INSIGHT HEALTH SERVICES HOLDINGS CORP - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - INSIGHT HEALTH SERVICES HOLDINGS CORP	c00934exv32w1.htm
EX-31.2 - EXHIBIT 31.2 - INSIGHT HEALTH SERVICES HOLDINGS CORP	c00934exv31w2.htm
EX-31.1 - EXHIBIT 31.1 - INSIGHT HEALTH SERVICES HOLDINGS CORP	c00934exv31w1.htm
EX-32.2 - EXHIBIT 32.2 - INSIGHT HEALTH SERVICES HOLDINGS CORP	c00934exv32w2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2010


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 333-75984-12

INSIGHT HEALTH SERVICES HOLDINGS CORP.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		04-3570028 (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 o No þ

Indicate by check mark whether the registrant (1) has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company þ

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

Yes o No þ

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes þ No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,644,444 shares of common stock as of May 10, 2010.

The number of pages in this Form 10-Q is 67.

INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES

INDEX


	PAGE NUMBER

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS		3

Condensed Consolidated Balance Sheets as of March 31, 2010 and June 30, 2009 (unaudited)		3

Condensed Consolidated Statements of Operations and Comprehensive Losses for the nine months ended March 31, 2010 and 2009 (unaudited)		4

Condensed Consolidated Statements of Operations and Comprehensive Losses for the three months ended March 31, 2010 and 2009 (unaudited)		5

Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2010 and 2009 (unaudited)		6

Notes to Condensed Consolidated Financial Statements (unaudited)		7-27

In accordance with SEC Regulation S-X Rule 3-10, the 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 18 to the condensed consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		28-53

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		53-54

ITEM 4T. CONTROLS AND PROCEDURES		54

PART II. OTHER INFORMATION

ITEM 1A. LEGAL PROCEEDINGS		55

ITEM 1A. RISK FACTORS		55-64

ITEM 5. EXHIBITS		65

SIGNATURES		66

EXHIBIT INDEX		67

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

ITEM 1. FINANCIAL STATEMENTS

INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in thousands, except share data)


	March 31,			June 30,
	2010			2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	11,372		$	19,640
Trade accounts receivables, net of allowance for contractual adjustments, bad debt, and professional fees of $20,555 and $22,977, respectively		23,855			25,594
Other current assets		9,181			9,988

Total current assets		44,408			55,222


PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $109,679 and $79,554 respectively		75,069			79,837

ASSETS HELD FOR SALE		—			2,700
CASH, restricted		1,384			6,488
INVESTMENTS IN PARTNERSHIPS		6,354			6,791
OTHER ASSETS		254			208
GOODWILL AND OTHER INTANGIBLE ASSETS, net		22,881			24,878

	$	150,350		$	176,124


LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current portion of notes payable	$	227		$	242
Current portion of capital lease obligations		1,232			1,468
Accounts payable and other accrued expenses		25,363			36,037

Total current liabilities		26,822			37,747


LONG-TERM LIABILITIES:
Notes payable, less current portion		284,603			279,726
Capital lease obligations, less current portion		2,538			2,589
Other long-term liabilities		739			1,408
Deferred income taxes		6,013			6,792

Total long-term liabilities		293,893			290,515


COMMITMENTS AND CONTINGENCIES (Note 14)

STOCKHOLDERS’ DEFICIT:
Common stock, $.001 par value, 10,000,000 shares authorized, 8,644,444 shares issued and outstanding		9			9
Additional paid-in capital		37,591			37,536
Accumulated other comprehensive loss		(316	)		(2,528	)
Accumulated deficit		(210,144	)		(188,939	)

Total stockholders’ equity (deficit) attributable to InSight Health Services Holdings Corp.		(172,860	)		(153,922	)

Noncontrolling interest		2,495			1,784

Total stockholders’ deficit		(170,365	)		(152,138	)

	$	150,350		$	176,124

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

INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSSES
(Unaudited)
(Amounts in thousands, except per share data)


	Nine Months Ended
	March 31,
	2010			2009
REVENUES:
Contract services	$	72,625		$	88,672
Patient services		69,896			83,959
Other operations		1,591			1,906

Total revenues		144,112			174,537


COSTS OF OPERATIONS:
Costs of services		95,735			117,243
Provision for doubtful accounts		3,127			3,311
Equipment leases		7,926			8,348
Depreciation and amortization		25,405			35,192

Total costs of operations		132,193			164,094


CORPORATE OPERATING EXPENSES		(14,254	)		(17,238	)

EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS		1,736			1,722

INTEREST EXPENSE, net		(19,768	)		(23,231	)

GAIN ON SALES OF CENTERS		300			7,689

GAIN ON PURCHASE OF NOTES PAYABLE		—			6,788

IMPAIRMENT OF OTHER LONG-LIVED ASSETS		(1,949	)		(4,600	)


Loss before income taxes		(22,016	)		(18,427	)

BENEFIT FOR INCOME TAXES		(1,321	)		(1,552	)


Net loss		(20,695	)		(16,875	)


Less: net income attributable to noncontrolling interests		510			534


Net loss attributable to InSight Health Services Holdings Corp.	$	(21,205	)	$	(17,409	)


COMPREHENSIVE LOSS:
Net loss attributable to InSight Health Services Holdings Corp.	$	(21,205	)	$	(17,409	)
Unrealized income (loss) attributable to change in fair value of interest rate contracts		2,212			(3,723	)


Comprehensive loss attributable to InSight Health Services Holdings Corp.	$	(18,993	)	$	(21,132	)


Basic and diluted loss per common share attributable to InSight Health Services Holdings Corp.	$	(2.45	)	$	(2.01	)

Weighted average number of basic and diluted common shares outstanding		8,644			8,644

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

INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSSES
(Unaudited)
(Amounts in thousands, except per share data)


	Three Months Ended
	March 31,
	2010			2009

REVENUES:
Contract services	$	23,672		$	28,079
Patient services		22,204			24,389
Other operations		483			738

Total revenues		46,359			53,206


COSTS OF OPERATIONS:
Costs of services		31,550			35,411
Provision for doubtful accounts		944			975
Equipment leases		2,768			2,632
Depreciation and amortization		7,929			10,754

Total costs of operations		43,191			49,772


CORPORATE OPERATING EXPENSES		(4,454	)		(6,111	)

EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS		564			614

INTEREST EXPENSE, net		(6,185	)		(7,282	)

GAIN ON SALES OF CENTERS		300			701

GAIN ON PURCHASE OF NOTES PAYABLE		—			5,542


Loss before income taxes		(6,607	)		(3,102	)

(BENEFIT) PROVISION FOR INCOME TAXES		(675	)		140

Net loss		(5,932	)		(3,242	)


Less: net income attributable to noncontrolling interests		125			164


Net loss attributable to InSight Health Services Holdings Corp.	$	(6,057	)	$	(3,406	)


COMPREHENSIVE LOSS:
Net loss attributable to InSight Health Services Holdings Corp.	$	(6,057	)	$	(3,406	)
Unrealized income (loss) attributable to change in fair value of interest rate contracts		1,134			(119	)


Comprehensive loss attributable to InSight Health Services Holdings Corp.	$	(4,923	)	$	(3,525	)


Basic and diluted loss per common share attributable to InSight Health Services Holdings Corp.	$	(0.70	)	$	(0.39	)

Weighted average number of basic and diluted common shares outstanding		8,644			8,644

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

INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in thousands)


	Nine Months Ended
	March 31,
	2010			2009
OPERATING ACTIVITIES:
Net loss	$	(20,695	)	$	(16,875	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		25,405			35,192
Amortization of bond discount		4,352			4,005
Share-based compensation		55			55
Equity in earnings of unconsolidated partnerships		(1,736	)		(1,722	)
Distributions from unconsolidated partnerships		2,173			2,005
Gain on sales of centers		(300	)		(7,689	)
Gain on sales of equipment		(836	)		(670	)
Gain on purchase of notes payable		—			(6,788	)
Impairment of intangible assets		1,949			4,600
Deferred income taxes		(779	)		(2,041	)
Cash (used in) provided by changes in operating assets and liabilities:
Trade accounts receivables, net		1,739			7,584
Other current assets		587			(2,414	)
Accounts payable and other accrued expenses		(8,757	)		(5,189	)

Net cash provided by operating activities		3,157			10,053


INVESTING ACTIVITIES:
Proceeds from sales of centers		2,721			19,720
Proceeds from sales of equipment		1,401			—
Additions to property and equipment		(18,576	)		(13,458	)
Acquisition of fixed-site center		(918	)		—
Decrease (increase) in restricted cash		5,104			(13,626	)
Other		—			136

Net cash used in investing activities		(10,268	)		(7,228	)


FINANCING ACTIVITIES:
Principal payments of notes payable and capital lease obligations		(2,135	)		(1,693	)
Proceeds from issuance of notes payable		1,083			—
Purchase of floating rate notes		—			(4,152	)
Cash contributions from non-controlling interest		88			—
Distributions to non-controlling interest		(193	)		—

Net cash used in financing activities		(1,157	)		(5,845	)


DECREASE IN CASH AND CASH EQUIVALENTS:		(8,268	)		(3,020	)
Cash, beginning of period		19,640			21,002

Cash, end of period	$	11,372		$	17,982


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	15,976		$	20,386
Income taxes paid		607			277
Non-cash acquisition of fixed assets		975			884
Non-cash contributions from non-controlling interest		306			—

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

INSIGHT HEALTH SERVICES HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. NATURE OF BUSINESS

All references to “we,” “us,” “our,” “our company” or “the Company” in this quarterly report on Form 10-Q, or 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 “Holdings” mean InSight Health Services Holdings Corp. by itself. All references to “InSight” mean InSight Health Services Corp., a Delaware corporation and a wholly-owned subsidiary of Holdings, by itself. Through InSight and its subsidiaries, we provide diagnostic imaging services in more than 30 states throughout the United States. Our operations are primarily concentrated in, Arizona, certain markets in California, Texas, New England, the Carolinas, Florida, and the Mid-Atlantic states. Our services are provided through a network of 88 mobile magnetic resonance imaging, or MRI, facilities, one mobile computed tomography, or CT, facility, 14 mobile positron emission tomography and computed tomography, or PET/CT, facilities (collectively, mobile facilities), 34 fixed-site MRI centers, and 29 multi-modality fixed-site centers (collectively, fixed-site centers). At our multi-modality fixed-site centers, we typically offer other services in addition to MRI, including PET/CT, CT, x-ray, mammography, ultrasound, nuclear medicine and bone densitometry services.

We have three reportable segments: contract services, patient services and other operations. In our contract services segment we generate revenue principally from 100 mobile facilities and 18 fixed-site centers. In our patient services segment we generate revenues principally from 45 fixed-site centers and 3 mobile facilities. Other operations generate revenues primarily from agreements with customers to provide management services, which could include field operations, billing and collections and accounting and other office services. We refer to this revenue as generated from our “Insight Imaging Enterprise Solutions” business. See additional information regarding our segments in Note 9 “Segment Information” below.

2. LIQUIDITY AND CAPITAL RESOURCES

We reported net losses attributable to Holdings of $21.2 million, $19.8 million, $169.2 million and $99.0 for nine months ended March 31, 2010, the year ended June 30, 2009, the eleven months ended June 30, 2008 and the year ended 2007, respectively. We have implemented steps in response to these losses, including a core market strategy and various initiatives. We have attempted to implement, and will continue to develop and implement, various revenue enhancement, receivables and collections management and cost reduction initiatives. Revenue enhancement initiatives have focused and will continue to focus on our sales and marketing efforts to maintain or improve our procedural volumes and contractual rates, and our InSight Imaging Enterprise Solutions initiative.

Receivables and collections management initiatives have focused and will continue to focus on collections at point of service for patients with commercial insurance, technology improvements to create greater efficiency in the gathering of patient and claim information when a procedure is scheduled or completed, and our initiative with Dell Perot Systems. In February 2009, we entered into a seven-year agreement with Dell Perot Systems to provide enhanced revenue cycle services and assist in the implementation of upgraded technology and IT services, which will provide new technology to manage our back-office billing, accounts receivable and collections functions. As a result of this agreement we terminated certain employees and transitioned certain other employees to Dell Perot Systems. We implemented the revenue cycle services in June 2009 and we expect to implement the new upgraded technology and IT services as of the beginning of fiscal year 2011.

Cost reduction initiatives have focused and will continue to focus on streamlining our organizational structure and expenses including enhancing and leveraging our technology to create greater efficiencies, and leveraging relationships with strategic vendors.

While we have experienced some improvements through our receivables and collections management and cost reduction initiatives, benefits from our revenue enhancement initiatives have yet to materialize and our revenues continue to decline. Moreover, future revenue enhancement initiatives will face significant challenges because of the continued overcapacity in the diagnostic imaging industry, reimbursement reductions and the country’s economic condition, including higher unemployment.

We can give no assurance that these steps will be adequate to improve our financial performance. Unless our financial performance significantly improves, we can give no assurance that we will be able to refinance the floating rate notes, which mature in November 2011, on commercially reasonable terms, if at all.

3. INTERIM FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, and therefore do not include all information and note disclosures necessary for a fair presentation of consolidated financial position, results of operations and cash flows in conformity with United States generally accepted accounting principles. 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 fiscal year ended June 30, 2009 filed with the Securities and Exchange Commission, or SEC. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair statement of results for the period have been included. The results of operations for the nine months ended March 31, 2010 are not necessarily indicative of the results to be achieved for the full fiscal year.

4. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Our condensed consolidated financial statements include our accounts and those of all controlled subsidiaries. All significant intercompany transactions and balances have been eliminated. Equity investments in which the Company exercises significant influence but does not control, and is not the primary beneficiary are accounted for using the equity method. Investments in which the Company does not exercise significant influence over the investee are accounted for under the cost method.

On July 1, 2009 we adopted the provisions of Accounting Standards Codification (“ASC”) Topic 810 “Consolidation” (“ASC 810”), which establishes the accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. As a result of the adoption of ASC 810, we are presenting noncontrolling interest as a component of stockholders’ deficit rather than a liability, at March 31, 2010, and the corresponding reclassification as of June 30, 2009. In addition, ASC 810 required the presentation of net income attributable to noncontrolling interest, rather than minority interest expense for the three and nine months ended March 31, 2010 and 2009, respectively.

Certain reclassifications have been made to previously reported amounts to conform to the current period presentation of non-controlling interest and segment reporting (see Note 9).

5. GOODWILL AND OTHER INTANGIBLE ASSETS

Identified intangible assets consist of our goodwill, trademark, certificates of need, wholesale contracts and customer relationships. The intangible assets, excluding the wholesale contracts and customer relationships, are indefinite-lived assets and are not amortized. Wholesale contracts and customer relationships are definite-lived intangible assets and are amortized over five and thirty years, respectively. In accordance with ASC Topic 350 “Intangibles — Goodwill and Other”, the 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.

We evaluate the carrying value of indefinite-lived intangible assets, in the second quarter of each fiscal year. Additionally, we review the carrying amount of indefinite-lived assets whenever events and circumstances indicate that the carrying amount of indefinite-lived assets may not be recoverable. Impairment indicators include, among other conditions, cash flow deficits, historic or anticipated declines in revenue or gross profit and adverse legal or regulatory developments. Impairment losses, if any, are reflected in the condensed consolidated statements of operations and comprehensive losses. We evaluate our indefinite-lived intangible assets each reporting period to determine if there has been any change that would not justify an indefinite life of the related intangible assets.

We completed our evaluation of the carrying value of our indefinite-lived intangible assets as of December 31, 2009. Our evaluation of the carrying value of intangible assets compares the fair value of the assets with their corresponding carrying value. The fair value of intangible assets is determined primarily using an income approach (see Note 13). Based on our annual evaluation of the carrying value of our indefinite-lived intangible assets in the second quarter of fiscal year 2010, we concluded that impairments had occurred and we recorded a non-cash impairment charge of $1.9 million in our contract services segment related to our trademark ($0.8 million) and our certificates of need ($0.9 million) and our patient services segment related to our certificates of need ($0.2 million). This impairment charge primarily resulted from a decline in our mobile business within our contract services segment.

We assess the ongoing recoverability of our other intangible assets subject to amortization in accordance with ASC Topic 360 “Property, Plant and Equipment”, whenever events and circumstances indicate that the carrying amount of our other intangible assets may not be recoverable, by determining whether the long-lived asset can be recovered over the remaining amortization period through projected undiscounted future cash flows. If projected future cash flows indicate that the unamortized long-lived asset will not be recovered, an adjustment is made to reduce the asset to an amount consistent with projected future cash flows discounted at the market interest 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.

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


	March 31, 2010				June 30, 2009
	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Value		Amortization		Value		Amortization

Amortized intangible assets:
Wholesale contracts	$	7,800	$	4,160	$	7,800	$	2,990
Customer relationships		3,800		93		2,800		—

Total amortized intangible assets		11,600		4,253		10,600		2,990


Unamortized goodwill and intangible assets:
Goodwill		1,618		—		1,403		—
Trademark		4,400		—		5,200		—
Certificates of need		9,516		—		10,665		—

Total unamortized intangible assets		15,534		—		17,268		—


Total goodwill and other intangible assets	$	27,134	$	4,253	$	27,868	$	2,990

Amortization of intangible assets was approximately $1.3 million for the nine months ended March 31, 2010 and 2009; and approximately $0.4 million for the three months ended March 31, 2010 and 2009.

Estimated remaining amortization expense for the three months ending June 30, 2010 and each of the fiscal years ending June 30, are as follows (amounts in thousands) (unaudited):


2010	$	421
2011		1,684
2012		1,684
2013		253
2014		123
Thereafter		3,182


Total	$	7,347

6. NOTES PAYABLE

As of March 31, 2010, we had total indebtedness of approximately $298.4 million in aggregate principal amount, which excludes an unamortized discount of approximately $9.8 million.

As of March 31, 2010, we had outstanding, through InSight, $293.5 million of aggregate principal amount of floating rate notes. The floating rate notes mature in November 2011 and bear interest at three-month LIBOR plus 5.25% per annum, payable quarterly. As of March 31, 2010, the weighted average interest rate on the floating rate notes was 5.50%. If prior to the maturity of the floating rate notes, we elect to redeem the floating rate notes or are otherwise required to make a prepayment with respect to the floating rate notes for which a redemption price is not otherwise specified in the indenture, regardless of whether such prepayment is made voluntarily or mandatorily, as a result of acceleration upon the occurrence of an event of default or otherwise, we are required to pay 102% of the principal amount of the floating rate notes plus accrued and unpaid interest. An open-market purchase of floating rate notes would not require a prepayment price at the foregoing rates. In addition, the indenture provides that if there is a change of control, we will be required to make an offer to purchase all outstanding floating rate notes at a price equal to 101% of their principal amount plus accrued and unpaid interest. The indenture provides that a change of control includes, among other things, if a person or group becomes directly or indirectly the beneficial owner of 35% or more of Holdings’ common stock. The fair value of the floating rate notes as of March 31, 2010, based on active market quotes, was approximately $132.1 million.

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

Through certain of InSight’s wholly owned subsidiaries, we have an asset-based revolving credit facility of up to $30.0 million, with the lenders named therein and Bank of America, N.A., as collateral and administrative agent. The credit facility is scheduled to terminate in June 2011. As of March 31, 2010, we had approximately $12.0 million of availability under the credit facility, based on our borrowing base. Holdings and InSight unconditionally guarantee all obligations of InSight’s subsidiaries that are borrowers under the credit facility. All obligations under the credit facility and the obligations of Holdings and InSight under the guarantees are secured, subject to certain exceptions, by a first priority security interest in all of Holdings’, InSight’s and the borrowers’: (i) accounts; (ii) instruments, chattel paper (including, without limitation, electronic chattel paper), documents, letter-of-credit rights and supporting obligations relating to any account; (iii) general intangibles that relate to any account; (iv) monies in the possession or under the control of the lenders under the credit facility; (v) products and cash and non-cash proceeds of the foregoing; (vi) deposit accounts established for the collection of proceeds from the assets described above; and (vii) books and records pertaining to any of the foregoing. Borrowings under the credit facility bear interest at LIBOR plus 2.5% per annum or, at our option, the prime rate. The applicable margin is currently 2.50% per annum; however, the applicable margin will be adjusted in accordance with a pricing grid based on our fixed charge coverage ratio, and will range from 2.00% to 2.50% per annum. In addition to paying interest on outstanding loans under the credit facility, we are required to pay a commitment fee to the lenders in respect of unutilized commitments thereunder at a rate equal to 0.50% per annum, subject to reduction based on a performance grid tied to our fixed charge coverage ratio, as well as customary letter-of-credit fees and fees of Bank of America, N.A.

There are no financial covenants included in the credit facility, except a minimum fixed charge coverage ratio test which will be triggered if our liquidity, as defined in the credit facility, falls below $7.5 million. At March 31, 2010, there were no borrowings outstanding under the credit facility; however, there were letters of credit of approximately $1.3 million outstanding under the credit facility. The credit facility agreement also contains customary borrowing conditions, including a material adverse effect provision. If we were to experience a material adverse effect, as defined by our credit facility agreement, we would be unable to borrow under the credit facility. As a result of our current fixed charge coverage ratio, we would only be able to borrow up to $4.5 million of the $12.0 million of availability under the borrowing base due to a restriction in the future if our liquidity, as defined in the credit facility agreement, falls below $7.5 million.

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

7. SHARE-BASED COMPENSATION

On April 14, 2008, the board of directors of Holdings adopted the 2008 Director Stock Option Plan (Director Plan) and the 2008 Employee Stock Option Plan (Employee Plan). The Director Plan permits the issuance of up to 192,096 shares of Holdings’ common stock to Holdings’ directors, and the Employee Plan permits the issuance of up to 768,000 shares of Holdings’ common stock to employees and key non-employees of Holdings. Each of the plans was approved at Holdings’ 2008 Annual Meeting of Stockholders.

On April 14, 2008, each of the Company’s non-employee directors was granted options under the Director Plan to purchase (i) 16,008 shares of Holdings’ common stock at an exercise price of $1.01 per share and (ii) 16,008 shares of Holdings’ common stock at an exercise price of $1.16 per share. Each set of options becomes exercisable in increments of 1/3rd (5,336 per set) on December 31, 2008, December 31, 2009 and December 31, 2010. As of March 31, 2010, options to purchase 192,096 shares of Holdings’ common stock were outstanding under this plan.

On August 19, 2008, we granted options under the Employee Plan to purchase 447,000 shares of our common stock to certain of our officers at an exercise price of $0.36 per share. On November 11, 2008, we granted options under the Employee Plan to purchase 140,000 shares of our common stock to certain other officers at an exercise price of $0.15 per share. In November, 2009, we entered into a separation agreement with one of our officers, which resulted in the cancellation of options to purchase 70,000 shares of common stock. On December 17, 2009, we granted options under the Employee Plan to purchase 95,000 shares of our common stock to certain other officers at an exercise price of $0.14 per share. On March 31, 2010, we granted options under the Employee Plan to purchase 40,000 shares of our common stock to certain other officers at an exercise price of $0.15 per share. The options granted under the Employee Plan expire ten years from the date of grant, and will vest and become exercisable if, and only if, a refinancing event (as defined in the option agreements) is achieved prior to the expiration of the options. As of March 31, 2010, options to purchase 652,000 shares of Holdings’ common stock were outstanding under the Employee Plan.

A summary of the status of options for shares of Holdings’ common stock at March 31, 2010 and changes during the period is presented below (unaudited):


								Weighted
						Weighted		Average
				Weighted		Average		Remaining
	Number of			Average		Grant Date		Contractual
	Options			Exercise Price		Fair Value		Term (years)
Outstanding, June 30, 2009		779,096		$	0.50	$	0.48		8.95
Granted		—			—		—

Outstanding, September 30, 2009		779,096		$	0.50	$	0.48		8.73
Granted		95,000			0.14		0.14		10.00
Canceled		(70,000	)		0.15		0.05		8.92

Outstanding, December 31, 2009		804,096			0.49		0.47		8.68
Granted		40,000			0.15		0.14		9.75
Canceled		—			—		—

Outstanding, March 31, 2010		844,096		$	0.49	$	0.47		8.49


Exercisable at June 30, 2009		64,032		$	1.09
Exercisable at September 30, 2009		64,032		$	1.09
Exercisable at December 31, 2009		128,064		$	1.09
Exercisable at March 31, 2010		128,064		$	1.09

Of the options outstanding at March 31, 2010, the characteristics are as follows (unaudited):


Exercise Price		Weighted Average		Options		Total Options		Remaining Contractual
Range		Exercise Price		Exercisable		Outstanding		Life
$	0.15	$	0.15		—		40,000	9.75 years
	0.14		0.14		—		95,000	9.75 years
	0.15		0.15		—		70,000	8.67 years
	0.36		0.36		—		447,000	8.42 years
	1.01		1.01		64,032		96,048	8.08 years
	1.16		1.16		64,032		96,048	8.08 years

					128,064		844,096

We account for share-based compensation under ASC Topic 718 Compensation “Stock Compensation” (“ASC 718”). We recognized approximately $0.1 million of compensation expense related to stock options under the Director Plan in the condensed consolidated statements of operations and comprehensive losses for each of the nine months ended March 31, 2010 and 2009. Because vesting of options granted under the Employee Plan is solely based on a refinancing event, management assessed whether a financing event, under the provisions of ASC 718, is considered probable. Management determined a refinancing event is currently not considered probable, and therefore, no share-based compensation expense has been recognized in the consolidated statement of operations and comprehensive losses related to the employee plan.

ASC 718 requires the use of a valuation model to calculate the fair value of share-based awards. We have elected to use the Black-Scholes option pricing model, which incorporates various assumptions including volatility, estimated life and interest rates. The estimated life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees. The average risk-free rate is based on the ten-year U.S. Treasury security rate in effect as of the grant date. The fair value of each non-employee director option grant issued was estimated on the date of grant or issuance using the Black-Scholes pricing model. The assumptions used for grants and issuances have not changed.

8. INCOME TAXES

As of March 31, 2010, we had federal net operating loss, or NOL, carryforwards of $139.5 million and various state NOL carryforwards. These NOL carryforwards expire between 2010 and 2029. On August 1, 2007 a confirmed plan of reorganization and cancellation of indebtedness for Holdings and InSight became effective. Future utilization of NOL carryforwards will be limited by Internal Revenue Code section 382 and related provisions as a result of the change in control that occurred. The rules under Internal Revenue Code Section 382 in connection with reorganization and cancellation of indebtedness allow for companies to make an election as to how to compute the annual limitation.

A valuation allowance is provided against net deferred tax assets when it is more likely than not that the net deferred tax asset will not be realized. Based upon (1) our losses in recent years, (2) impairment charges recorded in fiscal years 2010, 2009, 2008 and 2007 and (3) the available evidence, management determined that it is more likely than not that the net deferred tax assets will not be realized. Consequently, we have a full valuation allowance against such net deferred tax assets. In determining the net asset subject to a valuation allowance, we excluded the deferred tax liability related to our indefinite-lived other intangible assets that is not expected to reverse in the foreseeable future resulting in a net deferred tax liability of $6.0 million after application of the valuation allowance as of March 31, 2010. The valuation allowance may be reduced in the future if we forecast and realize future taxable income or other tax planning strategies are implemented. Future reversals of this valuation allowance recorded will be recorded as an income tax benefit.

On July 1, 2007, we adopted ASC 740 “Income Taxes” formerly the Financial Accounting Standards Board (“FASB”) Interpretation No. 48 an interpretation of FASB Statement No. 109 (“ASC 740”). ASC 740 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. ASC 740 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in the tax return. The liability for income taxes associated with uncertain tax positions was $0.7 and $1.4 million as of March 31, 2010 and June 30, 2009, respectively, and is included in other long-term liabilities. This amount, if not required, would favorably affect our effective tax rate. We recognize interest and penalties, if any, related to uncertain tax positions in the provision for income taxes. For the three months ended March 31, 2010, we recognized a tax benefit of $0.7 million associated with the uncertain tax positions due to the expiration of certain state jurisdictions’ statute of limitations. As of March 31, 2010, all material federal and state income tax matters have been concluded through June 30, 2004.

9. SEGMENT INFORMATION

Effective July 1, 2009, we redefined the business segments based on how our chief operating decision maker views the businesses and assesses the performance of our business managers. We now have three reportable segments: contract services, patient services and other operations, which are business units defined primarily by the type of service provided. Contract services consist of centers (primarily mobile units) which generate revenues from fee-for-service arrangements and fixed-fee contracts billed directly to our healthcare provider customers, such as hospitals, which we refer to as wholesale operations. We internally handle the billing and collections for our contract services at relatively low cost, and we do not bear the direct risk of collections from third party-payors or patients. Patient services consist of centers (mainly fixed-sites) that primarily generate revenues from services billed, on a fee-for-service basis, directly to patients or third-party payors, such as Medicare, Medicaid and health maintenance organizations, which we refer to as our retail operations. We have primarily outsourced the billing and collections for our patient services to Dell Perot Systems, and we bear the direct risk of collections from third-party payors and patients. We allocate corporate overhead, depreciation related to our billing system and income taxes to other operations. Other operations generate revenues primarily from agreements with customers to provide management services, which could include field operations, billing and collections and accounting and other office services. We refer to this revenue as generated from our “Insight Imaging Enterprise Solutions” business. Other operations include all unallocated corporate expenses. We manage cash flows and assets 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, 2010:


	Contract			Patient			Other
	services			Services			Operations			Consolidated
Total revenues	$	72,625		$	69,896		$	1,591		$	144,112

Equipment leases		6,316			1,610			—			7,926
Depreciation and amortization		14,242			9,325			1,838			25,405
Total costs of operations		60,953			68,865			2,375			132,193
Corporate operating expenses		—			—			(14,254	)		(14,254	)
Equity in earnings of unconsolidated partnerships		403			1,333			—			1,736
Interest expense, net		(489	)		(387	)		(18,892	)		(19,768	)
Gain on sales of centers		—			300			—			300
Impairment of intangible assets		(1,717	)		(232	)		—			(1,949	)
Income (loss) before income taxes		9,869			2,045			(33,930	)		(22,016	)

Net additions to property and equipment		6,542			10,813			2,018			19,373

Nine months ended March 31, 2009:


	Contract			Patient			Other
	Services			Services			Operations			Consolidated
Total Revenues	$	88,672		$	83,959		$	1,906		$	174,537

Equipment leases		7,158			1,159			31			8,348
Depreciation and amortization		19,578			13,338			2,276			35,192
Total costs of operations		74,535			86,751			2,808			164,094
Corporate operating expenses		—			—			(17,238	)		(17,238	)
Equity in earnings of unconsolidated partnerships		435			1,287			—			1,722
Interest expense, net		(1,100	)		(989	)		(21,142	)		(23,231	)
Gain on sales of centers		—			7,689			—			7,689
Gain on purchase of notes payable		—			—			6,788			6,788
Impairment of intangible assets		(4,600	)		—			—			(4,600	)
Income (loss) before income taxes		8,872			5,195			(32,494	)		(18,427	)

Net additions to property and equipment		5,610			(3,437	)		1,073			3,246

Three months ended March 31, 2010:


	Contract			Patient			Other
	services			Services			Operations			Consolidated
Total revenues	$	23,672		$	22,204		$	483		$	46,359

Equipment leases		2,216			552			—			2,768
Depreciation and amortization		4,279			3,082			568			7,929
Total costs of operations		19,749			22,716			726			43,191
Corporate operating expenses		—			—			(4,454	)		(4,454	)
Equity in earnings of unconsolidated partnerships		109			455			—			564
Interest expense, net		(126	)		(92	)		(5,967	)		(6,185	)
Gain on sales of centers		—			300			—			300
Income (loss) before income taxes		3,906			151			(10,664	)		(6,607	)

Net additions to property and equipment		1,713			6,560			581			8,854

Three months ended March 31, 2009:


	Contract			Patient			Other
	Services			Services			Operations			Consolidated
Total revenues	$	28,079		$	24,389		$	738		$	53,206

Equipment leases		2,232			369			31			2,632
Depreciation and amortization		6,633			3,723			398			10,754
Total costs of operations		24,231			24,940			601			49,772
Corporate operating expenses		—			—			(6,111	)		(6,111	)
Equity in earnings of unconsolidated partnerships		124			490			—			614
Interest expense, net		(303	)		(258	)		(6,721	)		(7,282	)
Gain on sales of centers		—			701			—			701
Gain on purchase of notes payable		—			—			5,542			5,542
Income (loss) before income taxes		3,669			382			(7,153	)		(3,102	)

Net additions to (disposals from) property and equipment		(2,193	)		10,862			(455	)		8,214

10. NEW ACCOUNTING PRONOUNCEMENTS

FASB ASC Topic 805 “Business Combinations” formerly SFAS 141(R) (“ASC 805”) establishes principles and requirements for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed and any noncontrolling interest in an acquisition, at their fair value as of the acquisition date. ASC 805 is effective for fiscal years beginning after December 15, 2008. We expect ASC 805 will have an impact on accounting for business combinations, but the effect is generally dependent upon acquisitions at that time. The adoption of ASC 805 did not have a material impact on our consolidated financial statements for the nine months ended March 31, 2010.

ASC 805 formerly FSP No. FAS 141(R)-1 is effective for contingent assets or contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this standard did not have a material impact on our consolidated financial statements for the nine months ended March 31, 2010.

FASB ASC Topic 810 “Consolidation” formerly SFAS 160 (“ASC 810”) establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. ASC 810 is effective for fiscal years beginning after December 15, 2008. On July 1, 2009 we adopted ASC 810. As of March 31, 2010, ASC 810 only effected our reporting requirements and therefore had no impact on our consolidated financial position, results of operations or cash flows. The adoption of ASC 810 could have a material impact on our consolidated financial statements and results of operations in the future if we were to acquire a non-controlling interest in an entity or change our interest in one of our joint ventures.

FASB ASC Topic 815 “Derivatives and Hedging” formerly SFAS 161 (“ASC 815”) requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under this topic, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. We adopted ASC 815 on January 1, 2009. As ASC 815 only requires enhanced disclosures, it had no impact on our consolidated financial statements.

FASB ASC Topic 810 “Amendments to FASB Interpretation No. 46(R)” formerly SFAS No. 167 (“ASC 810”) enhances the current guidance on disclosure requirements for companies with financial interest in a variable interest entity. This statement amends Interpretation 46(R) to replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (a) the obligation to absorb losses of the entity or (b) the right to receive benefits from the entity. This statement requires an additional reconsideration event when determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance. It also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity. This statement amends Interpretation 46(R) to require additional disclosures about an enterprise’s involvement in variable interest entities. ASC 810 is effective for fiscal years beginning after November 15, 2009, with early application prohibited. We are currently evaluating the impact of the adoption of ASC 810 on our consolidated financial statements.

FASB ASC Topic 105 “Generally Accepted Accounting Principles” formerly SFAS 168 (“ASC 105”) is the single source of authoritative Generally Accepted Accounting Principles (“GAAP”) in the United States. The previous GAAP hierarchy consisted of four levels of authoritative accounting and reporting guidance levels. The ASC 105 eliminated this hierarchy and replaced the previous GAAP with just two levels of literature: authoritative and non-authoritative. ASC 105 was effective as of July 1, 2009.

In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05 to provide guidance on measuring the fair value of liabilities. The ASU provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques:

	(i)		a valuation technique that uses the quoted price of the identical liability when traded as an asset; or, quoted prices for similar liabilities, or similar liabilities when traded as assets, or

	(ii)		another valuation technique consistent with the principles of ASC Topic 820 — Fair Value Measurements and Disclosures, such as an income approach or market approach.

Additionally, when estimating the fair value of a liability, a reporting entity is not required to make an adjustment relating to the existence of a restriction that prevents the transfer of the liability. This ASU also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments are required, are Level 1 fair value measurements under ASC Topic 820. The adoption of this standard did not have a material impact on our consolidated financial statements for the nine months ended March 31, 2010.

In September 2009, the FASB issued ASU 2009-13, which eliminates the criterion for objective and reliable evidence of fair value for the undelivered products or services. Instead, revenue arrangements with multiple deliverables should be divided into separate units of accounting provided the deliverables meet certain criteria. ASU 2009-13 provides a hierarchy for estimating the selling price for each of the deliverables. ASU 2009-13 eliminates the use of the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables based on their relative selling price. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We are currently assessing the impact of this accounting standards update on our consolidated financial position and results of operation.

11. HEDGING ACTIVITIES

We account for hedging activities in accordance with ASC Topic 815 — Derivatives and Hedging, and we formally document our hedge relationships, including identification of the hedging instruments and the hedged items, as well as our risk management objectives and strategies for undertaking the hedge. We also formally assess, both at inception and at least quarterly thereafter, whether the derivative instruments that are used in hedging transactions are highly effective in offsetting the changes in either the fair value or cash flows of the hedged item.

We had an interest rate hedging agreement with Bank of America, N.A. The agreement effectively provided us with an interest rate collar. The notional amount to which the agreement applies is $190 million, and it provided for a LIBOR cap of 3.25% and a LIBOR floor of 2.59% on that amount. Our obligations under the agreement were secured on a pari passu basis by the same collateral that secures our credit facility, and the agreement was cross-defaulted to our credit facility. We designated this contract as a highly effective cash flow hedge of the floating rate notes under ASC Topic 815 “Derivatives and Hedging” formerly SFAS 133 (“ASC 815). Accordingly, the value of the contract was marked-to-market quarterly, with changes in the fair value of the contract included as a separate component of other comprehensive income (loss).

In August 2009, we entered into an interest rate cap agreement with Bank of America, N.A. with a notional amount of $190 million that has been designated as a highly effective cash flow hedge of future interest payments associated with the floating rate notes. Under the terms of this agreement, we receive a three-month LIBOR cap of 3.0% effective February 1, 2010 through January 31, 2011, and pay a fee of approximately $0.5 million over the contract period. The contract exposes us to credit risk in the event that the counterparty to the contract does not or cannot meet its obligations; however, Bank of America, N.A. is a major financial institution and we expect that it will perform its obligations under the contract. The net effect of the hedge is to cap interest payments for $190 million of our debt at a rate of 8.25%, because our floating rate notes incur interest at three-month LIBOR plus 5.25%. The value of the interest rate cap contract is marked-to-market quarterly, with effective changes in the fair value of the contract included in other comprehensive income (loss). As of March 31, 2010, the interest rate cap contract had an asset value related to the premium of $0.3 million and a fair market value liability of $0.3 million, resulting in a net value of essentially zero.

12. (LOSS) INCOME PER COMMON SHARE

We report basic and diluted earnings per share, or EPS, for our common stock. Basic EPS is computed by dividing reported earnings by the weighted average number of common shares outstanding during the respective period. Diluted EPS is computed by adding to the weighted average number of common shares the dilutive effect of stock options. There were no adjustments to net income (loss) (the numerator) for purposes of computing EPS. Due to the net losses reported for the three and nine months ended March 31, 2010 and March 31, 2009 the calculation of diluted EPS is the same as basic EPS.

13. FAIR VALUE MEASUREMENTS

We adopted ASC Topic 820 “Fair Value Measurements and Disclosures” formerly SFAS 157 (“ASC 820”) on August 1, 2007, the date a confirmed plan of reorganization and cancellation of debt of Holdings and InSight became effective. ASC 820, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Assets and liabilities measured at fair value are based on one or more of three valuation techniques noted in ASC 820. The three valuation techniques are identified in the tables below. Where more than one technique is noted, individual assets or liabilities were valued using one or more of the noted techniques. The valuation techniques are as follows:

	(a)		Market approach — prices and other relevant information generated by market conditions involving identical or comparable assets or liabilities;

	(b)		Cost approach — amounts that would be required to replace the service capacity of assets (replacement cost); and

	(c)		Income approach — techniques to convert future amounts to single present amounts based on market expectations (including present value techniques, option-pricing and excess earnings models).

Assets and liabilities measured at fair value on a recurring basis consist of interest rate collar and cap contracts (amounts in thousands) (unaudited):

Fair Value Measurements Using

Quoted price

Significant

in active

other

markets for

observable

unobservable

March 31,

identical assets

inputs

Valuation

2010 (1)

(Level 1)

(Level 2)

(Level 3)

Technique

Interest rate cap — asset position

—

)


(1)		This amount includes prepaid premiums of $318K offset by the fair value of the derivative contract of $316K.

14. COMMITMENTS AND CONTINGENCIES

On January 5, 2010, Holdings, InSight and InSight Health Corp., a wholly-owned subsidiary of InSight, were served with a complaint filed in the Los Angeles County Superior Court alleging claims on behalf of current and former employees. In Kevin Harold and Denise Langhoff, on their own behalf and on behalf of others similaly situated v. InSight Health Services Holdings Corp., et al., the plaintiffs allege violations of California’s wage, overtime, meal period, break time and business practice laws and regulations. Plaintiffs seek recovery of unspecified economic damages, statutory penalties, punitive damages, interest, attorneys’ fees and costs of suit. We are currently evaluating the allegations of the complaint and are unable to predict the likely timing or outcome of this lawsuit. In the meantime we intend to vigorously defend this lawsuit.

We are engaged from time to time in the defense of other lawsuits arising out of the ordinary course and conduct of our business and have insurance policies covering certain potential insurable losses where such coverage is cost-effective. We do not believe that the outcome of any such other lawsuit will have a material adverse impact on our financial condition and results of operations.

15. RECONCILIATION OF TOTAL STOCKHOLDERS’ EQUITY

The following tables summarize the changes in consolidated stockholders’ equity, including noncontrolling interest, in accordance with ASC 805 for the nine months ended March 31 2010, and 2009 (amounts in thousands, except share data) (unaudited):


							Accumulated
					Additional		Other						InSight					Total
	Common Stock				Paid-In		Comprehensive			Retained			Health Services			Noncontrolling		Stockholders’
	Shares		Amount		Capital		Gain (Loss)			Deficit			Holdings Corp.			Interest		Equity
BALANCE AT JUNE 30, 2009		8,644,444	$	9	$	37,536	$	(2,528	)	$	(188,939	)	$	(153,922	)	$	1,784	$	(152,138	)

Net income (loss)		—		—		—		—			(21,205	)		(21,205	)		510		(20,695	)
Share-based compensation		—		—		55		—			—			55			—		55
Net contributions		—		—		—		—			—			—			201		201
Other comprehensive income:
Unrealized income attributable to change in fair value of interest rate contracts		—		—		—		2,212			—			2,212			—		2,212

Comprehensive loss														(18,993	)


BALANCE AT MARCH 31, 2010		8,644,444	$	9	$	37,591	$	(316	)	$	(210,144	)	$	(172,860	)	$	2,495	$	(170,365	)

16. ACQUISITIONS

In March, 2010 we acquired an equity interest in a joint venture with a prominent radiology group in the Dallas/Fort Worth, Texas area. The joint venture is a fixed-site multi-modality center. The total investment was $1.8 million, of which $0.9 was paid in cash. Acquisition-related transaction costs were minimal and expensed as incurred. In accordance with ASC 805, we allocated the purchase price of this joint venture based on the fair value of the assets acquired with the residual recorded to goodwill. We considered a number of factors in performing this valuation, including the valuation of identifiable intangible assets. Goodwill and intangible assets acquired included approximately $1.0 million for customer relationships (amortized over 30 years), and $0.2 million of goodwill which we reported in our patient services business segment. The goodwill and other intangibles recognized in this transaction are deductible for tax purposes.

Insight is the majority owner of the joint venture and therefore the results of operations and the financial position of the joint venture will be consolidated with Insight. The fair value of the noncontrolling interest at acquisition was $0.5 million.

17. SUBSEQUENT EVENTS

On May 13, 2010 we signed a definitive agreement to acquire eight fixed-site imaging centers in the Phoenix, Arizona, El Paso, Texas, and Las Cruces, New Mexico areas from MedQuest Associates (MedQuest), a subsidiary of Novant Health for a total purchase price of $8.5 million. In a separate transaction, we agreed to sell certain assets in our contract services segment for $9.2 million to MedQuest. Both transactions are fully cash with each party paying gross cash to the other. The acquisition is expected to close in July 2010.

18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Holdings and all of InSight’s wholly owned subsidiaries, or guarantor subsidiaries, guarantee InSight’s payment obligations under the floating rate notes (Note 6). These guarantees are full, unconditional and joint and several. The following condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 “Financial statements of guarantors and issuers of guaranteed securities registered or being registered.” We account for our investment in InSight and its subsidiaries under the equity method of accounting. Dividends from InSight to Holdings are restricted under the agreements governing our material indebtedness. 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 CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
March 31, 2010
(Amounts in thousands)


							GUARANTOR			NON-GUARANTOR
	HOLDINGS			INSIGHT			SUBSIDIARIES			SUBSIDIARIES		ELIMINATIONS			CONSOLIDATED
ASSETS
Current assets:
Cash and cash equivalents	$	—		$	—		$	8,829		$	2,543	$	—		$	11,372
Trade accounts receivables, net		—			—			21,376			2,479		—			23,855
Other current assets		—			—			8,841			340		—			9,181
Intercompany accounts receivable		37,601			283,690			2,557			—		(323,848	)		—

Total current assets		37,601			283,690			41,603			5,362		(323,848	)		44,408
Property and equipment, net		—			—			69,311			5,758		—			75,069
Cash, restricted		—			—			1,384			—		—			1,384
Investments in partnerships		—			—			6,354			—		—			6,354
Investments in consolidated subsidiaries		(210,461	)		(210,461	)		6,346			—		414,576			—
Other assets		—			—			254			—		—			254
Goodwill and other intangible assets, net		—			—			18,592			4,289		—			22,881

	$	(172,860	)	$	73,229		$	143,844		$	15,409	$	90,728		$	150,350

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable and capital lease obligations	$	—		$	—		$	487		$	972	$	—		$	1,459
Accounts payable and other accrued expenses		—			—			24,655			708		—			25,363
Intercompany accounts payable		—			—			321,291			2,557		(323,848	)		—

Total current liabilities		—			—			346,433			4,237		(323,848	)		26,822
Notes payable and capital lease obligations, less current portion		—			283,690			1,120			2,331		—			287,141
Other long-term liabilities		—			—			6,752			—		—			6,752
Total stockholders’ equity (deficit) attributable to InSight Health Services Holdings Corp		(172,860	)		(210,461	)		(210,461	)		6,346		414,576			(172,860	)
Noncontrolling interest		—			—			—			2,495		—			2,495

Total stockholders’ equity (deficit)		(172,860	)		(210,461	)		(210,461	)		8,841		414,576			(170,365	)

	$	(172,860	)	$	73,229		$	143,844		$	15,409	$	90,728		$	150,350

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
JUNE 30, 2009
(Amounts in thousands)


							GUARANTOR			NON-GUARANTOR
	HOLDINGS			INSIGHT			SUBSIDIARIES			SUBSIDIARIES		ELIMINATIONS			CONSOLIDATED
ASSETS
Current assets:
Cash and cash equivalents	$	—		$	—		$	17,443		$	2,197	$	—		$	19,640
Trade accounts receivables, net		—			—			23,429			2,165		—			25,594
Other current assets		—			—			9,766			222		—			9,988
Intercompany accounts receivable		37,544			291,403			3,101			—		(332,048	)		—

Total current assets		37,544			291,403			53,739			4,584		(332,048	)		55,222
Assets held for sale								2,700								2,700
Property and equipment, net		—			—			74,820			5,017		—			79,837
Cash, restricted		—			—			6,488			—		—			6,488
Investments in partnerships		—			—			6,791			—		—			6,791
Investments in consolidated subsidiaries		(191,466	)		(203,532	)		4,308			—		390,690			—
Other assets		—			—			208			—		—			208
Goodwill and other intangible assets, net		—			—			21,233			3,645		—			24,878

	$	(153,922	)	$	87,871		$	170,287		$	13,246	$	58,642		$	176,124

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable and capital lease obligations	$	—		$	—		$	732		$	978	$	—		$	1,710
Accounts payable and other accrued expenses		—			—			35,380			657		—			36,037
Intercompany accounts payable		—			—			328,948			3,100		(332,048	)		—

Total current liabilities		—			—			365,060			4,735		(332,048	)		37,747
Notes payable and capital lease obligations, less current portion		—			279,337			559			2,419		—			282,315
Other long-term liabilities		—			—			8,200			—		—			8,200
Total stockholders’ equity (deficit) attributable to InSight Health Services Holdings Corp		(153,922	)		(191,466	)		(203,532	)		4,308		390,690			(153,922	)
Noncontrolling interest		—			—			—			1,784		—			1,784

Total stockholders’ equity (deficit)		(153,922	)		(191,466	)		(203,532	)		6,092		390,690			(152,138	)

	$	(153,922	)	$	87,871		$	170,287		$	13,246	$	58,642		$	176,124

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, 2010
(Amounts in thousands)


							GUARANTOR			NON-GUARANTOR
	HOLDINGS			INSIGHT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATION		CONSOLIDATED
Total revenues	$	—		$	—		$	130,838		$	13,274		$	—	$	144,112
Costs of services		—			—			87,603			8,132			—		95,735
Provision for doubtful accounts		—			—			2,688			439			—		3,127
Equipment leases		—			—			7,301			625			—		7,926
Depreciation and amortization		—			—			23,547			1,858			—		25,405

Costs of operations		—			—			121,139			11,054			—		132,193
Corporate operating expenses		(55	)		—			(14,199	)		—			—		(14,254	)
Equity in earnings of unconsolidated partnerships		—			—			1,736			—			—		1,736
Interest expense, net		—			—			(19,562	)		(206	)		—		(19,768	)
Gain on sales of centers		—			—			300			—			—		300
Impairment of intangible assets		—			—			(1,949	)		—			—		(1,949	)

Income (loss) before income taxes		(55	)		—			(23,975	)		2,014			—		(22,016	)
Benefit for income taxes		—			—			(1,321	)		—			—		(1,321	)

Income (loss) before equity in loss of consolidated subsidiaries		(55	)		—			(22,654	)		2,014			—		(20,695	)
Equity in loss of consolidated subsidiaries		(21,150	)		(21,150	)		1,504			—			40,796		—

Net income (loss)		(21,205	)		(21,150	)		(21,150	)		2,014			40,796		(20,695	)
Less: net income attributable to noncontrolling interests		—			—			—			510			—		510

Net income (loss) attributable to InSight Health Services Corp.	$	(21,205	)	$	(21,150	)	$	(21,150	)	$	1,504		$	40,796	$	(21,205	)

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, 2009
(Amounts in thousands)


							GUARANTOR			NON-GUARANTOR
	HOLDINGS			INSIGHT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATION		CONSOLIDATED
Total revenues		—			—			160,376			14,161			—		174,537
Costs of services		—			—			108,206			9,037			—		117,243
Provision for doubtful accounts		—			—			2,704			607			—		3,311
Equipment leases		—			—			7,781			567			—		8,348
Depreciation and amortization		—			—			32,848			2,344			—		35,192

Costs of operations		—			—			151,539			12,555			—		164,094
Corporate operating expenses		(55	)		—			(17,183	)		—			—		(17,238	)
Equity in earnings of unconsolidated partnerships		—			—			1,722			—			—		1,722
Interest expense, net		—			—			(22,927	)		(304	)		—		(23,231	)
Gain on sales of centers		—			—			7,689			—			—		7,689
Gain on purchase of notes payable		—			6,788			—			—			—		6,788
Impairment of intangible assets		—			—			(4,600	)		—			—		(4,600	)

Income (loss) before income taxes		(55	)		6,788			(26,462	)		1,302			—		(18,427	)
Benefit for income taxes		—			—			(1,552	)		—			—		(1,552	)

Income (loss) before equity in loss of consolidated subsidiaries		(55	)		6,788			(24,910	)		1,302			—		(16,875	)
Equity in loss of consolidated subsidiaries		(17,354	)		(24,142	)		768			—			40,728		—

Net (loss) income		(17,409	)		(17,354	)		(24,142	)		1,302			40,728		(16,875	)
Less: net income attributable to noncontrolling interests		—			—			—			534			—		534

Net loss attributable to InSight Health Services Corp.	$	(17,409	)	$	(17,354	)	$	(24,142	)	$	768		$	40,728	$	(17,409	)

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2010
(Amounts in thousands)


							GUARANTOR			NON-GUARANTOR
	HOLDINGS			INSIGHT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATION		CONSOLIDATED
Total revenues	$	—		$	—		$	42,153		$	4,206		$	—	$	46,359
Costs of services		—			—			28,862			2,688			—		31,550
Provision for doubtful accounts		—			—			799			145			—		944
Equipment leases		—			—			2,527			241			—		2,768
Depreciation and amortization		—			—			7,258			671			—		7,929

Costs of operations		—			—			39,446			3,745			—		43,191
Corporate operating expenses		(18	)		—			(4,436	)		—			—		(4,454	)
Equity in earnings of unconsolidated partnerships		—			—			564			—			—		564
Interest expense, net		—			—			(6,124	)		(61	)		—		(6,185	)
Gain on sales of centers		—			—			300			—			—		300
Gain on purchase of notes payable		—			—			—			—			—		—

Income (loss) before income taxes		(18	)		—			(6,989	)		400			—		(6,607	)
Benefit for income taxes		—			—			(675	)		—			—		(675	)

Income (loss) before equity in loss of consolidated subsidiaries		(18	)		—			(6,314	)		400			—		(5,932	)
Equity in loss of consolidated subsidiaries		(6,039	)		(6,039	)		275			—			11,803		—

Net income (loss)		(6,057	)		(6,039	)		(6,039	)		400			11,803		(5,932	)
Less: net income attributable to noncontrolling interests		—			—			—			125			—		125

Net income (loss) attributable to InSight Health Services Corp.	$	(6,057	)	$	(6,039	)	$	(6,039	)	$	275		$	11,803	$	(6,057	)

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2009
(Amounts in thousands)


							GUARANTOR			NON-GUARANTOR
	HOLDINGS			INSIGHT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATION		CONSOLIDATED
Total revenues		—			—			53,728			(522	)		—		53,206
Costs of services		—			—			37,093			(1,682	)				35,411
Provision for doubtful accounts		—			—			944			31					975
Equipment leases		—			—			2,695			(63	)				2,632
Depreciation and amortization		—			—			11,098			(344	)		—		10,754

Costs of operations		—			—			51,830			(2,058	)		—		49,772
Corporate operating expenses		(19	)		—			(6,092	)		—			—		(6,111	)
Equity in earnings of unconsolidated partnerships		—			—			614			—			—		614
Interest expense, net		—			—			(7,258	)		(24	)		—		(7,282	)
Gain on sales of centers		—			—			701			—			—		701
Gain on purchase of notes payable		—			5,542			—			—			—		5,542

Income (loss) before income taxes		(19	)		5,542			(10,137	)		1,512			—		(3,102	)
Benefit for income taxes		—			—			140			—			—		140

Income (loss) before equity in loss of consolidated subsidiaries		(19	)		5,542			(10,277	)		1,512			—		(3,242	)
Equity in loss of consolidated subsidiaries		(3,387	)		(8,929	)		1,348			—			10,968		—

Net (loss) income		(3,406	)		(3,387	)		(8,929	)		1,512			10,968		(3,242	)
Less: net income attributable to noncontrolling interests		—			—			—			164			—		164

Net loss attributable to InSight Health Services Corp.	$	(3,406	)	$	(3,387	)	$	(8,929	)	$	1,348		$	10,968	$	(3,406	)

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, 2010
(Amounts in thousands)


							GUARANTOR			NON-GUARANTOR
	HOLDINGS			INSIGHT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
OPERATING ACTIVITIES:
Net (loss) income	$	(21,205	)	$	(21,150	)	$	(21,150	)	$	2,014		$	40,796		$	(20,695	)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		—			—			23,547			1,858			—			25,405
Amortization of bond discount		—			—			4,352			—			—			4,352
Share-based compensation		55			—			—			—			—			55
Equity in earnings of unconsolidated partnerships		—			—			(1,736	)		—			—			(1,736	)
Distributions from unconsolidated partnerships		—			—			2,173			—			—			2,173
Gain on sales of equipment		—			—			(836	)		—			—			(836	)
Gain/loss on sales of centers		—			—			(300	)		—			—			(300	)
Impairment of intangible assets		—			—			1,949			—			—			1,949
Equity in (loss) income of consolidated subsidiaries		21,150			21,150			(1,504	)		—			(40,796	)		—
Deferred income taxes		—			—			(779	)		—			—			(779	)
Changes in operating assets and liabilities:																	—
Trade accounts receivables, net		—			—			2,053			(314	)		—			1,739
Intercompany receivables, net		—			—			10			(10	)		—			—
Other current assets		—			—			889			(302	)		—			587
Accounts payable and other accrued expenses		—			—			(8,808	)		51			—			(8,757	)

Net cash (used in) provided by operating activities		—			—			(140	)		3,297			—			3,157


INVESTING ACTIVITIES:
Proceeds from sales of centers		—			—			2,721			—			—			2,721
Proceeds from sales of equipment		—			—			1,401			—			—			1,401
Additions to property and equipment		—			—			(16,467	)		(2,109	)		—			(18,576	)
Acquisition of fixed-site centers		—			—			(275	)		(643	)		—			(918	)
Decrease in restricted cash		—			—			5,104			—			—			5,104

Net cash used in investing activities		—			—			(7,516	)		(2,752	)		—			(10,268	)


FINANCING ACTIVITIES:
Principal payments of notes payable and capital lease obligations		—			—			(958	)		(1,177	)		—			(2,135	)
Proceeds from issuance of debt obligations		—			—			—			1,083			—			1,083
Cash contributions from non-controlling interest		—			—			—			88			—			88
Distributions to non-controlling interest		—			—			—			(193	)		—			(193	)

Net cash used in financing activities		—			—			(958	)		(199	)		—			(1,157	)


INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		—			—			(8,614	)		346			—			(8,268	)
Cash, beginning of period		—			—			17,443			2,197			—			19,640

Cash, end of period	$	—		$	—		$	8,829		$	2,543		$	—		$	11,372

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, 2009
(Amounts in thousands)


							GUARANTOR			NON-GUARANTOR
	HOLDINGS			INSIGHT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
OPERATING ACTIVITIES:
Net (loss) income	$	(17,409	)	$	(17,354	)	$	(24,142	)	$	1,302		$	40,728		$	(16,875	)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		—			—			31,786			3,406			—			35,192
Amortization of bond discount		—			—			4,005			—			—			4,005
Share-based compensation		55			—			—			—			—			55
Equity in earnings of unconsolidated partnerships		—			—			(1,722	)		—			—			(1,722	)
Distributions from unconsolidated partnerships		—			—			2,005			—			—			2,005
Gain on sales of centers		—			—			(4,837	)		(2,852	)		—			(7,689	)
Gain on sales of equipment		—			—			(670	)		—			—			(670	)
Gain on purchase of notes payable		—			(6,788	)					—			—			(6,788	)
Impairment of intangible assets								4,600									4,600
Deferred income taxes		—			—			(2,041	)		—			—			(2,041	)
Equity in loss of consolidated subsidiaries		17,354			24,142			(768	)		—			(40,728	)		—
Changes in operating assets and liabilities:
Trade accounts receivables, net		—			—			5,512			2,072			—			7,584
Intercompany receivables, net		—			—			10,223			(10,223	)		—			—
Other current assets		—			—			(2,182	)		(232	)		—			(2,414	)
Accounts payable and other accrued expenses		—			—			(3,043	)		(2,146	)		—			(5,189	)

Net cash provided by (used in) operating activities		—			—			18,726			(8,673	)		—			10,053


INVESTING ACTIVITIES:
Proceeds from sales of centers		—			—			10,643			9,077			—			19,720
Additions to property and equipment		—			—			(12,563	)		(895	)		—			(13,458	)
Increase in restricted cash		—			—			(13,626	)		—			—			(13,626	)
Other		—			—			(997	)		1,133			—			136

Net cash provided by (used in) investing activities		—			—			(16,543	)		9,315			—			(7,228	)


FINANCING ACTIVITIES:
Principal payments of notes payable and capital lease obligations		—			—			(207	)		(1,486	)		—			(1,693	)
Repurchase of notes payable		—			—			(4,152	)		—			—			(4,152	)

Net cash used in financing activities		—			—			(4,359	)		(1,486	)		—			(5,845	)


DECREASE IN CASH AND CASH EQUIVALENTS		—			—			(2,176	)		(844	)		—			(3,020	)
Cash, beginning of period		—			—			17,934			3,068			—			21,002

Cash, end of period	$	—		$	—		$	15,758		$	2,224		$	—		$	17,982

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

All references to “we,” “us,” “our,” “our company” or “the Company” in this Form 10-Q mean InSight Health Services Holdings Corp., a Delaware corporation incorporated in 2001, and all entities and subsidiaries owned or controlled by InSight Health Services Holdings Corp. All references to “Holdings” mean InSight Health Services Holdings Corp. by itself. All references to “InSight” mean InSight Health Services Corp., a Delaware corporation and a wholly owned subsidiary of Holdings, by itself.

This quarterly report on Form 10-Q (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 projects, financing needs, debt purchases, plans or intentions relating to acquisitions and new fixed-site developments, 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 Form 10-Q 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 Form 10-Q. Important factors that could cause our actual results to differ materially from the forward-looking statements made in this Form 10-Q are described herein, including the factors described in Part II, Item 1A. “Risk Factors” and the following:

	•		our ability to successfully implement our core market strategy;

	•		overcapacity and competition in our markets;

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

	•		contract renewals and financial stability of customers;

	•		changes in the nature of commercial health insurance arrangements, so that individuals bear greater financial responsibility through high deductible plans, co-insurance and co-payments;

	•		conditions within the healthcare environment;

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

	•		operating, legal, governmental and regulatory risks;

	•		conditions within the capital markets, including liquidity and interest rates; and

	•		economic (including financial and employment markets), political and competitive forces affecting our business, and the country’s economic condition as a whole.

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 disclaim any intention or obligation to update or revise forward-looking statements to reflect future events or circumstances.

Overview

We are a provider of retail and wholesale diagnostic imaging services. Our services are noninvasive procedures 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 more than 30 states including the following targeted regional markets: Arizona, certain markets in California, Texas, New England, the Carolinas, Florida and the Mid-Atlantic states. While we generated approximately 67% of our total revenues from MRI services during fiscal 2010, we provide a comprehensive offering of diagnostic imaging services, including PET/CT, CT, mammography, bone densitometry, ultrasound and x-ray.

As of March 31, 2010, our network consists of 63 fixed-site centers and 103 mobile facilities. This combination allows us to provide a full range of imaging services to better meet the varying needs of our customers. Our fixed-site centers include freestanding centers and joint ventures with hospitals and radiology groups. 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 do not engage in the practice of medicine, instead we contract with radiologists to provide professional services, including supervision, interpretation and quality assurance.

We have three reportable segments; contract services, patient services and other operations. Please see below for a discussion of our segments. In our contract services segment we generate revenue principally from 100 mobile units and 18 fixed sites. In our patient services segment we generate revenues principally from 45 fixed site centers and 3 mobile units. In our other operations segment, we generate revenues principally from agreements with customers to provide management services and technical solutions.

The diagnostic imaging industry has grown, and we believe will continue to grow, because of (1) an aging population, (2) the increasing acceptance of diagnostic imaging, particularly PET/CT and (3) expanding applications of CT, MRI and PET technologies. Notwithstanding the growth in the industry, as a result of the various factors that affect our industry generally and our business specifically, we have experienced declines in Adjusted EBITDA as compared to prior year periods (see our definition of Adjusted EBITDA and reconciliation of net cash provided by operating activities to Adjusted EBITDA in the subsection “Financial Condition, Liquidity and Capital Resources” below). Our Adjusted EBITDA for the three and nine months ended March 31, 2010 declined approximately 16.9% and 17.9%, respectively, as compared to our Adjusted EBITDA for the prior year periods. Our Adjusted EBITDA declined approximately 1.2% and 33.1% for fiscal 2009 and 2008, respectively, as compared to prior fiscal years. We have had a negative historical trend of declining Adjusted EBITDA for the past five fiscal years, which may continue and be exacerbated by negative effects of the country’s economic condition, increased competition in our contract services segment and the reimbursement reductions discussed in the subsection “Reimbursement” below.

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

Core Market Strategy. We have pursued a strategy based on core markets. We believe this strategy will allow us more operating efficiencies and synergies than are available in a nationwide strategy. A core market is based on many factors, including, without limitation, demographic and population trends, utilization and reimbursement rates, existing and potential market share, the potential for profitability and return on assets, competition within the surrounding area, regulatory restrictions, such as certificates of need, and potential for alignment with radiologists, hospitals or payors. This strategy has resulted in our exiting some markets while increasing our presence in others or establishing new markets through acquisitions and dispositions. In implementing our core market strategy, we have taken the following actions:

•

During fiscal 2009, we sold eight fixed-site centers (six in California, one in Illinois and one in Tennessee), and equity interests in three joint ventures that operated five fixed-site centers (four in New York and one in California). In addition, we closed three fixed-site centers (two in California and one in Arizona) during fiscal 2009.

	•		During fiscal 2009, we acquired two fixed-site centers in Massachusetts and two fixed-site centers in Arizona.

	•		In July 2009, we sold two fixed-site centers in Pennsylvania.

	•		In March, 2010 we acquired equity interest in a joint venture that operates a fixed-site center in the Dallas/Fort Worth, Texas area.

As a result of implementing our core market strategy, we have reduced our cost of services as a percentage of revenues from 67.2% for the nine months ended March 31, 2009 to 66.4% for the nine months ended March 31, 2010. The decrease is primarily due to disposing of low margin fixed site centers, which had an average cost of services as a percentage of revenues of approximately 73% for the nine months ended March 31, 2009. However, for the three months ended March 31, 2010 versus the same period in the prior year, our cost of services as a percentage of revenues increased to 68.1% from 66.6% due to the decline in revenues for the three month period exceeding our reductions in costs. Nevertheless, while revenues have been adversely affected due to the negative trends discussed below, as a percentage of revenues our Adjusted EBITDA has remained consistent for the nine month periods ended March 31, 2009 and 2010 and the three month periods ended March 31, 2009 and 2010.

We are continuously evaluating opportunities for the acquisition and disposition of certain businesses. There can be no assurance that we can complete sales and/or purchases of these businesses on terms favorable to us in a timely manner to replace the loss of Adjusted EBITDA related to the businesses we sell.

Initiatives — We have attempted to implement, and will continue to develop and implement, various revenue enhancement, receivables and collections management and cost reduction initiatives:

	•		Revenue enhancement initiatives have focused and will focus on our sales and marketing efforts to maintain or improve our procedural volumes and contractual rates, and our Insight Imaging Enterprise Solutions initiative discussed below.

	•		Receivables and collections management initiatives have focused and will continue to focus on collections at point of service, technology improvements to create greater efficiency in the gathering of patient and claim information when a procedure is scheduled or completed, and the initiative with Dell Perot Systems discussed below.

	•		Cost reduction initiatives have focused and will continue to focus on streamlining our organizational structure and expenses including, enhancing and leveraging our technology to create greater efficiencies, and leveraging relationships with strategic vendors.

While we have experienced some improvements through our receivables and collections management and cost reduction initiatives, benefits from our revenue enhancement initiatives have yet to materialize fully and our revenues have continued to decline. Moreover, future revenue enhancement initiatives will face significant challenges because of the continued overcapacity in the diagnostic imaging industry, reimbursement reductions and the country’s economic condition, including higher unemployment.

In February 2009, we entered into a seven-year agreement with Dell Perot Systems (formerly Perot Systems Corporation) to provide enhanced revenue cycle services and assist in the implementation of upgraded technology and IT services, which will provide new technology to manage our back-office billing, accounts receivable and collections functions. As a result of this agreement we terminated certain employees and transitioned certain other employees to Dell Perot Systems. We implemented the revenue cycle services in June 2009 and we expect to implement the new upgraded technology and IT services as of the beginning of fiscal year 2011. We estimate start-up costs of this initiative to be approximately $3.5 million (including $3.0 million of capital expenditures), of which $2.8 million (including $2.3 million of capital expenditure) has been incurred as of March 31, 2010.

In addition to our traditional offerings of equipment and management services, we believe that we have the ability to offer packaged technology solutions to hospitals and other medical imaging services providers. Besides our traditional offerings, these customers would have the ability to choose from a broad spectrum of systems and services, including, but not limited to, image archiving and Picture Archiving Communication System (PACS) services, patient registration portals, radiology information systems, receivables and collections management services, and financial and operational tools. We launched this offering of solutions in fiscal 2010 under the name Insight Imaging Enterprise Solutions and we recently extended a contract with an existing customer and entered into a contract with a new customer.

Segments

Effective July 1, 2009, we redefined the business segments based on how our chief operating decision maker views the business and assesses the performance of our business managers. We now have three reportable segments: contract services, patient services and other operations, which are business units defined primarily by the type of service provided:

Contract Services: Contract services consist of centers (primarily mobile units) which generate revenues from fee-for-service arrangements and fixed-fee contracts billed directly to our healthcare provider customers, such as hospitals, which we refer to as wholesale operations. We internally handle the billing and collections for our contract services at relatively low cost, and we do not bear the direct risk of collections from third-party payors or patients. Revenues from our wholesale operations have been and will continue to be driven by the trends in the diagnostic imaging industry and are dependent on our ability to:

	•		establish new wholesale customers within our core markets;

	•		structure efficient wholesale routes that maximize equipment utilization and reduce vehicle operations costs;

	•		timely collect payments from our wholesale customers; and

	•		renew existing contracts with our wholesale customers.

Patient Services: Patient services consist of centers (mainly fixed-sites) that primarily generate revenues from services billed, on a fee-for-service basis, directly to patients or third-party payors, such as Medicare, Medicaid, health maintenance organizations and insurers, which we refer to as our retail operations. We have primarily outsourced the billing and collections for our patient services to Dell Perot Systems, and we bear the direct risk of collections from third-party payors and patients. Revenues from our retail operations have been and will continue to be driven by the trends in the diagnostic imaging industry and are dependent on our ability to:

	•		attract and maintain patient referrals from physician groups and hospitals;

	•		maximize procedural volume, which includes ensuring that a patient attends his or her scheduled procedure;

	•		bill and collect appropriately directly from patients their share of the procedure charge (i.e., co-payment, co-insurance and/or deductible);

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

	•		acquire or develop new retail centers.

Other Operations: Other operations generate revenues primarily from agreements with customers to provide management services, which could include field staffing, billing and collections, technical solutions, accounting and other office services. We refer to these operations as our “Insight Imaging Enterprise Solutions” operations. We allocate corporate overhead, depreciation related to our billing system and income taxes to other operations. We manage cash flows and assets on a consolidated basis and not by segment.

Negative Trends

Our operations have been and will continue to be adversely affected by the following negative trends:

	•		overcapacity in the diagnostic imaging industry;

	•		reductions in reimbursement from certain third-party payors including Medicare;

	•		reductions in compensation paid by our wholesale customers;

	•		shifting of health care costs from private insurers and employers to patients, who may elect to delay or forego medical procedures;

	•		limited capital to invest in our business;

	•		lower revenues due to our aging equipment in both of our operating segments;

	•		competition from other wholesale and retail providers;

	•		competition from equipment manufacturers;

	•		loss of revenues from former referral sources that invested in their own diagnostic imaging equipment; and

	•		loss of revenues from former wholesale customers that invested in their own diagnostic imaging equipment.

Recently there has been an increase in the amount of available equipment for lease within the industry. This increase in availability within the industry has caused a decline in demand for our contract services mobile systems, which has resulted in (1) a lower than normal success rate in replacing lost revenues, (2) lower contractual reimbursement as compared to prior periods and (3) an increase in the number of our underutilized mobile systems..

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 other individuals. 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. Hospital inpatient services are reimbursed under a prospective payment system. Hospitals receive a specific prospective payment for inpatient treatment services based upon the diagnosis of the patient.

Under Medicare’s prospective payment system for hospital outpatient services, or 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. Each year the Centers for Medicare and Medicaid Services, or CMS, publishes new APC rates that are determined in accordance with the promulgated methodology.

In recent years, CMS modified the OPPS with the effect of reducing the reimbursement received by hospitals for certain outpatient radiological services, including PET/CT, and CMS continues to examine imaging with a view toward potential further reductions. Because unfavorable reimbursement policies constrict the profit margins of the mobile customers we bill directly, we have and may continue to lower our fees to retain existing PET/CT customers and attract new ones. Although CMS continues to expand reimbursement for new applications of PET/CT, broader applications are unlikely to significantly offset the anticipated overall reductions in PET/CT reimbursement. Any modifications under OPPS further reducing reimbursement to hospitals may adversely impact our financial condition and results of operations since hospitals will seek to offset such modifications.

Services provided in non-hospital based freestanding facilities, such as independent diagnostic treatment facilities, are paid under the Medicare Physician Fee Schedule, or MPFS. Several years ago, CMS reduced the reimbursement for certain diagnostic procedures performed together on the same day. They did so by modifying Medicare to pay 100% of the technical component of the higher priced procedure and 75% for the technical component of each additional procedure for procedures involving contiguous body parts within a family of codes when performed in the same session. As a result of federal healthcare regulation, described below, CMS will reduce the technical component of each additional procedure for procedures involving contiguous body parts from 75% to 50% commencing July 1, 2010. CMS has also published proposed regulations for hospital outpatient services that would implement the same multi procedure reimbursement methodology set forth under the MPFS; however it has delayed the implementation of this reimbursement methodology for an indefinite period of time. As a result Medicare continues to pay 100% of the technical component of each procedure for hospital outpatient services. If CMS implements this reimbursement methodology, it would adversely impact our financial condition and results of operations since our hospital customers would seek to offset their reduced reimbursement through lower rates with us.

We have experienced significant reimbursement reductions for radiology services provided to Medicare beneficiaries, including reductions pursuant to the Deficit Reduction Act, or DRA. The DRA, which became effective in 2007, set reimbursement for the technical component for imaging services (excluding diagnostic and screening mammography) in non-hospital based freestanding facilities at the lesser of OPPS or the MPFS.

Medicare reimbursement rates under the MPFS are calculated in accordance with a statutory formula. As a result, for calendar years 2007, 2008 and 2009, CMS published regulations decreasing the fee schedule rates by 5.0%, 10.1% and 5.4%, respectively. In each instance, Congress enacted legislation preventing the decreases from taking effect. We anticipate that CMS will continue to release regulations for decreases in fee schedule rates under the MPFS until the statutory formula is changed through enactment of new legislation. We do not know if Congress will continue to enact legislation to prevent future decreases under the statutory formula, but if Congress failed to act, there could be significant decreases to the MPFS. In fact, CMS (under the Final Rule cited below) announced a 21.2% decrease under the MPFS for calendar year 2010. The effective date of the proposed 21.2% decrease was postponed to March 1, 2010 under legislation passed in December 2009, and further legislative action has delayed the decrease until June 1, 2010. Congress is currently proposing additional legislation for further delays. However, if the 21.2% or similar decrease in the fee schedule rates under the MPFS becomes effective June 1, 2010 (as is currently mandated) it will have a significant adverse effect on our financial condition and results of operations.

On October 30, 2009, CMS released a display copy of the final rule (the “Final Rule”) which updates the payment policies and rates for the MPFS, for calendar year 2010. In addition to other changes to the physician payment formulae, the MPFS reduces payment rates for services using equipment costing more than $1 million by increasing the usage assumptions from the current 50% usage rate to a 90% usage rate. This reduction primarily impacts radiology and other diagnostic tests. The Final Rule was superseded by passage of the Patient Protection and Affordable Care Act (H.R. 3590), signed into law on March 23, 2010 (“PPACA”), and by passage of the Health Care and Education Reconciliation Act of 2010 (H.R. 4872), signed into law on March 30, 2010 (“HCERA”). Under HCERA, the usage rate assumption for diagnostic imaging equipment priced at more than $1 million was set at 75% for 2011 and subsequent years. PPACA also requires CMS to reduce the contiguous body part discount to 50% and to examine the practice expense geographic index. Regulations on practice expense adjustments are to be issued in January, 2012.

Further with respect to its 2010 changes, CMS will also reduce payment for services primarily involving the technical component rather than the physician work component, including the services we provide, by adjusting downward malpractice payments for these services. The reductions primarily impact radiology and other diagnostic tests. The changes to the MPFS will be transitioned over a four-year period such that beginning in 2013, CMS will fully implement the revised payment rates. Thus, even if the announced 21.2% decrease mentioned above is not implemented (as certain members of Congress and the federal government administration are currently pledging), this change to the MPFS, could have an adverse effect on our financial condition and results of operations. For our fiscal year ended June 30, 2009, Medicare revenues represented $22.2 million, or approximately 10.0% of our total revenues for such period. If the Final Rule had been fully phased in during our fiscal year ended June 30, 2009, we estimate that our total revenues would have been reduced by approximately $2.6 million, or 1.1%. We expect that for our fiscal year ending June 30, 2010, the initial phase of the Final Rule will reduce our total revenues by less than one percent. The impact of the new MPFS will increase over the four-year transition period unless mitigated by future legislation (either currently proposed or pledged by Congress and the federal government administration). The foregoing estimate does not reflect potential reductions if any of the following were implemented (a) the 21.2% decrease under the MPFS, or (b) any comparable reductions by third-party payors other than Medicare.

In addition to reimbursement cuts, the new MPFS confirms that suppliers of technical component advanced imaging services must be accredited by January 1, 2012. Our mobile facilities are currently accredited by The Joint Commission, which has been designated by CMS as an authorized accrediting body. We do not know the impact the accreditation requirements will have on our financial condition or results of operations.

We are unable to predict how many of the legislative mandates contained in PPACA and HCERA will be implemented or in what form, whether any additional or similar changes to statutes or regulations (including interpretations), will occur in the future, or what effect any future legislation or regulation would have on our business. We do believe, however, that there will likely be changes to reimbursement for services provided to Medicare patients, and the federal government will likely have greater involvement in the healthcare industry than in prior years, and such reimbursement changes and greater involvement may adversely affect 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 and Private Insurance. Health Maintenance Organizations, 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 and mandating less costly treatment alternatives. Managed care contracting is competitive and reimbursement schedules are at or below Medicare reimbursement levels. However, some managed care organizations have reduced or otherwise limited, and we believe that other managed care organizations may reduce or otherwise limit, reimbursement in response to reductions in government reimbursement. These reductions have had, and any future reductions could have, an adverse impact on our financial condition and results of operations. These reductions have been, and any future reductions may be, similar to the reimbursement reductions proposed by CMS, Congress and the current federal government administration. The development and expansion of HMOs, PPOs and other managed care organizations within our core markets 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 health insurance programs generally have authorized payment for our services on satisfactory terms. However, we believe that private health insurance programs may also reduce or otherwise limit reimbursement in response to reductions in government reimbursement, which could have an adverse impact on our financial condition and results of operations.

Several significant third-party payors implemented the reduction for multiple images on contiguous body parts (as currently in effect under CMS regulations) and additional payors may propose to implement this reduction as well. If the government implements a discount on the technical component discount on imaging of contiguous body parts third-party payors may follow this practice and implement a similar reduction. Such reduction would further negatively affect our financial condition and results of operations.

Furthermore, 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, and payors are continuing to monitor reimbursement for diagnostic imaging services. A third-party payor has instituted a requirement of participation that requires freestanding imaging center providers to offer multi-modality imaging services and not simply offer one type of diagnostic imaging service. Other third-party payors have instituted specific credentialing requirements on imaging center providers and physicians performing interpretations and providing supervision. Similar initiatives enacted in the future by a significant number of additional third-party payors may have a significant adverse impact on our financial condition and results of operations.

Revenues

We earn revenues by providing services to patients, hospitals and other healthcare providers. Our patient services revenue is 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, collectively, payors. Patient services revenues also include balances due from patients, which are primarily collected at the time the procedure is performed. We refer to our patient services revenues as our retail operations. With respect to our retail operations we bear the direct risk of collections from third-party payors and patients. 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.

Historically and through fiscal 2009, our billing system did not generate contractual adjustments. Consequently, contractual adjustments had been manual estimates based upon an analysis of historical experience of contractual payments from payors and the outstanding accounts receivables from payors. In July 2009, we completed the implementation of a new report that extracts data from our billing system and automatically generates the contractual adjustments based on actual contractual rates with our payors in effect at the time the service is provided to the patient. Contractual adjustments are written-off against contractual fee rates with our payors in effect when the service was provided to the patient.

We report net the payments due to radiologist from our revenue because (1) we are not the primary obligor for the provision of professional services and (2) because the radiologists receive contractually agreed upon percentage of collections, the radiologists bear the risk of non-collection. In the past we had arrangements with certain radiologists pursuant to which we paid the radiologists for their professional services at an agreed upon contractual rate irrespective of the ultimate collections. With respect to these arrangements, the professional component is included in our revenues, and our payments to the radiologists are included in costs of services. In fiscal year 2010, we no longer have these types of arrangements.

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, CT or PET/CT procedure is performed on a patient.

We refer to our revenues from hospitals, physician groups and other healthcare providers as contract services revenues or our wholesale operations. Contract services or wholesale 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 service revenues are generally billed to our customers on a monthly basis. Contract services revenues are recognized when the service is provided. Revenues collected in advance are recorded as unearned revenue. Fee for services revenues are affected by the timing of holidays, patient and referring physicians vacation schedules and inclement weather.

The provision for doubtful accounts is reflected as an operating expense and represents our estimate of amounts that are legally owed to us but will be uncollectible from patients, payors, hospitals, physician groups and other healthcare providers. The provision for doubtful accounts includes amounts to be written off with respect to specific accounts involving customers that are financially unstable or materially fail to comply with the payment terms of their contracts and 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, 2010 and 2009:


	Nine months ended
	March 31,
	2010			2009
Percentage of Total Revenues
Hospitals, physician groups and other healthcare providers (1)(2)		51	%		48	%
Managed care and insurance		34	%		37	%
Medicare / Medicaid		12	%		12	%
Other, including workers’ compensation and self-pay patients		3	%		3	%


(1)		We have one healthcare provider that accounted for approximately 6.0% of our total revenues during the nine months ended March 31, 2010. No other single hospital, physician group or other healthcare provider accounted for more than 5% of our total revenues.

(2)		These payors principally represent our contract services or wholesale operations.

The aging of our gross and net trade accounts receivables as of March 31, 2010 is as follows (amounts in thousands):


													120 days
	Current			30 days			60 days			90 days			and older			Total
	(unaudited)

Hospitals, physician groups and other healthcare providers	$	8,481		$	2,842		$	943		$	386		$	816		$	13,468
Managed care and insurance		12,807			3,286			1,857			952			3,833			22,735
Medicare/Medicaid		3,308			591			252			179			1,070			5,400
Other, including workers compensation		821			567			362			257			504			2,511
Other, including self paid patients		85			41			(3	)		36			137			296

Trade accounts receivables		25,502			7,327			3,411			1,810			6,360			44,410

Less: Allowances for professional fees		(2,673	)		(726	)		(398	)		(237	)		(937	)		(4,971	)
Allowances for contractual adjustments		(8,258	)		(1,965	)		(1,067	)		(37	)		(114	)		(11,441	)
Allowances for doubtful accounts		(237	)		(75	)		(61	)		(778	)		(2,992	)		(4,143	)

Trade accounts receivables, net December 31, 2009	$	14,334		$	4,561		$	1,885		$	758		$	2,317		$	23,855

		60	%		19	%		8	%		3	%		10	%		100	%

Our days sales outstanding, for trade accounts receivables on a net basis was 44 days at March 31, 2010 as compared to 43 days at June 30, 2009.

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 depreciation and amortization, debt service, lease payments, salaries and benefit obligations, equipment maintenance expenses, insurance and vehicle operations costs. Because a large portion of our operating expenses are fixed, any increase in our procedure volume or reimbursement rates disproportionately increases our operating cash flow. Conversely, any decrease in our procedure volume or reimbursement rates disproportionately decreases our operating cash flow. Our variable costs, which comprise only a small portion of our total operating expenses, include billing fees related to patient services, bad debt expense and the cost of service supplies such as film, contrast media and radiopharmaceuticals.

Results of Operations

The following table sets forth the results of operations for the three and nine months ended March 31, 2010 and 2009.


	Nine Months Ended						Three Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
	(unaudited)

REVENUES:
Contract services	$	72,625		$	88,672		$	23,672		$	28,079
Patient services		69,896			83,959			22,204			24,389
Other operations		1,591			1,906			483			738

Total revenues		144,112			174,537			46,359			53,206


COSTS OF OPERATIONS:
Costs of services		95,735			117,243			31,550			35,411
Provision for doubtful accounts		3,127			3,311			944			975
Equipment leases		7,926			8,348			2,768			2,632
Depreciation and amortization		25,405			35,192			7,929			10,754

Total costs of operations		132,193			164,094			43,191			49,772


CORPORATE OPERATING EXPENSES		(14,254	)		(17,238	)		(4,454	)		(6,111	)

EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS		1,736			1,722			564			614

INTEREST EXPENSE, net		(19,768	)		(23,231	)		(6,185	)		(7,282	)

GAIN ON SALES OF CENTERS		300			7,689			300			701

GAIN ON PURCHASE OF NOTES PAYABLE		—			6,788			—			5,542

IMPAIRMENT OF OTHER LONG-LIVED ASSETS		(1,949	)		(4,600	)		—			—


Loss before income taxes		(22,016	)		(18,427	)		(6,607	)		(3,102	)

PROVISION (BENEFIT) FOR INCOME TAXES		(1,321	)		(1,552	)		(675	)		140


Net loss		(20,695	)		(16,875	)		(5,932	)		(3,242	)


Less: net income attributable to noncontrolling interests		510			534			125			164


Net loss attributable to InSight Health Services Holdings Corp.	$	(21,205	)	$	(17,409	)	$	(6,057	)	$	(3,406	)

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


	Nine Months Ended						Three Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
	(unaudited)

REVENUES:
Contract services		50.4	%		50.8	%		51.1	%		52.8	%
Patient services		48.5	%		48.1	%		47.9	%		45.8	%
Other operations		1.1	%		1.1	%		1.0	%		1.4	%

Total revenues		100.0	%		100.0	%		100.0	%		100.0	%


COSTS OF OPERATIONS:
Costs of services		66.4	%		67.2	%		68.1	%		66.6	%
Provision for doubtful accounts		2.2	%		1.9	%		2.0	%		1.8	%
Equipment leases		5.5	%		4.8	%		6.0	%		4.9	%
Depreciation and amortization		17.6	%		20.2	%		17.1	%		20.2	%

Total costs of operations		91.7	%		94.1	%		93.2	%		93.5	%


CORPORATE OPERATING EXPENSES		-9.9	%		-9.9	%		-9.6	%		-11.5	%

EQUITY IN EARNINGS OF UNCONSOLIDATED PARTNERSHIPS		1.2	%		1.0	%		1.2	%		1.2	%

INTEREST EXPENSE, net		-13.7	%		-13.3	%		-13.3	%		-13.7	%

GAIN ON SALES OF CENTERS		0.2	%		4.4	%		0.6	%		1.3	%

GAIN ON PURCHASE OF NOTES PAYABLE		0.0	%		3.9	%		0.0	%		10.4	%

IMPAIRMENT OF OTHER LONG-LIVED ASSETS		-1.4	%		-2.6	%		0.0	%		0.0	%


Loss before income taxes		-15.3	%		-10.6	%		-14.3	%		-5.8	%

BENEFIT FOR INCOME TAXES		-0.9	%		-0.9	%		-1.5	%		0.3	%


Net loss		-14.4	%		-9.7	%		-12.8	%		-6.1	%

Less: net income attributable to noncontrolling interests		0.4	%		0.3	%		0.3	%		0.3	%


Net loss attributable to InSight Health Services Holdings Corp.		-14.8	%		-10.0	%		-13.1	%		-6.4	%

The following table sets forth certain historical financial data by segment for the periods indicated (amounts in thousands except percentages):


	Nine Months Ended
	March 31,
	2010			2009			Variance			Variance %
	(unaudited)
Revenues
Patient services (1)	$	69,896		$	83,959		$	(14,063	)		-17	%
Contract services (3)		72,625			88,672			(16,047	)		-18	%
Other operations		1,591			1,906			(315	)		-17	%

Total	$	144,112		$	174,537		$	(30,425	)		-17	%

Costs of Operations
Patient services (2)	$	68,865		$	86,751		$	(17,886	)		-21	%
Contract services (4)		60,953			74,535			(13,582	)		-18	%
Other operations		2,375			2,808			(433	)		-15	%

Total	$	132,193		$	164,094		$	(31,901	)		-19	%

Costs of Operations as a Percentage of Revenues
Patient services		99	%		103	%
Contract services		84	%		84	%
Other operations		149	%		147	%

Total		92	%		94	%


(1)		Patient services revenues for the nine months ended March 31, 2008 include $13.5 million related to patient services centers that were sold or closed in fiscal 2009 and 2010 and were in operation in the first nine months of 2009, but were not in operation for the entire nine months of 2010. Patient services revenues for the nine months ended March 31, 2010 include $4.8 million in revenues from acquired patient services centers that were not in operation in the first nine months of 2009.

(2)		Patient services cost of operations for the nine months ended March 31, 2008 include $14.8 million related patient services centers that were sold or closed in fiscal 2009 and 2010 and were in operation in the first nine months of 2009, but were not in operation for the entire nine months of 2010. Patient services costs of operations for the nine months ended March 31, 2010 include $3.1 million in costs from acquired patient services centers that were not in operation in the first nine months of 2009.
(3)		Contract services revenues for the nine months ended March 31, 2009 include $5.1 million related to the closure of a fixed site center in fiscal 2009 providing services to a large health care provider contract.
(4)		Contract services cost of operations for the nine months ended March 31, 2009 includes $2.9 million related to the closure of a fixed site center in fiscal 2009 providing services to a large health care provider contract.

Non-GAAP Measure — Revenues net of acquisitions and dispositions as presented herein is defined as revenue excluding the effects of acquisitions and dispositions. We believe this metric is a useful financial measure for investors in evaluating our operating performance for the periods presented, as when read in conjunction with our revenues, it presents a useful tool to evaluate our ongoing operations and provides investors with a tool they can use to evaluate our management of assets held from period to period. In addition, revenues net of acquisitions and dispositions is one of the factors we use in internal evaluations of the overall performance of our business. This metric, however, is not a measure of financial performance under accounting principles generally accepted in the United States (“GAAP”) and should not be considered a substitute for revenues as determined in accordance with GAAP and may not be comparable to similarly titled measures reported by other companies.

Nine Months Ended March 31, 2010 and 2009

Revenues: Net of acquisitions and dispositions, revenues decreased 10.7% to $138.3 million for the nine months ended March 31, 2010, from $154.9 million for the nine months ended March 31, 2009. This decrease was primarily due to lower contract services revenues ($10.9 million) and lower patient services revenues ($5.3 million). Revenues from other operations decreased by $0.3 million.

Our patient services revenues, net of acquisitions and dispositions, decreased 7.7% to $64.1 million for the nine months ended March 31, 2010 from $69.4 million for the nine months ended March 31, 2009. This decrease was primarily a result of a decrease in scan volumes, which we attribute to various factors, including high unemployment rates and the impact of high deductible health plans. The decrease is also due to a decline in the percentage of scan volume related to more expensive procedures, coupled with reimbursement rate reductions from various payors.

Our contract services revenues decreased 18.1% to $72.6 million for the nine months ended March 31, 2010 from $88.7 million for the nine months ended March 31, 2009. This decrease was due partially to the closure of a fixed-site center related to a large health care provider contract ($5.1 million). Additionally we experienced a reduction in the number of active contracts and reductions in reimbursement from our contract services customers for all modalities. The reductions in reimbursement are primarily the result of competition from other contract services providers and fewer mobile units in service. Our aging mobile fleet also contributed to the decline in revenues as did the continued propensity for customers to take their business in-house.

We believe we may continue to experience declining revenues due to the negative trends discussed above, which may be intensified by the negative effects of the country’s economic condition, including higher unemployment, higher deductible plans, fewer individuals with healthcare insurance and reductions in third-party payor reimbursement.

Costs of services: As a percentage of revenues, costs of services decreased 0.8% to 66.4% for the nine months ended March 31, 2010 as compared to 67.2% for the same period in 2009. Cost of services decreased $21.5 million to $95.7 million for the nine months ended March 31, 2010 from $117.2 million for the nine months ended March 31, 2009. The decrease is attributable partially to lower costs in our contract services ($7.4 million) and in our patient services ($14.1 million) coupled with the disposition of certain of our patient services centers ($11.7 million), offset by acquisitions ($2.6 million).

As a percentage of revenues, costs of services at our patient services centers decreased 3.6% to 78.8% for the nine months ended March 31, 2010 from 82.4% for the same period in the prior year. The decrease is partially the result of the disposition of patient services centers with costs of services as a percentage of revenue of over 86% and the acquisition of centers with lower costs of services as a percentage of revenues of 57.3%. Total costs of services in our patient services segment decreased $14.1 million. Our dispositions eliminated $11.7 million of costs from the nine months ended March 31, 2009 to the current nine month period, which was partially offset by acquisitions ($2.6 million). Additionally we also reduced the cost of services for our existing patient services centers by 1.1% as a percentage of revenues ($5.1 million). The decrease in costs of services for our existing patient services centers was due primarily to decreased salary related expenses ($2.0 million), reading fees ($1.0 million), billing fees ($1.0 million), and equipment maintenance ($0.8 million). Net of acquisitions and dispositions, as a percentage of revenues, our cost of services decreased 1.1% to 80.6% for the nine months ended March 31, 2010 from 81.7% for the nine months ended March 31, 2009.

As a percentage of revenues our contract services costs of services increased 1.6% to 55.2% for the nine months ended March 31, 2010 from 53.6% for the same period in the prior year. The increase is attributable to the decline in revenues. Costs of services in our contract services operations decreased $7.4 million for the nine months ended March 31, 2010 as compared to the same period in the prior year. The decrease was due partially to the closure of a fixed site center related to the large health care provider contract ($2.1 million). The decrease in costs of services for our existing contract services operations is a result of our cost reduction initiatives. Notable variances included a decrease in salary related expenses ($2.8 million), a decrease in our mobile fleet related costs ($2.1 million), and decreases in supplies, insurance and taxes and license fees ($0.5 million).

Provision for doubtful accounts: The provision for doubtful accounts decreased by $0.2 million for the nine months ended March 31, 2010 as compared to the prior year. Net of acquisitions and dispositions, our provision for doubtful accounts increased $0.1 million to $3.0 million for the nine months ended March 31, 2010 as compared to $2.9 million in the same period in the prior year, related primarily to contract services operations.

Equipment leases: Equipment leases decreased $0.4 million for the nine months ended March 31, 2010 as compared to the same period in the prior year. Equipment leases, net of acquisitions and dispositions, decreased $0.3 million, to $7.6 million from $7.9 million for the nine months ended March 31, 2010 and 2009, respectively.

Depreciation and amortization: Depreciation and amortization expense decreased $9.8 million for the nine months ended March 31, 2010 to $25.4 million from $35.2 million for the same period in the prior year. Net of acquisitions and dispositions, depreciation and amortization decreased $6.6 million for the nine months ended March 31, 2010 as compared to same period in the prior year. The decrease can be primarily attributed to the age of our equipment resulting in more fully depreciated equipment during the nine months ended March 31, 2010 than the prior year period, partially offset by purchases of new property and equipment.

Corporate operating expenses: Corporate operating expenses decreased $3.0 million, or 17.3%, to $14.3 million for the nine months ended March 31, 2010 from $17.2 million for the nine months ended March 31, 2009. Our cost reduction initiatives primarily contributed to decreases in salary related expenses ($0.6 million), office related expenses ($0.6 million) and legal and accounting expenses ($0.5 million). In addition, during the nine months ended March 31, 2009, we incurred a $1.1 million charge relating to a contingent non-income tax liability which did not recur in the current year period. As a percentage of revenues corporate operating expenses remained consistent, however, after considering the effect of the $1.1 million one-time charge for the non-income tax liability in the prior year period, corporate expenses increased 0.8% to 9.9% the nine months ended March 31, 2010 from 9.1% for the nine months ended March 31, 2009. This increase is due the decline in revenues exceeding our reduction in costs.

Interest expense, net: Interest expense, net decreased $3.4 million from $23.2 million for the nine months ended March 31, 2009, to $19.8 million for the nine months ended March 31, 2010. The decrease was due primarily to lower interest rates ($3.8 million) on the floating rate notes coupled with lower debt balances resulting from our purchase of $21.5 million of floating rate notes in fiscal year 2009 partially offset by increased amortization of the bond discount ($0.3 million).

Gain on sales of centers: During the nine months ended March 31, 2009, we sold five fixed-site centers in California, one fixed-site center in Illinois and one fixed-site center in Tennessee and our equity interest in three joint ventures in New York and California that operated five fixed-site centers. We received $19.7 million, net of cash sold, from the sales and recorded a gain of $7.7 million. In addition, we deferred recognition of a $0.3 million contingent payment upon the satisfaction of a certain guaranty as measured on the first anniversary of the transaction. During the nine months ended March 31, 2010, the contingency was satisfied and we recognized the deferred gain on sale of center.

Gain on purchase of notes payable: During the nine months ended March 31, 2009, we purchased $11.5 million in principal amount of our floating rate notes for $4.1 million. We realized a gain of $6.8 million, after the write-off of unamortized discount of $0.6 million.

Impairment of other long-lived assets: Impairment of other long-lived assets decreased $2.7 million from $4.6 million for the nine months ended March 31, 2009 to $1.9 million for the nine months ended March 31, 2010. Based on our annual evaluation of the carrying value of our indefinite-lived intangible assets as of December 31, 2009, we concluded that impairments had occurred and we recorded a non-cash impairment charge of $1.9 million in our contract services segment related to our trademark ($0.8 million) and our certificates of need ($0.9 million) and our patient services segment related to our certificates of need ($0.2 million). This impairment charge primarily resulted from a decline in our mobile business within our contract services segment.

Loss before income taxes: Loss before income taxes increased from $18.4 million for the nine months ended March 31, 2009, to $22.0 million for the nine months ended March 31, 2010. An analysis of the change in loss before income taxes is as follows (amounts in thousands) (unaudited):


	Consolidated
Loss before income taxes —
Nine Months ended March 31, 2009	$	(18,427	)
Decrease in existing centers revenues		(16,587	)
Decrease in existing centers costs of services		10,381
Decrease in existing centers equipment leases		302
Decrease in existing centers depreciation and amortization		6,632
Decrease in existing centers interest expense		3,270
Increase in existing centers provision for doubtful accounts		(80	)
Impact of centers sold, closed or acquired		1,021
Decrease in corporate operating expenses		2,984
Increase in equity in earnings of unconsolidated partnerships		14
Gain on sales of centers		(7,389	)
Gain on purchase of floating rate notes		(6,788	)
Decrease in impairment of other long-lived assets		2,651

Loss before income taxes —
Nine Months ended March 31, 2010	$	(22,016	)

Benefit for income taxes: For the nine months ended March 31, 2010, we recorded a benefit for income taxes of $1.3 million as compared to a benefit for income taxes of $1.6 million for the nine months ended March 31, 2009. The benefit for income taxes is related to a decrease in our deferred income tax liability of approximately $0.7 million due to the impairment of our indefinite-live intangible assets, and a decrease in income taxes associated with uncertain tax positions of $0.7 million, offset partially by a provision primarily related to state income taxes and interest expense related to the uncertain tax positions.

Three Months Ended March 31, 2010 and 2009


	Three Months Ended
	March 31,
	2010			2009			Variance			Variance %
	(unaudited)
Revenues
Patient services	$	22,204		$	24,389	(1)	$	(2,185	)		-9	%
Contract services		23,672			28,079	(2)		(4,407	)		-16	%
Other operations		483			738			(255	)		-35	%

Total	$	46,359		$	53,206		$	(6,847	)		-13	%

Costs of Operations
Patient services	$	22,716		$	24,940	(1)	$	(2,224	)		-9	%
Contract services		19,749			24,231	(2)		(4,482	)		-18	%
Other operations		726			601			125			21	%

Total	$	43,191		$	49,772		$	(6,581	)		-13	%

Costs of Operations as a Percentage of Revenues
Patient services		102	%		102	%
Contract services		83	%		86	%
Other operations		150	%		81	%

Total		93	%		94	%


(1)		Of the patient services revenues variance of $2.2 million $0.1 million was related to dispositions, net of acquisitions.

		Of the patient services cost of operations variance of $2.2 million for the three months ended March 31, 2010 as compared to March 31, 2009, $0.7 million was related to dispositions, net of acquisitions.


(2)		Of the contract services revenue variance of $4.4 million for the three months ended March 31, 2010 as compared to March 31, 2009, $1.3 million is related to the closure of a fixed site center related to a large health care provider contract.

		Of the contract services costs of operations variance of $4.5 million for the three months ended March 31, 2010 as compared to the same period ended March 31, 2009, $1.2 million is related to the closure of a fixed site center related to a large health care provider contract

Revenues: Net of dispositions and acquisitions, revenues decreased 10.9% to $44.4 million for the three months ended March 31, 2010 from $49.8 million for the three months ended March 31, 2009. The decrease was due to lower existing contract services revenues ($3.1 million) and lower existing patient services center revenues ($2.1 million). Revenues from other operations decreased by $0.3 million.

Patient services revenues, net of acquisitions and dispositions, decreased 9.4% to $20.2 million for the three months ended March 31, 2010 from $22.3 million for the three months ended March 31, 2009. This decrease was primarily a result of a decrease in scan volumes which we attribute to various factors, including high unemployment rates and the impact of high deductible health plans. The decrease is also due to a decline in the percentage of scan volumes related to more expensive procedures, coupled with reimbursement rate reductions from various payors.

Our contract services revenues decreased 15.7% to $23.7 million for the three months ended March 31, 2010 from $28.1 million for the three months ended March 31, 2009. This decrease was due partially to the closure of a fixed site center related to a large health care provider contract ($1.3 million). Additionally we experienced a reduction in the number of active contracts and reductions in reimbursement from our contract services customers for all modalities. The reductions in reimbursement are primarily the result of competition from other contract services providers and fewer mobile units in service. Our aging mobile fleet also contributed to the decline in revenues as did the continued propensity for customers to take their business in-house.

We believe we may continue to experience declining revenues due to the negative trends discussed above, which may be intensified by the negative effects of the economic condition, including higher unemployment, higher deductible health care plans, fewer individuals with healthcare insurance and any reductions in third-party payor reimbursement.

Costs of services: As a percentage of revenues, costs of services increased 1.5% to 68.1% for the three months ended March 31, 2010 as compared to 66.6% for the same period in 2009. The increase is attributable to the decline in revenues. Cost of services decreased $3.8 million from $35.4 million for the three months ended March 31, 2009 to $31.6 million for the three months ended March 31, 2010. The decrease is attributable to lower costs in our contract services ($2.1 million) and lower costs, net of acquisitions and dispositions in our patient services ($1.1 million) coupled with the disposition of certain of our patient services centers ($1.6 million), offset by cost of services for acquisitions ($0.9 million).

As a percentage of revenues, costs of services at our patient services centers remained consistent for both periods at approximately 82% for the three months ended March 31, 2010 and 2009. Costs of services in the patient services segment decreased $1.8 million for the quarter ended March 31, 2010 as compared to the same quarter in the prior year. The decrease is partially the result of the disposition of patient services centers ($1.6 million) offset partially by acquisitions ($0.9 million). Our cost of services for our existing patient services centers decreased by $1.1 million. The decrease in costs of services for our existing patient services centers was due primarily to decreased salary related expenses ($0.5 million), equipment and service supplies ($0.7 million), billing fees ($0.3 million) and increased gain on sale of equipment ($0.3 million), partially offset by increased software maintenance cost as we implemented our new upgraded technology and revenue cycle services ($0.3 million). Net of acquisitions and dispositions, cost of services as a percentage of revenue increased 2.9% to 84.1% for the three months ended March 31, 2010 from 81.2% for the three months ended March 31, 2010, due to the decline in revenue exceeding the reduction in costs.

As a percentage of revenues, our contract services costs of services increased 1.2% to 55.5% for the three months ended March 31, 2010 from 54.3% for the same period in the prior year. The increase is due to the decline in revenues exceeding the reduction in costs. Costs of services in our contract services operations decreased $2.1 million for the three months ended March 31, 2010 as compared to the same period in the prior year. The decrease was due partially to the closure of a fixed-site center related to a large health care provider contract ($0.7 million).

The remaining decrease in costs of services for our existing contract services operations was a result of our cost reduction initiatives which included decreases in salary related expenses ($0.5 million) and mobile fleet related costs ($0.4 million), and an increase in gain on sale of equipment ($0.2 million).

Provision for doubtful accounts: The provision for doubtful accounts remained consistent for both periods at $0.9 million for the three months ended March 31, 2010 and 2009. Net of acquisitions and dispositions, our provisions for doubtful accounts also remained consistent both on a nominal and percentage of revenues basis.

Equipment leases: Equipment leases increased $0.1 million for the quarter ended March 31, 2010 as compared to the same period in the prior year. Equipment leases, net of acquisitions and dispositions, increased by $0.1 million from $2.5 million to $2.6 million for the quarter ended March 31, 2010 and 2009, respectively

Depreciation and amortization: Depreciation and amortization expense decreased $2.8 million for the quarter ended March 31, 2010 to $7.9 million from $10.7 million for the same period in the prior year. Net of acquisitions and dispositions, depreciation and amortization decreased $2.1 million in the quarter ended March 31, 2010 as compared to same period in the prior year. The decrease can be primarily attributed to the age of our equipment resulting in more fully depreciated equipment during the quarter ended March 31, 2010 than the prior year period, partially offset by purchases of new property and equipment.

Corporate operating expenses: Corporate operating expenses decreased $1.6 million, or 27.1%, to $4.5 million for the quarter ended March 31, 2010 from $6.1 million for the quarter ended March 31, 2009. The reduction in expenses was a result primarily of our cost reduction initiatives which contributed to decreased salary related expenses ($0.2 million), office related expenses ($0.3 million) and legal expenses ($0.3 million). In addition, during the three months ended March 31, 2009, we incurred a $1.1 million charge relating to a contingent non-income tax liability which did not recur in the current year period. As a percentage of revenues corporate operating expenses decreased 1.9% to 9.6% for the three months ended March 31, 2010 from 11.5% for the same period in the prior year despite the decline in revenues. However, considering the $1.1 million one-time charge for the tax liability, corporate operating expenses increased 0.1% as compared to the prior period. This increase is due the decline in revenues exceeding our reduction in costs.

Interest expense, net: Interest expense, net, decreased $1.1 million from $7.3 million for the quarter ended March 31, 2009, to $6.2 million for the quarter ended March 31, 2010. The decrease was due primarily to lower interest rates ($1.2 million) on the floating rate notes coupled with lower debt balances resulting from our purchase of $21.5 million of floating rate notes partially offset by increased amortization of the bond discount ($0.1 million).

Gain on sales of centers: During the three months ended March 31, 2009, we sold two fixed-site centers in California. We received $1.6 million from the sales and recorded a gain of $0.7 million. In addition, we deferred recognition of a $0.3 million contingent payment upon the satisfaction of a certain guaranty as measured on the first anniversary of the transaction. During the quarter ended March 31, 2010, the contingency was satisfied and we recognized the deferred gain on sale of center.

Loss before income taxes: Loss before income taxes increased $3.5 million from $3.1 million for the quarter ended March 31, 2009, to $6.6 million for the quarter ended March 31, 2010. An analysis of the change in loss before income taxes is as follows (amounts in thousands):


	Consolidated
Loss before income taxes —
Three Months ended March 31, 2009	$	(3,102	)
Decrease in existing centers revenues		(5,455	)
Decrease in existing centers costs of services		2,552
Increase in existing centers equipment leases		(84	)
Decrease in existing centers depreciation and amortization		2,129
Decrease in existing centers interest expense		1,069
Decrease in existing centers provision for doubtful accounts		28
Impact of centers sold, closed or acquired		592
Decrease in corporate operating expenses		1,657
Decrease in equity in earnings of unconsolidated partnerships		(50	)
Gain on sales of centers		(401	)
Gain on purchase of floating rate notes		(5,542	)

Loss before income taxes —
Three Months ended March 31, 2010	$	(6,607	)

(Benefit) provision for income taxes: For the quarter ended March 31, 2010, we recorded a benefit for income taxes of $0.7 million as compared to a provision for income taxes of $0.1 million for the quarter ended March 31, 2009. The benefit for income taxes is related to a decrease in income taxes associated with uncertain tax positions, offset partially by a provision primarily related to state income taxes and interest expense related to the uncertain tax positions.

Financial Condition, Liquidity and Capital Resources

We have historically funded our operations and capital project requirements from net cash provided by operating activities and capital and operating leases. We expect to fund future working capital and capital project requirements from cash on hand, sales of fixed-site centers and mobile facilities, net cash provided by operating activities and our credit facility.

To the extent available, we will also use capital and operating leases, but the current conditions in the capital markets and our high level of leverage have limited our ability to obtain attractive lease financing. Our operating cash flows have been negatively impacted by the sales and closures of certain centers and the negative trends we have experienced with each of our segments. If our operating cash flows continue to be negatively impacted by these and other factors and we are unable to offset them with cost savings and other initiatives, it will result in:

	•		a reduction in our borrowing base, and therefore a decline in the amounts available under our credit facility;

	•		difficulty funding our capital projects;

	•		more stringent financing from equipment manufacturers and other financing resources; and

	•		an inability to refinance our floating rate notes due in November 2011.

Liquidity: We have a substantial amount of debt, which requires significant interest and principal payments. As of March 31, 2010, we had total indebtedness of $298.4 million in aggregate principal amount, including $293.5 million of floating rate notes. We believe that cash on hand, future net cash provided by operating and investing activities and our credit facility will be adequate to meet our operating cash and debt service requirements for at least the next twelve months.

We reported net losses attributable to Holdings of $21.2 million, $19.8 million and $169.2 million for nine months ended March 31, 2010, the year ended June 30, 2009, and the eleven months ended June 30, 2008, respectively. We have implemented steps in response to these losses, including a core market strategy and various initiatives. We have attempted to implement, and will continue to develop and implement, various revenue enhancement, receivables and collections management and cost reduction initiatives:

	•		Revenue enhancement initiatives have focused and will continue to focus on our sales and marketing efforts to maintain or improve our procedural volumes and contractual rates, and our InSight Imaging Enterprise Solutions initiative.

	•		Receivables and collections management initiatives have focused and will continue to focus on collections at point of service, technology improvements to create greater efficiency in the gathering of patient and claim information when a procedure is scheduled or completed, and our initiative with Dell Perot Systems.

	•		Cost reduction initiatives have focused and will continue to focus on streamlining our organizational structure and expenses including enhancing and leveraging our technology to create greater efficiencies, and leveraging relationships with strategic vendors.

While we have experienced some improvements through our receivables and collections management and notable improvements due to our cost reduction initiatives, benefits from our revenue enhancement initiatives have yet to materialize and our revenues continue to decline. Moreover, future revenue enhancement initiatives will face significant challenges because of the continued overcapacity in the diagnostic imaging industry, reimbursement reductions and the country’s economic condition, including higher unemployment. We can give no assurance that these steps will be adequate to improve our financial performance. Unless our financial performance significantly improves, we can give no assurance that we will be able to refinance the floating rate notes, which mature in November 2011, on commercially reasonable terms, if at all.

Our short-term liquidity needs relate primarily to:

	•		interest payments relating to the floating rate notes

	•		capital projects;

	•		working capital requirements;

	•		potential acquisitions; and

	•		potential purchases of portions of the floating rate notes.

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

As mentioned above, we may from time to time, in one or more open market or privately negotiated transactions, purchase a portion of our outstanding floating rate notes. Any such purchases shall be in accordance with the terms of agreements governing our material indebtedness.

Cash, cash equivalents and restricted cash as of March 31, 2010 were $12.8 million (including $1.4 million that was subject to the lien for the benefit of the floating rate note holders, and may only be used for wholly owned capital projects or under certain circumstances the purchase of floating rate notes). Our primary source of liquidity is typically cash provided by operating activities. Our ability to generate cash flows from operating activities is based upon several factors including the following:

	•		the procedure volume of patients at our fixed-site centers for our retail operations;

	•		the reimbursement we receive for our services;

	•		the demand for our wholesale operations;

	•		our ability to control expenses;

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

	•		our ability to implement steps to improve our financial performance.

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


	Nine Months Ended
	March 31,
	2010			2009

Net cash provided by operating activities	$	3,157		$	10,053
Net cash used in investing activities		(10,268	)		(7,228	)
Net cash used in financing activities		(1,157	)		(5,845	)


Decrease in cash and cash equivalents	$	(8,268	)	$	(3,020	)

Net cash provided by operating activities was $3.2 million for the nine months ended March 31, 2010 and resulted primarily from our Adjusted EBITDA ($24.3 million) (see reconciliation below) less cash paid for interest and taxes ($16.6 million) and changes in certain assets and liabilities ($5.4 million) offset by the effect of non-controlling interest ($0.9 million). The changes in certain assets and liabilities primarily consist of a decrease in accounts payable and other accrued expenses primarily related to the timing of payment of short-term obligations ($5.8 million), payment of a non-income tax settlement ($0.5 million); and accrued compensation and related benefits ($2.5 million) due primarily to the timing of our payroll periods, partially offset by a decrease in accounts receivables, net ($1.7 million) and other assets ($0.5 million), an increase in deferred income tax liabilities ($0.6 million) and other ($0.6 million).

Net cash used in investing activities was $10.3 million for the nine months ended March 31, 2010 and resulted primarily from the purchase or upgrade of diagnostic imaging equipment and construction projects at certain of our centers ($18.6 million) and the acquisition of a fixed-site center ($0.9 million), partially offset by proceeds from the sales of certain centers ($2.7 million) and equipment sales ($1.4 million), and a decrease in restricted cash ($5.1 million).

Net cash used in financing activities was $1.2 million for the nine months ended March 31, 2010 and resulted from principal payments on notes payable and capital lease obligations, offset partially by borrowings for debt obligations.

We define Adjusted EBITDA as our earnings before interest expense, income taxes, depreciation and amortization, excluding impairment of tangible and intangible assets, gain on sales of centers, and gain on purchase of notes payable. Adjusted EBITDA has been included because we believe that it is a useful tool for us and our investors to measure our ability to provide cash flows to meet debt service, capital projects and working capital requirements. Adjusted 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 GAAP. We present the discussion of Adjusted EBITDA because covenants in the agreements governing our material indebtedness contain ratios based on this measure. While Adjusted EBITDA is used as a measure of liquidity 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 calculation. Our reconciliation of net cash provided by operating activities to Adjusted EBITDA is as follows (amounts in thousands) (unaudited):


	Nine Months Ended						Three Months Ended
	March 31,						March 31,
	2010			2009			2010			2009

Net cash provided by operating activities	$	3,157		$	10,053		$	1,890		$	1,194
(Benefit) provision for income taxes		(1,321	)		(1,552	)		(675	)		140
Interest expense, net		19,768			23,231			6,185			7,282
Amortization of bond discount		(4,352	)		(4,005	)		(1,490	)		(1,358	)
Share-based compensation		(55	)		(55	)		(18	)		(19	)
Equity in earnings of unconsolidated partnerships		1,736			1,722			564			614
Distributions from unconsolidated partnerships		(2,173	)		(2,005	)		(439	)		(568	)
Gain (loss) on sales of equipment		836			670			299			52
Net change in operating assets and liabilities		6,431			19			891			1,430
Effect of non-controlling interests		(510	)		(534	)		(125	)		(164	)
Net change in deferred income taxes		779			2,041			—			(76	)


Adjusted EBITDA	$	24,296		$	29,585		$	7,082		$	8,527

Our reconciliation of income (loss) before income taxes to Adjusted EBITDA by segment for the nine months ended March 31, 2010 and 2009 is as follows (amounts in thousands):


	Contract Services		Patient Services			Other Operations			Consolidated
Nine months ended March 31, 2010

Income (loss) before income taxes	$	9,869	$	2,045		$	(33,930	)	$	(22,016	)
Interest expense, net		489		387			18,892			19,768
Depreciation and amortization		14,242		9,325			1,838			25,405
Effect of noncontrolling interests		—		(510	)		—			(510	)
Gain on sale of centers		—		(300	)		—			(300	)
Impairment of other long-lived assets		1,717		232			—			1,949


Adjusted EBITDA	$	26,317	$	11,179		$	(13,200	)	$	24,296


Nine months ended March 31, 2009

Income (loss) before income taxes	$	8,872	$	5,195		$	(32,494	)	$	(18,427	)
Interest expense, net		1,100		989			21,142			23,231
Depreciation and amortization		19,578		13,338			2,276			35,192
Effect of noncontrolling interests		—		(534	)		—			(534	)
Gain on sale of centers		—		(7,689	)		—			(7,689	)
Gain on purchase of notes payable		—		—			(6,788	)		(6,788	)
Impairment of other long-lived assets		4,600		—			—			4,600


Adjusted EBITDA	$	34,150	$	11,299		$	(15,864	)	$	29,585

Adjusted EBITDA decreased 17.9% for the nine months ended March 31, 2010 compared to the nine months ended March 31, 2009. This decrease was due primarily to reductions in Adjusted EBITDA from our contract services ($7.8 million) offset by a decrease in the negative Adjusted EBITDA in our other operations ($2.7 million). The decrease in the negative Adjusted EBITDA from our other operations is due to reductions in costs mainly attributable to our cost reduction initiatives discussed previously, including a $3.1 million decrease in corporate operating expenses.

Adjusted EBITDA from our patient services operations remained relatively consistent at $11.2 million and $11.3 million for the nine months ended March 31, 2010 and the nine months ended March 31, 2009, respectively.

Adjusted EBITDA from our contract services operations decreased 22.8% to $26.3 million for the nine months ended March 31, 2010 from $34.2 million for the nine months ended March 31, 2009. This decrease was due to Adjusted EBITDA lost due to the closure of a center serving a large health care provider ($2.9 million) and the reduction in revenues discussed above, partially offset by the reduction in costs additionally discussed above.

Our reconciliation of income (loss) before income taxes to Adjusted EBITDA by segment for the three months ended March 31, 2010 and 2009 is as follows (amounts in thousands):


	Contract Services		Patient Services			Other Operations			Consolidated
Three months ended March 31, 2010

Income (loss) before income taxes	$	3,906	$	151		$	(10,664	)	$	(6,607	)
Interest expense, net		126		92			5,967			6,185
Depreciation and amortization		4,279		3,082			568			7,929
Effect of noncontrolling interests		—		(125	)		—			(125	)
Gain on sale of centers		—		(300	)		—			(300	)


Adjusted EBITDA	$	8,311	$	2,900		$	(4,129	)	$	7,082


Three months ended March 31, 2009

Income (loss) before income taxes	$	3,669	$	382		$	(7,153	)	$	(3,102	)
Interest expense, net		303		258			6,721			7,282
Depreciation and amortization		6,633		3,723			398			10,754
Effect of noncontrolling interests		—		(164	)		—			(164	)
Gain on sale of centers		—		(701	)		—			(701	)
Gain on purchase of notes payable		—		—			(5,542	)		(5,542	)


Adjusted EBITDA	$	10,605	$	3,498		$	(5,576	)	$	8,527

Adjusted EBITDA decreased 16.9% for the three months ended March 31, 2010 compared to the three months ended March 31, 2009. This decrease was due primarily to reductions in Adjusted EBITDA from our contract services ($2.3 million) and our patient services ($0.6 million) partially offset by a decrease in negative Adjusted EBITDA from our other operations ($1.4 million).

Adjusted EBITDA from our patient services operations decreased 17.1% to $2.9 million for the three months ended March 31, 2010 from $3.5 million for the three months ended March 31, 2009. This decrease was due primarily to decreased Adjusted EBITDA from our existing patient services centers ($1.1 million) partially offset by our acquisitions ($0.5 million).

Adjusted EBITDA from our contract services operations decreased 21.6% to $8.3 million for the three months ended March 31, 2010 from $10.6 million for the three months ended March 31, 2009. This decrease was due primarily to the elimination of Adjusted EBITDA from the closure of a center serving a large health care provider ($0.6 million) coupled with the reduction in revenues discussed above, partially offset by the reduction in costs additionally discussed above.

Capital Projects: As of March 31, 2010, we have committed to capital projects of approximately $3.8 million through March 2010. We expect to use either internally generated funds, operating leases, cash on hand, including restricted cash, and the proceeds from the sale of fixed-site centers to finance the acquisition 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 core market strategy. If we are unable to generate sufficient cash from our operations or obtain additional funds through bank financing, the issuance of equity or debt securities, or operating leases, we may be unable to maintain a competitive equipment base. As a result, we may not be able to maintain our competitive position in our core markets or expand our business.

Floating Rate Notes and Credit Facility: As of March 31, 2010, we had outstanding, through InSight, $293.5 million of aggregate principal amount of floating rate notes. The floating rate notes mature in November 2011 and bear interest at LIBOR plus 5.25% per annum, payable quarterly. As of March 31, 2010, the weighted average interest rate on the floating rate notes was 5.50%. If prior to the maturity of the floating rate notes, we elect to redeem the floating rate notes or are otherwise required to make a prepayment with respect to the floating rate notes for which a redemption price is not otherwise specified in the indenture, regardless of whether such prepayment is made voluntarily or mandatorily, as a result of acceleration upon the occurrence of an event of default or otherwise, we are required to pay 102% of the principal amount plus accrued and unpaid interest. An open-market purchase of floating rate notes would not require a prepayment price at the foregoing rates. In addition,

the indenture provides that if there is a change of control, we will be required to make an offer to purchase all outstanding floating rate notes at a price equal to 101% of their principal amount plus accrued and unpaid interest. The indenture provides that a change of control includes, among other things, if a person or group becomes directly or indirectly the beneficial owner of 35% or more of Holdings’ common stock. The fair value of the floating rate notes as of March 31, 2010 was approximately $132.1 million.

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

Through certain of InSight’s wholly owned subsidiaries we have an asset-based revolving credit facility of up to $30 million, which matures in June 2011, with the lenders named therein and Bank of America, N.A. as collateral and administrative agent. The credit facility is scheduled to terminate in June 2011. As of March 31, 2010, we had approximately $12.0 million of availability under the credit facility, based on our borrowing base. At March 31, 2010, there were no outstanding borrowings under the credit facility; however, there were letters of credit of approximately $1.3 million outstanding under the credit facility. As a result of our current fixed charge coverage ratio, we would only be able to borrow up to $4.5 million of the $12.0 million of availability under the borrowing base due to a restriction in the future if our liquidity, as defined in the credit facility agreement, falls below $7.5 million.

Holdings and InSight unconditionally guarantee all obligations of InSight’s subsidiaries that are borrowers under the credit facility. All obligations under the credit facility and the obligations of Holdings and InSight under the guarantees are secured, subject to certain exceptions, by a first priority security interest in all of Holdings’, InSight’s and the borrowers’: (i) accounts; (ii) instruments, chattel paper (including, without limitation, electronic chattel paper), documents, letter-of-credit rights and supporting obligations relating to any account; (iii) general intangibles that relate to any account; (iv) monies in the possession or under the control of the lenders under the credit facility; (v) products and cash and non-cash proceeds of the foregoing; (vi) deposit accounts established for the collection of proceeds from the assets described above; and (vii) books and records pertaining to any of the foregoing.

Borrowings under the credit facility bear interest at a per annum rate equal to LIBOR plus 2.5%, or, at our option, the base rate (which is the Bank of America, N.A. prime rate); however, the applicable margin will be adjusted in accordance with a pricing grid based on our fixed charge coverage ratio, and will range from 2.00% to 2.50% per annum. In addition to paying interest on outstanding loans under the credit facility, we are required to pay a commitment fee to the lenders in respect of unutilized commitments there under at a rate equal to 0.50% per annum, subject to reduction based on a performance grid tied to our fixed charge coverage ratio, as well as customary letter-of-credit fees and fees of Bank of America, N.A. There are no financial covenants included in the credit facility, except a minimum fixed charge coverage ratio test which will be triggered if our liquidity, as defined in the credit facility, falls below $7.5 million.

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

NEW ACCOUNTING PRONOUNCEMENTS

FASB ASC Topic 805 “Business Combinations” formerly SFAS 141(R) (“ASC 805”) establishes principles and requirements for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed and any noncontrolling interest in an acquisition, at their fair value as of the acquisition date. ASC 805 is effective for fiscal years beginning after December 15, 2008. The adoption of ASC 805 did not have a material adverse effect on our financial position or cash flows.

	(i)		a valuation technique that uses the quoted price of the identical liability when traded as an asset; or, quoted prices for similar liabilities, or similar liabilities when traded as assets, or

	(ii)		another valuation technique consistent with the principles of ASC Topic 820 — Fair Value Measurements and Disclosures, such as an income approach or market approach.

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 Form 10-Q are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these 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. We believe the critical accounting policies that most impact the consolidated financial statements are described below. 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, 2009 filed with the Securities and Exchange Commission.

Revenue Recognition: Revenues from contract services and from patient services are recognized when services are provided. 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 private health insurance programs, Medicare, Medicaid and other federal healthcare programs, and (2) payments due to radiologists. We report payments made to radiologists on a net basis because (i) we are not the primary obligor for the provision of professional services, (ii) the radiologists receive contractual percentages of collections and (iii) the radiologists bear the risk of non-collection. Contract services revenues are recognized as services are provided. Revenues collected in advance are recorded as unearned revenue. Other operations revenues are recognized as the services are provided based on the contract.

Intangible Assets: Identified intangible assets consist primarily of our goodwill, trademark, certificates of need, customer relationships and wholesale contracts. The intangible assets, excluding the wholesale contracts and customer relationships, are indefinite-lived assets and are not amortized. Wholesale contracts and customer relationships are definite-lived assets and are amortized over the expected term of the respective contracts and relationships, respectively. In accordance with ASC Topic 350 (“ASC 350”) formerly 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.

We evaluate the carrying value of goodwill and other indefinite-lived intangible assets in the second quarter of each fiscal year. Additionally, we review the carrying amount of goodwill and other indefinite-lived intangible assets whenever events and circumstances indicate that their respective carrying amounts may not be recoverable. Impairment indicators include, among other conditions, cash flow deficits, historic or anticipated declines in revenue or operating profit and adverse legal or regulatory developments. As of March 31, 2010, we had goodwill of $1.6 million associated with the acquisition of two fixed-site centers in the Boston-metropolitan area of Massachusetts and equity interest in a joint venture in Texas, which was allocated to our patient services operations. In evaluating goodwill, we complete the two-step impairment test as required by ASC 350. In the first of a two-step impairment test, we determine the fair value of our reporting units, which we define as fixed site center or mobile units, using a discounted cash flow valuation model, market multiple model or appraised values, as appropriate. ASC 350 requires us to compare the fair value for the reporting unit to its carrying value on an annual basis to determine if there is potential impairment. If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not impaired and no further testing is required. If the fair value does not exceed the carrying value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of the goodwill with the carrying amount of that goodwill. Impairment losses, if any, are reflected in the consolidated statements of operations. We completed our annual impairment testing of our goodwill during the second quarter and determined that our goodwill was not impaired.

We additionally completed our evaluation of the carrying value of our indefinite-lived intangible assets as of December 31, 2009. Based on our annual evaluation of the carrying value of our indefinite-lived intangible assets (other than our goodwill), we concluded that impairments had occurred and we recorded a non-cash impairment charge of $1.9 million in our contract services segment related to our trademark ($0.8 million) and our certificates of need ($0.9 million) and our patient services segment related to our certificates of need ($0.2 million). This impairment charge primarily resulted from a decline in our mobile business within our contract services segment.

We assess the ongoing recoverability of our intangible assets subject to amortization in accordance with SFAS No. 144 which has been incorporated into ASC Topic 360, “Property, Plant and Equipment” by determining whether the long-lived asset can be recovered over the remaining amortization period through projected undiscounted future cash flows. If projected future cash flows indicate that the long-lived asset balances will not be recovered, an adjustment is made to reduce the asset to an amount consistent with projected future cash flows discounted at the market interest 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.

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 relating to the floating rate notes and our credit facility. As a result, we will periodically use interest rate swaps, caps and collars to hedge variable interest rates on long-term debt. We believe there was not a material quantitative change in our market risk exposure during the quarter ended March 31, 2010, as compared to prior periods. At March 31, 2010, approximately 98.4% of our indebtedness was variable rate indebtedness; however, as a result of the interest rate cap contract discussed below our exposure on variable rate indebtedness was reduced by $190 million, to approximately 34.7% of our total indebtedness as of March 31, 2010. 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 indebtedness 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.

We had an interest rate hedging agreement with Bank of America, N.A. which effectively provided us with an interest rate collar. The notional amount to which the agreement applied was$190 million, and it provided for a LIBOR cap of 3.25% and a LIBOR floor of 2.59% on that amount. Our obligations under the agreement were secured on a pari passu basis by the same collateral that secures our credit facility, and the agreement was cross-defaulted to our credit facility. This agreement expired on February 1, 2010.

In August 2009, we entered into an interest rate cap agreement with Bank of America, N.A. with a notional amount of $190 million and a three-month LIBOR cap of 3.0% effective between February 1, 2010 and January 31, 2011. The terms of the agreement call for us to pay a fee of approximately $0.5 million over the contract period. The contract exposes us to credit risk in the event that the counterparty to the contract does not or cannot meet its obligations; however, Bank of America, N.A. is a major financial institution and we expect that it will perform its obligations under the contract. We designated this contract as a highly effective cash flow hedge of the floating rate notes under ASC 815. Accordingly, the value of the contract is marked-to-market quarterly, with effective changes in the intrinsic value of the contract included as a separate component of other comprehensive income (loss). The net effect of the hedge is to cap interest payments for $190 million of our debt at a rate of 8.25%, because our floating rate notes incur interest at three-month LIBOR plus 5.25%. As of March 31, 2010, the contract had an asset value related to the premium of $0.3 million and a fair market liability value of $0.3 million, resulting in a net value of zero.

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, 2010, a 1.0% increase in interest rates on our $293.5 million of floating rate debt would affect annual future earnings and cash flows by approximately $1.0 million. Since the interest on our floating rates notes is based on LIBOR, and LIBOR was less than 1.0% as of March 31, 2010, if LIBOR were to drop to zero, our annual future earnings and cash flows would be affected by approximately $0.3 million. The weighted average interest rate on the floating debt as of March 31, 2010, including the effects of the interest rate hedging agreement was 7.3%.

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.

Inflation Risk

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

ITEM 4T. CONTROLS AND PROCEDURES

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 15d-15 under the Securities Exchange Act of 1934. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2010, 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 Securities and Exchange Commission filings. There were no changes in the Company’s internal control over financial reporting that occurred during the nine months ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On January 5, 2010, Holdings, InSight and InSight Health Corp., a wholly-owned subsidiary of InSight, were served with a complaint filed in the Los Angeles County Superior Court alleging claims on behalf of current and former employees. In Kevin Harold and Denise Langhoff, on their own behalf and on behalf of others similarly situated v. InSight Health Services Holdings Corp., et al., the plaintiffs allege violations of California’s wage, overtime, meal period, break time and business practice laws and regulations. Plaintiffs seek recovery of unspecified economic damages, statutory penalties, punitive damages, interest, attorneys’ fees and costs of suit. We are currently evaluating the allegations of the complaint and are unable to predict the likely timing or outcome of this lawsuit. In the meantime we intend to vigorously defend this lawsuit.

ITEM 1A. RISK FACTORS

RISKS RELATING TO OUR INDEBTEDNESS

Our substantial indebtedness could adversely affect our financial condition.

We have a substantial amount of debt, which requires significant interest and principal payments. As of March 31, 2010, we had total indebtedness of approximately $298.4 million in aggregate principal amount. In addition, subject to the restrictions contained in the indenture governing the floating rate notes and in our other debt instruments, we may be able to incur additional indebtedness from time to time to finance working capital, capital projects, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could intensify. Specifically, our high level of debt could have important consequences, including the following:

	•		making it more difficult for us to satisfy our obligations with respect to the floating rate notes and our other debt;

	•		limiting our ability to obtain additional financing to fund future working capital, capital projects, acquisitions or other general corporate requirements;

	•		requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes;

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

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

	•		placing us at a competitive disadvantage compared to our competitors that have stronger capital structures, more flexibility in operating their businesses and greater access to capital; and

	•		increasing our cost of borrowing.

We may be unable to service our debt.

Our ability to make scheduled payments on or to refinance our obligations with respect to our debt, including, but not limited to, the floating rate notes, will depend on our financial and operating performance, which will be affected by general economic, financial, competitive, business and other factors beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to service our debt, including, but not limited to, the floating rate notes, or to fund our other liquidity needs.

If we are unable to meet our debt obligations or fund our other liquidity needs, we may need to sell certain of our assets, restructure or refinance all or a portion of our debt on or before maturity, including, but not limited to, the floating rate notes. The floating rate notes mature in November 2011 and unless our financial performance significantly improves, we can give no assurance that we will be able to restructure or refinance any of our debt on commercially reasonable terms, if at all, which could cause us to default on our debt obligations and impair our liquidity.

Our operations may be restricted by the terms of our debt, which could adversely affect us and increase our credit risk.

The agreements governing our material indebtedness include a number of significant restrictive covenants. These covenants could adversely affect us, and adversely affect investors, by limiting our ability to plan for or react to market conditions or to meet our capital needs. These covenants, among other things, restrict our ability to:

	•		incur more debt;

	•		create liens;

	•		pay dividends and make distributions or repurchase stock;

	•		make certain investments;

	•		merge, consolidate or transfer or sell assets; and

	•		engage in transactions with affiliates.

A breach of a covenant or other provision in any debt instrument governing our current or future indebtedness could result in a default under that instrument and, due to cross-default and cross-acceleration provisions, could result in a default under our other debt instruments. Upon the occurrence of an event of default under our debt instruments, the lenders may be able to elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If we are unable to repay those amounts, the lenders could proceed against the collateral granted to them, if any, to secure the indebtedness. If the lenders under our current or future indebtedness accelerate the payment of the indebtedness, we can give no assurance that our assets or cash flow would be sufficient to repay in full our outstanding indebtedness. Substantially all of our assets, other than those assets consisting of accounts receivables and related assets or cash accounts related to receivables, which secure our credit facility, and a portion of InSight’s stock and the stock of its subsidiaries, are subject to the liens in favor of the holders of the floating rate notes. This may further limit our flexibility in obtaining secured or unsecured financing in the future.

We may not have sufficient funds to purchase all outstanding floating rate notes and our other debt upon a change of control.

Upon a change of control, we will be required to make an offer to purchase all outstanding floating rate notes at a price equal to 101% of their principal amount plus accrued and unpaid interest. Under the terms of the indenture for the floating rate notes, a change of control includes, among things, if a person or group becomes directly or indirectly the beneficial owner of 35% or more of Holdings’ common stock. We believe that as of September 15, 2009, one person holds beneficial ownership in excess of 20% of Holdings’ common stock and another holds beneficial ownership in excess of 10% of Holdings’ common stock. Because of the low trading price of our common stock, $0.18 closing price on March 31, 2010, a person or group may be able to acquire 35% or more of Holdings’ common stock for a relatively small amount of money. We cannot assure you that we will have or will be able to borrow sufficient funds at the time of any change of control to make any required purchases of such notes or our other debt. If we failed to make a change of control offer and to purchase all of the tendered notes, it would constitute an event of default under the indenture for the floating rate notes, and potentially, other debt. Any future credit arrangements or other debt agreements to which we become party may contain similar agreements.

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

Our property and equipment (other than land, building and leasehold improvements and assets securing our capital lease obligations), which make up a significant portion of our tangible assets, had a net book value as of March 31, 2010 of approximately $60.0 million. The book value of these assets should not be relied on as a measure of realizable value for such assets. The realizable value of our assets may be greater or lower than such net book value. The value of our assets in the event of liquidation will depend upon market, credit and economic conditions, the availability of buyers and similar factors. A sale of these assets in a bankruptcy or similar proceeding would likely be made under duress, which would reduce the amounts that could be recovered. Furthermore, such a sale could occur when other companies in our industry also are distressed, which might increase the supply of similar assets and therefore reduce the amounts that could be recovered. Our intangible assets had a net book value as of March 31, 2010 of approximately $22.9 million. As a result, in the event of a default under the agreements governing our material indebtedness or any bankruptcy or dissolution of our company, the realizable value of these assets will likely be substantially lower and may be insufficient to satisfy the claims of our creditors.

The condition of our assets will likely deteriorate during any period of financial distress preceding a sale of our assets. In addition, a material amount of our assets consist of illiquid assets that may have to be sold at a substantial discount in an insolvency situation.

Accordingly, the proceeds of any such sale of our assets may not be sufficient to satisfy, and may be substantially less than, amounts due to our creditors.

We may be unable to obtain necessary capital to finance certain projects or refinance our existing indebtedness because of conditions in the financial markets and economic conditions generally.

Our ability to obtain necessary capital is affected by conditions in the financial markets and economic conditions generally. Slowing growth, contraction of credit, increasing energy prices, declines in business or investor confidence or risk tolerance, increases in inflation, higher unemployment, outbreaks of hostilities or other geopolitical instability, corporate, political or other scandals that reduce investor confidence in capital markets and natural disasters, among other things, can affect the financial markets and economic conditions generally. If we are unable to obtain sufficient capital at commercially reasonable rates, we may be unable to fund certain capital projects or refinance our existing indebtedness, including the floating rate notes, which may erode our competitive positions in various markets.

Increases in interest rates could adversely affect our financial condition and results of operations.

An increase in prevailing interest rates would have an immediate effect on the interest rates charged on our variable rate indebtedness, which rise and fall upon changes in interest rates. At March 31, 2010, approximately 98.4% of our indebtedness was variable rate indebtedness. We have an interest rate cap contract, with a notional amount of $190 million with a LIBOR cap of 3.0%. As a result of this contract our exposure on variable rate indebtedness was reduced by $190 million, or to approximately 35% as of March 31, 2010. Increases in interest rates could also impact the refinancing of our existing indebtedness, including the floating rate notes. Moreover, the increased interest expense would adversely affect our cash flow and our ability to service our indebtedness. 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, subject us to the risk that the other parties to the agreements may not perform their obligations there under or that the agreements could be unenforceable.

RISKS RELATING TO OUR BUSINESS

Our efforts to implement initiatives to enhance revenues and reduce costs may not be adequate or successful.

We have attempted to implement, and will continue to develop and implement, various revenue enhancement, receivables and collections management and cost reduction initiatives. Revenue enhancement initiatives have focused and will continue to focus on our sales and marketing efforts to maintain or improve our procedural volumes and contractual rates, and our Insight Imaging Enterprise Solutions initiative. Receivables and collections management initiatives have focused and will continue to focus on collections at point of service for patients with commercial insurance, technology improvements to create greater efficiency in the gathering of patient and claim information when a procedure is scheduled or completed, and our initiative with Dell Perot Systems. Cost reduction initiatives have focused and will continue to focus on streamlining our organizational structure and expenses including enhancing and leveraging our technology to create greater efficiencies, and leveraging relationships with strategic vendors. While we have experienced some improvements through our receivables and collections management and cost reduction initiatives, benefits from our revenue enhancement initiatives have yet to materialize and our revenues continue to decline. Moreover, future revenue enhancement initiatives will face significant challenges because of the continued overcapacity in the diagnostic imaging industry, reimbursement reductions and the effects of the country’s economic condition, including higher unemployment. The adequacy and ultimate success of our initiatives cannot be assured.

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 condition and results of operations.

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, lease payments, depreciation and amortization, salaries and benefit obligations, equipment maintenance expenses, insurance and vehicle operations costs. As a result, a relatively small reduction in the prices we charge for our services or procedural volume could have a disproportionate negative effect on our financial condition and results of operations.

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

We operate in a competitive, capital intensive, high fixed-cost industry. The development of new technologies or refinements of existing ones might make our existing systems technologically or economically obsolete, or reduce the need for our systems. Competition among manufacturers has resulted in and likely will continue to result in technological advances in the speed and imaging capacity of new systems. Consequently, the obsolescence of our systems may be accelerated. Other than ultra-high field MRI systems and 256-slice CT systems, we are aware of no substantial technological changes; however, should such changes occur, we may not be able to acquire the new 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 or equipment vendor financing, the issuance of equity or debt securities, and operating leases, we may be unable to maintain a competitive equipment base. In addition, advancing technology may enable hospitals, physicians or other diagnostic imaging service providers to perform procedures without the assistance of diagnostic imaging service providers such as ourselves. As a result of the age of our imaging equipment, we may not be able to maintain our competitive position in our core markets or expand our business.

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

For fiscal 2009, we derived approximately 54% of our revenues from direct billings to patients and third-party payors such as Medicare, Medicaid, managed care and private health insurance companies. Certain third-party payors have proposed and implemented changes in the methods and rates of reimbursement that have had the effect of substantially decreasing reimbursement for diagnostic imaging services that we provide. In addition, the passage of recent federal health care legislation and new regulations promulgated by CMS could result in significant decreases in reimbursement for services provided to Medicare patients. Managed care contracting is competitive and reimbursement schedules are at or below Medicare reimbursement levels. However, some managed care organizations have reduced or otherwise limited, and we believe that other managed care organizations may reduce or otherwise limit, reimbursement in response to reductions in government reimbursement. These reductions have had, and any future reductions could have, an adverse impact on our financial condition and results of operations. See our discussion regarding Medicare reimbursement changes in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Reimbursement”.

Moreover, our healthcare provider customers, which provided approximately 46% of our revenues during fiscal 2009, generally rely on reimbursement from third-party payors. To the extent our healthcare provider customers’ reimbursement from third-party payors is reduced, it will likely have an adverse impact on the rates they pay us as they would seek to offset such decreased reimbursement rates. Furthermore, many commercial health care insurance arrangements are changing, so that individuals bear greater financial responsibility through high deductible plans, co-insurance and higher co-payments, which may result in patients delaying or foregoing medical procedures.

We expect that any further changes to the rates or methods of reimbursement for our services, whether directly through billings to third-party payors or indirectly through our healthcare provider customers, will result in a further decline in our revenues and adversely affect our financial condition and results of operations. See our discussion regarding reimbursement changes in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Reimbursement”.

Negative trends could continue to adversely affect our financial condition and results of operations.

As a result of the various factors that affect our industry generally and our business specifically, we have experienced declines in Adjusted EBITDA as compared to prior year periods (see our definition of Adjusted EBITDA and reconciliation of net cash provided by operating activities to Adjusted EBITDA in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition, Liquidity and Capital Resources”). Our Adjusted EBITDA for the three and nine months ended March 31, 2010 declined approximately 16.9% and 17.9%, respectively, as compared to our Adjusted EBITDA for the prior year periods. Our Adjusted EBITDA declined approximately 1.2% and 33.1% for fiscal 2009 and 2008, respectively, as compared to prior fiscal years. We have had a negative historical trend of declining Adjusted EBITDA for the past five fiscal years, which may continue and be exacerbated by negative effects of the economic condition and the reimbursement reductions discussed in the subsection entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Reimbursement”.

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

Our financial condition and results of operations 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 on favorable terms. For our mobile facilities, we generally enter into contracts with hospitals having one to five year terms. A significant number of our mobile contracts will expire each year. To the extent we do not renew a customer contract it is not always possible to immediately obtain replacement customers. Historically, many replacement customers have been smaller, with lower procedural volumes. Recently there has been an increase in the amount of available equipment for lease within the industry. This increase in availability has caused a decline in demand for our contract services mobile systems, which has resulted in (1) a lower than normal success rate in replacing lost revenues, (2) lower contractual reimbursement as compared to prior periods and (3) an increase in the number of our idle mobile systems. In addition, attractive gross margins have caused hospitals and physician groups who have utilized mobile services from our company and our competitors to purchase and operate their own equipment. Although reimbursement reductions may dissuade physician groups from operating their own equipment, we expect that some high volume customer accounts will continue to elect not to renew their contracts with us and instead acquire their own diagnostic imaging equipment. As a result of the age of our imaging equipment, we may not be able to renew contracts of existing customers or attract new customers on favorable terms. This would adversely affect our financial condition and results of operations.

We have experienced, and will continue to experience, competition from hospitals, physician groups and other diagnostic imaging companies and this competition could adversely affect our financial condition and results of operations.

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 hospitals, physician groups and certain other independent organizations, including equipment manufacturers and leasing companies that own and operate imaging equipment. We have encountered and we will continue to encounter competition from hospitals and physician groups that purchase their own diagnostic imaging equipment. Some of our direct competitors may have access to greater financial resources than we do. If we are unable to successfully compete, our customer base would decline and our financial condition and results of operations would be adversely affected.

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 core market strategy, we have pursued, and may continue to pursue, selective acquisitions and arrangements through partnerships and joint ventures with hospitals and other healthcare providers. Acquisitions and joint ventures require substantial capital which may exceed the funds available to us from internally generated funds and our available financing arrangements. We may not be able to raise any necessary additional funds through bank or equipment vendor 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 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.

If we do not successfully identify, complete and 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 acquisitions will depend upon our ability to manage their operations and to eliminate excess costs.

Consolidation in the imaging industry could adversely affect our financial condition and results of operations.

We compete with several national and regional providers of diagnostic imaging services, as well as local providers. As a result of the reimbursement reductions by Medicare and other third-party payors, some of these competitors may consolidate their operations in order to obtain certain cost structure advantages and improve equipment utilization. Certain of our competitors have certain advantages over us including larger financial and business resources, economies of scale, breadth of service offerings, and favored relationships with equipment vendors, hospital systems, leading radiologists and third-party payors. We may be forced to exit certain markets, reduce our prices or provide state-of-the-art equipment in order to retain and attract customers. These pressures could adversely affect our financial condition and results of operations.

Failure to attract and retain qualified employees and contracted radiologists could hinder our business strategy and negatively impact our financial condition and results of operations.

Our future success depends on our continuing ability to identify, hire or contract with, develop, motivate and retain highly skilled persons for all areas of our organization, including senior executives and contracted radiologists. Competition in our industry for qualified employees is intense. There is a very high demand for qualified technologists, particularly MRI, PET and PET/CT technologists, and we may not be able to hire and retain a sufficient number of technologists. Failure to attract and retain qualified employees and contracted radiologists could hinder our business strategy and negatively impact our financial condition and results of operations.

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

Our fixed-site centers are dependent on our ability to attract referrals from physicians and other healthcare providers representing a variety of specialties. Our eligibility to provide services in response to a referral is often dependent on the existence of a contractual arrangement with the referred patient’s managed care organization. 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. A significant decline in referrals would have a material adverse effect on our financial condition and results of operations.

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

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 our liability insurance, could have a material adverse effect on our financial condition and results of operations. In addition 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 financial condition and results of operations.

Our 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/CT services and some of our other imaging services require the use of radioactive materials to produce 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 which would adversely affect our financial condition and results of operations.

We may not receive payment from some of our healthcare provider customers because of their financial circumstances.

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

We may be unable to generate revenue when our equipment is not operational.

Timely, effective service is essential to maintaining our reputation and utilization rates on our imaging equipment. Our warranties and maintenance contracts do not compensate us for the loss of revenue when our systems are not fully operational. Equipment manufacturers may not be able to perform repairs or supply needed parts in a timely manner. Thus, if we experience more equipment malfunctions than anticipated or if we are unable to promptly obtain the service necessary to keep our equipment functioning effectively, our financial condition and results of operations would be adversely affected.

Natural disasters and harsh weather conditions could adversely affect our business and operations.

Our corporate headquarters, including our information technology center, and a material number of our fixed-site centers are located in California, which has a high risk for natural disasters, including earthquakes and wildfires. Depending upon its severity, a natural disaster could severely damage our facilities or our information technology system, interrupt our business or prevent potential patients from traveling to our centers, each of which would adversely affect our financial condition and results of operations. We currently do not maintain a secondary disaster recovery facility for our information technology system. In addition, while we presently carry earthquake and business interruption 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. We may discontinue some or all of this insurance coverage on some or all of our centers in the future if the cost of premiums 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 centers as well as the anticipated future cash flows from those centers.

To the extent severe weather patterns affect the regions in which we operate (e.g., hurricanes and snow storms), 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 procedural volume during that period. Accordingly, harsh weather conditions could adversely impact our financial condition and results of operations.

High fuel costs would adversely affect our financial condition and results of operations.

Fuel costs constitute a significant portion of our mobile operating expenses. Historically, fuel costs have been subject to wide price fluctuations based on geopolitical issues and supply and demand. Fuel availability is also affected by demand for home heating oil, diesel, gasoline and other petroleum products. Because of the effect of these events on the price and availability of fuel, the cost and future availability of fuel cannot be predicted with any degree of certainty. In the event of a fuel supply shortage or further increases in fuel prices, we may need to curtail certain mobile routes or redeploy our mobile facilities. There have been significant fluctuations in fuel costs and any further increases to already high fuel costs would adversely affect our financial condition and results of operations.

If we fail to comply with various licensure, certification and accreditation standards we may be subject to loss of licensure, certification or accreditation which would adversely affect our financial condition and results of operations.

All of the states in which we operate require that technologists who operate our MRI, CT and PET/CT systems be licensed or certified. Also, each of our fixed-site centers must continue to meet various requirements in order to receive payments from Medicare. In addition, our mobile facilities are currently accredited by The Joint Commission, an independent, non-profit organization that accredits various types of healthcare providers, such as hospitals, nursing homes, outpatient ambulatory care centers and diagnostic imaging providers. If we were to lose such accreditation for our mobile facilities, it could adversely affect our results of operations and financial condition because some of our customer contracts require accreditation by The Joint Commission and one of our primary competitors has such accreditation.

Managed care providers prefer to contract with accredited organizations. Any lapse in our licenses, certifications or accreditations, or those of our technologists, or the failure of any of our fixed-site centers to satisfy the necessary requirements under Medicare could adversely affect our financial condition and results of operations.

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 and adversely affect our ability to operate our business and our financial condition and results of operations.

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 Health Insurance Portability and Accountability Act of 1996 and other state and federal legislation dealing with patient privacy;

	•		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;

	•		Food and Drug Administration requirements;

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

	•		federal and state laws governing the diagnostic imaging 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 applicable laws and regulations, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines, exclusion from Medicare, Medicaid or other governmental programs 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 condition and results of operations. 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. Moreover, if we are unsuccessful in defending against such action, the imposition of certain penalties would adversely affect our financial condition and results of operations. If we were excluded from Medicare, Medicaid or other governmental programs, not only would we lose the revenues associated with such payors, but we anticipate that our other customers and partners would terminate their contracts or relationships with us.

The regulatory and political 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 financial condition and results of operations. 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 or restrict our operations.

In March 2010, the President signed one of the most significant health care reform measures in decades. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the “PPACA”), substantially changes the way health care is financed by both governmental and private insurers, including several payment reforms that establish payments to hospitals and physicians based in part on quality measures, and may significantly impact our industry. The PPACA requires, among other things, payment rates for services using imaging equipment that costs over $1 million to be calculated using revised equipment usage assumptions and reduced payment rates for imaging services paid under the Medicare Part B fee schedule. The current 50% usage assumption rate would be replaced with a 75% usage rate for such equipment for services furnished on or after January 1, 2011. In addition, the PPACA changes the technical component discount on imaging of contiguous body parts during a single imaging session from 25% to 50%, as mandated by the DRA. We are unable to predict what effect the PPACA or other healthcare reform measures that may be adopted in the future will have on our business. The federal government will, however, have greater involvement in the healthcare industry than in prior years, and such greater involvement may adversely affect our financial condition and results of operations.

RISKS RELATED TO RELATIONSHIPS WITH STOCKHOLDERS, AFFILIATES AND RELATED PARTIES

A small number of stockholders control a significant portion of Holdings’ common stock.

A significant portion of Holdings’ outstanding common stock is held by a small number of holders. We believe that as of September 15, 2009, one person holds beneficial ownership in excess of 20% of Holdings’ common stock and another holds beneficial ownership in excess of 10% of Holdings’ common stock. As a result, these stockholders will have significant voting power with respect to the ability to:

	•		authorize additional shares of Holdings’ capital stock;

	•		amend Holdings’ certificate of incorporation or bylaws;

	•		elect Holdings’ directors; or

	•		effect or reject a merger, sale of assets or other fundamental transaction.

The extent of ownership by these stockholders may also discourage a potential acquirer from making an offer to acquire us. This could reduce the value of Holdings’ common stock.

ITEM 5. EXHIBITS


31.1		Certification of Louis E. Hallman, III, Holdings’ Chief Executive Officer, pursuant to Rule 15d-14 of the Securities Exchange Act of 1934, filed herewith.

31.2		Certification of Keith S. Kelson, Holdings’ Chief Financial Officer, pursuant to Rule 15d-14 of the Securities Exchange Act of 1934, filed herewith.

32.1		Certification of Louis E. Hallman, III, Holdings’ 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 Keith S. Kelson, Holdings’ 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 14, 2010


	INSIGHT HEALTH SERVICES HOLDINGS CORP. (Registrant)
	By:	/s/ Louis E. Hallman, III
		Louis E. Hallman, III
		President and Chief Executive Officer (Principal Executive Officer)


	By:	/s/ Keith S. Kelson
		Keith S. Kelson
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

EXHIBIT INDEX


EXHIBIT NUMBER		DESCRIPTION

31.1		Certification of Louis E. Hallman, III, Holdings’ Chief Executive Officer, pursuant to Rule 15d-14 of the Securities Exchange Act of 1934, filed herewith.

31.2		Certification of Keith S. Kelson, Holdings’ Chief Financial Officer, pursuant to Rule 15d-14 of the Securities Exchange Act of 1934, filed herewith.

32.1		Certification of Louis E. Hallman, III, Holdings’ 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 Keith S. Kelson, Holdings’ 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.

INSIGHT HEALTH SERVICES HOLDINGS CORP - FORM 10-Q - May 14, 2010

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INSIGHT HEALTH SERVICES HOLDINGS CORP Reports

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