notes if we fail to perform our obligations under, or we fail to meet the conditions of, the credit facility or if payment creates a default under the credit facility.

NEW PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment”. SFAS 123R requires expensing of stock options and other share-based payments and supersedes FASB’s earlier rule (SFAS No. 123) that had allowed companies to choose between expensing stock options or showing pro-forma disclosure only. We will be required to implement SFAS 123R beginning in the fiscal year ending June 30, 2007. We do not believe that the impact of adopting SFAS 123R would be materially different than the pro-forma disclosures under SFAS 123 (Note 7 to the unaudited condensed consolidated financial statements).

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations, as well as disclosures included elsewhere in this report are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingencies. A summary of our significant accounting policies can be found in the notes to our consolidated financial statements which are included in our annual report on Form 10-K for the period ended June 30, 2004 filed with the SEC on September 24, 2004.

RISK FACTORS

RISKS RELATING TO OUR INDEBTEDNESS

Our substantial indebtedness could adversely affect our financial health.

As of March 31, 2005, we had total indebtedness of approximately $513.5 million. Our substantial indebtedness could have important consequences to us. For example, it could:

• make it more difficult for us to satisfy our obligations with respect to our senior subordinated notes and our credit facility;

• increase our vulnerability to general adverse economic and industry conditions;

• require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and investments and other general corporate purposes;

• limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate;

• place us at a competitive disadvantage compared to our competitors that have less debt; and

• limit our ability to borrow additional funds.

In addition, we may incur substantial additional indebtedness in the future. The terms of the indenture governing our senior subordinated notes and the credit agreement governing our credit facility allow us to issue and incur additional debt subject to certain limitations. If new debt is added to current debt levels, the related risks described above could increase.

We are subject to restrictive debt covenants that impose operating and financial restrictions on our operations and could limit our business flexibility.

The agreements governing our indebtedness impose significant operating and financial restrictions on us. These restrictions prohibit or limit, among other things:

• the incurrence of additional indebtedness and the issuance of preferred stock and certain redeemable capital stock;

• a number of other restricted payments, including investments;

• specified sales of assets;

• specified transactions with affiliates;

• the creation of a certain types of liens;

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

• our ability to change the nature of our business.

These restrictions could limit our ability to obtain future financing, make acquisitions, withstand downturns in our business or take advantage of business opportunities.

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

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

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

Our ability to make payments on our indebtedness will depend on our ability to generate cash flow in the future which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, future borrowings may not be available to us under our credit facility in an amount sufficient to enable us to pay our indebtedness or to fund our other cash needs. We may not be able to refinance any of our indebtedness, including our credit facility and our senior subordinated notes, on commercially reasonable terms or at all. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants which could further restrict our business operations.

The realizable value of our assets upon liquidation may be insufficient to satisfy claims.

At March 31, 2005, our assets included approximately $316.8 million of intangible assets, representing approximately 48.6% of our total consolidated assets. These assets primarily consist of the excess of the acquisition cost over the fair market value of the net assets acquired in purchase transactions. The value of these intangible assets will continue to depend significantly upon the success of our business as a going concern and the growth in future cash flows. As a result, in the event of a default under our credit facility or our indenture or any bankruptcy or dissolution of our company, the realizable value of these assets may be substantially lower and may be insufficient to satisfy the claims of our creditors.

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

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

In the event of a bankruptcy, liquidation or reorganization or similar proceeding relating to us or the subsidiary guarantors, holders of our senior subordinated notes will participate with all other holders of unsecured indebtedness of ours or the subsidiary guarantors that are similarly subordinated in the assets remaining after we and the subsidiary guarantors have paid all senior indebtedness. However, because of the existence of the subordination provisions, including the requirement that holders of the senior subordinated notes pay over distributions to holders of senior indebtedness, holders of the senior subordinated notes may receive less, ratably, than our other unsecured creditors, including trade creditors. In any of these cases, we and the subsidiary guarantors may not have sufficient funds 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 financial condition.

An increase in prevailing interest rates would have an immediate effect on the interest rates charged on our variable rate debt, which rise and fall upon changes in interest rates. At March 31, 2005, approximately 49% of our debt was variable rate debt. Increases in interest rates would also impact the refinancing of our fixed rate debt. If interest rates are higher when our fixed debt becomes due, we may be forced to borrow at the higher rates. If prevailing interest rates or other factors result in higher interest rates, the increased interest expense would adversely affect our cash flow and our ability to service our debt. As a protection against rising interest rates, we may enter into agreements such as interest rate swaps, caps, floors and other interest rate exchange contracts. These agreements, however, increase our risks as to the other parties to the agreements not performing or that the agreements could be unenforceable.

RISKS RELATING TO OUR BUSINESS

Changes in the rates or methods of third-party reimbursements for diagnostic imaging and therapeutic services could result in reduced demand for our services or create downward pricing pressure, which would result in a decline in our revenues and harm our financial position.

For the nine months ended March 31, 2005, we derived approximately 57% of our revenues from direct billings to patients and third-party payors such as Medicare, Medicaid, managed care and private health insurance companies. Changes in the rates or methods of reimbursement for the services we provide could have a significant negative impact on those revenues. Moreover, our healthcare provider customers on whom we depend for approximately 43% of our revenues generally rely on reimbursement from third-party payors. In the past, certain third-party payors have proposed and implemented initiatives which have the effect of substantially decreasing reimbursement rates for diagnostic imaging services provided at non-hospital facilities. Recently, a third-party payor announced a requirement of participation, which has not yet taken effect, that would require freestanding imaging center providers to be multi-modality and not simply offer one type of diagnostic imaging service. In addition, the Medicare Payment Advisory Commission, in its March 2005 report to Congress, recommended that the government adopt standards for physicians and providers who bill Medicare for interpreting diagnostic imaging studies and adopt utilization management techniques used by third-party private payors, such as the credentialing of physicians, in an attempt to control the rise of imaging costs. Similar initiatives enacted in the future by a significant number of additional third-party payors would have an adverse impact on our financial condition and our operations.

Under Medicare’s OPPS a hospital is paid for outpatient services on a rate per service basis that varies according to the ambulatory payment classification group, or APC, to which the service is assigned rather than on a hospital’s costs. OPPS was implemented on August 1, 2000 and due to the anticipated adverse economic effect on hospitals, Congress provided for outlier payments for especially costly cases, as well as transitional payments for new technologies and innovative medical devices, drugs and biologics. While most of the transitional payments expired in 2003, CMS continues to make payments for new technology until sufficient data is collected to assign the new technology to an APC. Each year CMS publishes new APC rates that are determined in accordance with the promulgated methodology. However, the overall effect of OPPS has been to decrease reimbursement rates from those paid under the prior cost-based system.

Any further changes in the rates of or conditions for reimbursement could substantially reduce the number of procedures for which we or our customers can obtain reimbursement or the amounts reimbursed to us or our customers for services provided by us. If third-party payors reduce the amount of their payments to our customers, our customers may seek to reduce their payments to us or seek an alternate supplier of diagnostic imaging services. Because unfavorable reimbursement policies have constricted and may continue to constrict the profit margins of the hospitals, physician groups and other healthcare providers that we bill directly, we have lowered and may continue to need to lower our fees to retain existing customers and attract new ones. These reductions could have a significant adverse effect on our revenues and financial results by decreasing demand for our services or creating downward pricing pressure.

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

Our financial results depend on our ability to sustain and grow our revenues from existing customers. Our revenues would decline if we are unable to renew our existing customer contracts or renew these contracts on favorable terms. For our mobile facilities, we generally enter into contracts with hospitals having one to five year terms. Approximately 33% of our mobile contracts will expire each year. Our mobile facility contract renewal rate was 80% for the nine months ended March 31, 2005. We may not, however, achieve these renewal rates in the future. To the extent we do not renew a customer contract, it is not always possible to immediately obtain replacement customers. Historically, many replacement customers have been smaller facilities which have lower procedure volumes. In addition, attractive financing from original equipment manufacturers may cause hospitals and physician groups who have utilized shared mobile services from our company and our competitors to purchase and operate

their own equipment. If attractive financing causes hospitals and physician groups to establish their own diagnostic imaging centers, our business, financial condition and results of operations would be materially adversely affected. Although the non-renewal of a single customer contract would not have a material impact on our contract services revenues, non-renewal of several contracts on favorable terms or at all could have a significant negative impact on our revenues.

We may experience competition from hospitals, physician groups, other diagnostic imaging companies and this competition could adversely affect our revenues and our business.

The healthcare industry in general, and the market for diagnostic imaging services in particular, is highly competitive and fragmented, with only a few national providers. We compete principally on the basis of our service reputation, equipment, breadth of managed care contracts and convenient locations. Our operations must compete with groups of radiologists, established hospitals and certain other independent organizations, including equipment manufacturers and leasing companies that own and operate imaging equipment. We will also encounter competition from hospitals and physician groups that purchase their own diagnostic imaging equipment from original equipment manufacturers who provide low-cost financing. Some of our direct competitors that provide diagnostic imaging services may have access to greater financial resources than we do. If we are unable to successfully compete, our customer base would decline and our business, financial condition and results of operations would be adversely affected.

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

Our fixed-site centers are principally dependent on our ability to attract referrals from physicians and other healthcare providers representing a variety of specialties. Our eligibility to provide service in response to a referral is often dependent on the existence of a contractual arrangement with the referred patient’s managed care organization. We currently have more than 1,000 contracts with managed care organizations for diagnostic imaging services provided at our fixed-site centers. Despite having a large number of contracts with managed care organizations, healthcare providers may be inhibited from referring patients to us in cases where the patient is not associated with one of the managed care organizations with which we have contracted. The loss of patient referrals causes us to lose procedure volume which adversely impacts our revenues. A significant decline in referrals would have a material adverse effect on our business, financial condition and results of operations.

Technological change in our industry could reduce the demand for our services and require us to incur significant costs to upgrade our equipment.

We operate in a competitive, capital intensive, high fixed-cost industry that requires significant amounts of capital. The development of new technologies or refinements of existing ones might (1) make our existing systems technologically or economically obsolete, or (2) reduce the need for our systems. MRI and other diagnostic imaging systems are currently manufactured by numerous companies. Competition among manufacturers for a greater share of the MRI and other diagnostic imaging systems market has resulted in and likely will continue to result in technological advances in the speed and imaging capacity of these new systems. Consequently, the obsolescence of our systems may be accelerated. Other than ultra-high field MRI systems (a 3.0 Tesla MRI scanner costs approximately 40% to 60% more than a 1.5 Tesla MRI scanner and has higher annual maintenance costs) and PET/CT or “fusion” scanners (a PET/CT scanner costs approximately 35% to 50% more than a standard PET scanner and has higher annual maintenance costs), we are aware of no imminent substantial technological changes; however, should such changes occur, we may not be able to acquire the new or improved systems. In the future, to the extent we are unable to generate sufficient cash from our operations or obtain additional funds through bank financing or the issuance of equity or debt securities, we may be unable to maintain a competitive equipment base. In addition, advancing technology may enable hospitals, physicians or other diagnostic service providers to perform procedures without the assistance of diagnostic service providers such as ourselves. As a result, we may not be able to maintain our competitive position in our targeted regions or expand our business.

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

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

Because a high percentage of our operating expenses are fixed, a relatively small decrease in revenues could have a significant negative impact on our financial results.

A high percentage of our expenses are fixed, meaning they do not vary significantly with the increase or decrease in revenues. Such expenses include, but are not limited to, debt service and capital lease payments, rent and operating lease payments, salaries, maintenance, insurance and vehicle operation costs. As a result, a relatively small reduction in the prices we charge for our services or procedure volume could have a disproportionate negative effect on our financial results.

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

We have not experienced any material losses due to claims for malpractice. However, claims for malpractice have been asserted against us in the past and any future claims, if successful, could entail significant defense costs and could result in substantial damage awards to the claimants, which may exceed the limits of any applicable insurance coverage. Successful malpractice claims asserted against us, to the extent not covered by its liability insurance, could have a material adverse affect on our business, financial condition and results of operations. In addition to being exposed to claims for malpractice, there are other professional liability risks to which we are exposed through our operation of diagnostic imaging systems, including liabilities associated with the improper use or malfunction of our diagnostic imaging equipment.

To protect against possible professional liability from malpractice claims, we maintain professional liability insurance in amounts that we believe are appropriate in light of the risks and industry practice. However, if we are unable to maintain insurance in the future at an acceptable cost or at all or if our insurance does not fully cover us in the event a successful claim was made against us, we could incur substantial losses. Any successful malpractice or other professional liability claim made against 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 our management from our operations, which could have a material adverse effect on our business, financial condition and results of operations.

Our failure to effectively integrate acquisitions and establish joint venture arrangements through partnerships with hospitals and other healthcare providers could impair our business.

As part of our business strategy, we have pursued selective acquisitions and arrangements through partnerships and joint ventures with hospitals and other healthcare providers. Our acquisition and joint venture strategies require substantial capital which may exceed the funds available to us from internally generated funds and our credit facility. We may not be able to raise any necessary additional funds through bank financing or through the issuance of equity or debt securities on terms acceptable to us, if at all.

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

• demands on management related to the increase in our size after an acquisition;

• the diversion of our management’s attention from the management of daily operations to the integration of operations;

• integration of information systems;

• risks associated with unanticipated events or liabilities;

• difficulties in the assimilation and retention of employees;

• potential adverse effects on operating results;

• challenges in retaining customers and referral sources; and

• amortization or write-offs of acquired intangible assets.

Although we believe we have successfully integrated acquisitions in the past, we may not be able to successfully integrate the operations from any future acquisitions. If we do not successfully integrate our acquisitions, we may

not realize anticipated operating advantages, economies of scale and cost savings. Also, we may not be able to maintain the levels of operating efficiency that the acquired companies would have achieved or might have achieved separately. Successful integration of each of their operations will depend upon our ability to manage those operations and to eliminate excess costs.

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

Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization. Competition in our industry for qualified employees is intense. In particular, there is a very high demand for qualified technologists who are necessary to operate our systems, particularly PET technologists. We may not be able to hire and retain a sufficient number of technologists, and we may be required to pay bonuses and higher salaries to our technologists, which would increase our expenses. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.

Our PET and PET/CT service and some of our other imaging services require the use of radioactive materials, which could subject us to regulation, related costs and delays and potential liabilities for injuries or violations of environmental, health and safety laws.

Our PET and PET/CT service and some of our other imaging and therapeutic services require the use of radioactive materials to produce the images. While this radioactive material has a short half-life, meaning it quickly breaks down into non-radioactive substances, storage, use and disposal of these materials present the risk of accidental environmental contamination and physical injury. We are subject to federal, state and local regulations governing storage, handling and disposal of these materials and waste products. Although we believe that our safety procedures for storing, handling and disposing of these hazardous materials comply with the standards prescribed by law and regulation, we cannot completely eliminate the risk of accidental contamination or injury from those hazardous materials. In the event of an accident, we would be held liable for any resulting damages, and any liability could exceed the limits of or fall outside the coverage of our insurance. In addition, we may not be able to maintain insurance on acceptable terms, or at all. We could incur significant costs in order to comply with current or future environmental, health and safety laws and regulations.

An earthquake could adversely affect our business and operations.

Our corporate headquarters and a significant portion of our fixed-site centers are located in California, which has a high risk for earthquakes. Depending upon its magnitude, an earthquake could severely damage our facilities or prevent potential patients from traveling to our centers. Damage to our equipment or any interruption in our business would adversely affect our financial condition. While we presently carry earthquake insurance in amounts we believe are appropriate in light of the risks, the amount of our earthquake insurance coverage may not be sufficient to cover losses from earthquakes. In addition, we may discontinue earthquake insurance on some or all of our facilities in the future if the cost of premiums for earthquake insurance exceeds the value of the coverage discounted for the risk of loss. If we experience a loss which is uninsured or which exceeds policy limits, we could lose the capital invested in the damaged facilities as well as the anticipated future cash flows from those facilities.

RISKS RELATING TO GOVERNMENT REGULATION OF OUR BUSINESS

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

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

• the federal False Claims Act;

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

• the federal Civil Money Penalty Law;

• the federal Health Insurance Portability and Accountability Act of 1996;

• the federal physician self-referral prohibition commonly known as the Stark Law and the state law equivalents of the Stark Law;

• state laws that prohibit the practice of medicine by non-physicians, and prohibit fee-splitting arrangements involving physicians;

• United States Food and Drug Administration requirements;

• state licensing and certification requirements, including certificates of need; and

• federal and state laws governing the diagnostic imaging and therapeutic equipment used in our business concerning patient safety, equipment operating specifications and radiation exposure levels.

If our operations are found to be in violation of any of the laws and regulations to which we or our customers are subject, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines and the curtailment of our operations. Any penalties, damages, fines or curtailment of our operations, individually or in the aggregate, could adversely affect our ability to operate our business and our financial results. The risks of our being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action brought against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

The regulatory framework is uncertain and evolving.

Healthcare laws and regulations may change significantly in the future. We continuously monitor these developments and modify our operations from time to time as the regulatory environment changes. However, we may not be able to adapt our operations to address new regulations, which could adversely affect our business. In addition, although we believe that we are operating in compliance with applicable federal and state laws, neither our current or anticipated business operations nor the operations of our contracted radiology groups have been the subject of judicial or regulatory interpretation. A review of our business by courts or regulatory authorities may result in a determination that could adversely affect our operations or the healthcare regulatory environment may change in a way that restricts our operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Our market risk exposure relates primarily to interest rates, for which we may periodically use interest rate swaps to hedge variable interest rates on long-term debt under our credit facility. We do not engage in activities using complex or highly leveraged instruments.

Interest Rate Risk

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

Our future earnings and cash flows and some of our fair values relating to financial instruments are dependent upon prevailing market rates of interest, such as LIBOR. Based on interest rates and outstanding balances as of March 31, 2005, a 1% change in interest rates on our $248.2 million of floating rate debt would affect annual future earnings and cash flows by approximately $2.5 million. The weighted-average interest rate on our floating debt as of March 31, 2005 was approximately 6.35%.

Through InSight, we also have outstanding $250 million in unsecured senior subordinated notes which mature in November 2011 and bear interest at 9.875% per annum, payable semi-annually. The fair value of our unsecured senior subordinated notes as of March 31, 2005 was approximately $245.0 million.

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

ITEM 4. CONTROLS AND PROCEDURES

We carried out an evaluation, with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (pursuant to Rule 15d-15 under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic SEC filings. There has been no change in our internal control over financial reporting during the quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 6.		EXHIBITS

10.26		Fourth Amendment to Credit Agreement, dated as of February 22, 2005, by and among InSight, InSight Holdings, 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, filed herewith.

31.1		Certification of Michael N. Cannizzaro, 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 Michael N. Cannizzaro, 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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 6, 2005

	INSIGHT HEALTH SERVICES HOLDINGS CORP.
	(Registrant)


	By:	/s/ Michael N. Cannizzaro
		Michael N. Cannizzaro
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)


	By:	/s/ Mitch C. Hill
		Mitch C. Hill
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer)

EXHIBIT INDEX

EXHIBIT NUMBER	DESCRIPTION AND REFERENCES	PAGE NUMBER

10.26	Fourth Amendment to Credit Agreement, dated as of February 22, 2005, by and among InSight, InSight Holdings, 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, filed herewith.

31.1	Certification of Michael N. Cannizzaro, 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 Michael N. Cannizzaro, 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.