**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q/A**

**(AmendmentNo. 1)**

**QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OFSECURITIES EXCHANGE ACT OF 1934**

**ForQuarter Ended:  March 31, 2007**

**CommissionFile Number:  1-16609**

**ALLIANCE  IMAGING,  INC.**

(Exact name of registrantas specified in its charter)

| **DELAWARE**                     |   | **33-0239910**                        |
|----------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of |   | (IRS Employer  Identification Number) |
| incorporation or  organization)  |   |                                  |

 

**1900 South State CollegeBoulevardSuite 600Anaheim, California 92806**(Address of principalexecutive office)

**(714) 688-7100**

(Registrant’s telephonenumber, including area code)

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934, during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.    Yes   x        No  o

Indicate by check mark whether the registrant is alarge accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2of the Exchange Act).

Large accelerated filer   o          Accelerated Filer   x          Non-accelerated filer   o

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

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of April 30, 2007:

Common Stock, $.01 par value, 50,221,262 shares

 

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**ALLIANCE IMAGING,INC.**

**FORM 10-Q/A**

**For the FiscalQuarter Ended March 31, 2007**

**Explanatory Note**

Alliance Imaging, Inc. (the “Company”) is filingthis Amendment No. 1 to its Quarterly Report on Form 10-Q forthe quarter ended March 31, 2007 (the “10-Q”), originally filed onMay 10, 2007, to restate its condensed consolidated balance sheet as ofMarch 31, 2007 and its condensed consolidated statements of operations andcomprehensive income and condensed consolidated statements of cash flows forthe quarters ended March 31, 2007 and 2006, and related disclosures.Please refer to Note 13 to the accompanying condensed consolidated financialstatements for additional information.

Subsequent to the filing of the 10-Q, the Companyidentified an error with respect to the accounting for interest rate swapagreements. The swap agreements were executed in 2004 and mature at variousdates in 2007. Since inception the Company had recorded the unrealized gainsand losses in fair value of the swap agreements through other comprehensiveincome (loss). The Company has determined that these transactions do not meetthe requirements for hedge accounting treatment and any unrealized gains orlosses should have been recognized through earnings.

This Amendment No. 1 does not result in a changein the Company’s previously reported revenues, cash flow from operations ortotal cash and cash equivalents shown in its condensed consolidated financialstatements. Furthermore, the Company has not modified or updated disclosurespresented in this Form 10-Q/A, except as required to reflect theeffects of the items discussed above. Accordingly, this Form 10-Q/Adoes not reflect events occurring after the filing of the 10-Q or modifyor update those disclosures affected by subsequent events or discoveries.Information not affected by these restatements is unchanged and reflects thedisclosures made at the time of the original filing of the 10-Q onMay 10, 2007.

The following items have been amended as a result ofthe restatements described above:

Part I—Item 1—Financial Statements

Part I—Item 2—Management’s Discussion andAnalysis of Financial Condition and Results of Operations

Part I—Item 3—Quantitative and QualitativeDisclosures About Market Risk

Part I—Item 4—Controls and Procedures

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**ALLIANCE  IMAGING, INC.FORM 10-Q/AMarch 31, 2007Index**
|                                                                                                                                                           | ** ** | **Page** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| PART I—FINANCIAL INFORMATION                                                                                                                    |       |     |       |   |   |
| Item 1—Financial Statements:                                                                                                                         |       |     |       |   |   |
| Condensed  Consolidated Balance Sheets (Unaudited)   December 31, 2006 and March 31, 2007 (as restated)                                         |       |     | 3          |   |   |
| Condensed  Consolidated Statements of Operations and Comprehensive Income (Unaudited) Quarter  ended March 31, 2006 and 2007 (as restated) |       |     | 4          |   |   |
| Condensed  Consolidated Statements of Cash Flows (Unaudited)   Quarter ended March 31, 2006 and 2007 (as restated)                                   |       |     | 5          |   |   |
| Notes  to Condensed Consolidated Financial Statements (Unaudited)                                                                                         |       |     | 6          |   |   |
| Item  2—Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                                  |       |     | 19         |   |   |
| Item  3—Quantitative and Qualitative Disclosures about Market Risk                                                                                   |       |     | 26         |   |   |
| Item 4—Controls  and Procedures                                                                                                                      |       |     | 27         |   |   |
| PART II—OTHER INFORMATION                                                                                                                       |       |     |       |   |   |
| Item 1—Legal  Proceedings                                                                                                                            |       |     | 29         |   |   |
| Item 1A—Risk  Factors                                                                                                                                |       |     | 29         |   |   |
| Item  2—Unregistered Sales of Equity Securities and Use of Proceeds                                                                                  |       |     | 30         |   |   |
| Item  3—Defaults Upon Senior Securities                                                                                                              |       |     | 30         |   |   |
| Item  4—Submission of Matters to a Vote of Security Holders                                                                                          |       |     | 30         |   |   |
| Item 5—Other  Information                                                                                                                            |       |     | 30         |   |   |
| Item 6—Exhibits                                                                                                                                      |       |     | 31         |   |   |
| SIGNATURES                                                                                                                                                |       |     | 34         |   |   |

 

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**PART I—FINANCIALINFORMATION**

**ITEM 1.**                FINANCIALSTATEMENTS

**ALLIANCEIMAGING, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)(in thousands)**

| ** **                                                   | ** ** | **December 31,** | ** ** | **March 31,**                             | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|------------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**              | ** ** | **2007**                                       | ** ** |
| ** **                                                   | ** ** | ** **            | ** ** | **(as restated,  see Note 13)** | ** ** |
| **ASSETS**                                                   | ** ** |                  | ** ** | ** **                                     |       |   | ** ** | ** ** |   |
| Current assets:                                              |       |                  |       |                                           |       |   |   |   |   |
| Cash and cash  equivalents                                   |       |                  | $          | 16,440                                         |       |   |   | $ | 30,581 |   |   |
| Accounts receivable, net  of allowance for doubtful accounts |       |                  | 51,569     |                                           |       |   | 54,044 |   |   |
| Deferred income taxes                                        |       |                  | 20,199     |                                           |       |   | 23,473 |   |   |
| Prepaid expenses and  other current assets                   |       |                  | 4,211      |                                           |       |   | 3,747 |   |   |
| Other receivables                                            |       |                  | 8,096      |                                           |       |   | 9,927 |   |   |
| Total current assets                                         |       |                  | 100,515    |                                           |       |   | 121,772 |   |   |
| Equipment, at cost                                           |       |                  | 769,967    |                                           |       |   | 771,743 |   |   |
| Less accumulated  depreciation                               |       |                  | (425,790   | )                                              |       |   | (424,675 | ) |   |
| Equipment, net                                               |       |                  | 344,177    |                                           |       |   | 347,068 |   |   |
| Goodwill                                                     |       |                  | 150,069    |                                           |       |   | 150,069 |   |   |
| Other intangible assets,  net                                |       |                  | 35,782     |                                           |       |   | 34,572 |   |   |
| Deferred financing  costs, net                               |       |                  | 6,947      |                                           |       |   | 6,677 |   |   |
| Other assets                                                 |       |                  | 27,036     |                                           |       |   | 17,887 |   |   |
| Total assets                                                 |       |                  | $          | 664,526                                        |       |   |   | $ | 678,045 |   |   |
| **LIABILITIES AND STOCKHOLDERS’  DEFICIT**              | ** ** |                  | ** ** | ** **                                     |       |   | ** ** | ** ** |   |
| Current liabilities:                                         |       |                  |       |                                           |       |   |   |   |   |
| Accounts payable                                             |       |                  | $          | 14,525                                         |       |   |   | $ | 14,174 |   |   |
| Accrued compensation and  related expenses                   |       |                  | 16,993     |                                           |       |   | 15,733 |   |   |
| Accrued interest payable                                     |       |                  | 4,320      |                                           |       |   | 6,977 |   |   |
| Income taxes payable                                         |       |                  | 637        |                                           |       |   | — |   |   |
| Other accrued  liabilities                                   |       |                  | 32,331     |                                           |       |   | 32,645 |   |   |
| Current portion of  long-term debt                           |       |                  | 2,858      |                                           |       |   | 2,704 |   |   |
| Total current  liabilities                                   |       |                  | 71,664     |                                           |       |   | 72,333 |   |   |
| Long-term debt, net of  current portion                      |       |                  | 373,026    |                                           |       |   | 371,863 |   |   |
| Senior subordinated  notes                                   |       |                  | 153,541    |                                           |       |   | 153,541 |   |   |
| Minority interests and  other liabilities                    |       |                  | 4,376      |                                           |       |   | 5,675 |   |   |
| Deferred income taxes                                        |       |                  | 78,893     |                                           |       |   | 84,578 |   |   |
| Total liabilities                                            |       |                  | 681,500    |                                           |       |   | 687,890 |   |   |
| Commitments and  contingencies (Note 10)                     |       |                  |       |                                           |       |   |   |   |   |
| Stockholders’ deficit:                                  |       |                  |       |                                           |       |   |   |   |   |
| Common stock                                                 |       |                  | 499        |                                           |       |   | 501 |   |   |
| Additional paid-in  deficit                                  |       |                  | (7,070     | )                                              |       |   | (5,345 | ) |   |
| Accumulated  comprehensive income                            |       |                  | 1,356      |                                           |       |   | 1,087 |   |   |
| Accumulated deficit                                          |       |                  | (11,759    | )                                              |       |   | (6,088 | ) |   |
| Total stockholders’  deficit                            |       |                  | (16,974    | )                                              |       |   | (9,845 | ) |   |
| Total liabilities and stockholders’ deficit             |       |                  | $          | 664,526                                        |       |   |   | $ | 678,045 |   |   |

 

*See accompanying notes.*

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**ALLIANCE IMAGING, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSAND COMPREHENSIVE INCOME(Unaudited)(in thousands, except per share amounts)**

| ** **                                                                                         | ** ** | **Quarter Ended  March 31,**         | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2006**                                       | ** ** | **2007** | ** ** |
| ** **                                                                                         | ** ** | **(as restated,  see Note 13)** | ** ** | **(as restated,  see Note 13)** | ** ** |
| Revenues                                                                                           |       |                                           | $          | 115,343 |   |   |   | $ | 109,406 |   |   |
| Costs and expenses:                                                                                |       |                                           |       |   |   |   |   |   |   |
| Cost of revenues,  excluding depreciation and amortization                                         |       |                                           | 59,867     |   |   |   | 56,177 |   |   |
| Selling, general  and administrative expenses                                                      |       |                                           | 13,756     |   |   |   | 14,728 |   |   |
| Severance and  related costs                                                                       |       |                                           | 489        |   |   |   | 76 |   |   |
| Depreciation  expense                                                                              |       |                                           | 21,001     |   |   |   | 20,801 |   |   |
| Amortization  expense                                                                              |       |                                           | 1,244      |   |   |   | 1,210 |   |   |
| Interest expense,  net of interest income                                                          |       |                                           | 9,774      |   |   |   | 10,074 |   |   |
| Other (income)  and expense, net                                                                   |       |                                           | 728        |   |   |   | (320 | ) |   |
| Total costs and  expenses                                                                          |       |                                           | 106,859    |   |   |   | 102,746 |   |   |
| Income before  income taxes, minority interest expense and earnings from unconsolidated  investees |       |                                           | 8,484      |   |   |   | 6,660 |   |   |
| Income tax  expense                                                                                |       |                                           | 3,651      |   |   |   | 3,952 |   |   |
| Minority interest  expense                                                                         |       |                                           | 540        |   |   |   | 521 |   |   |
| Earnings from  unconsolidated investees                                                            |       |                                           | (1,040     | ) |   |   | (3,484 | ) |   |
| Net income                                                                                         |       |                                           | $          | 5,333 |   |   |   | $ | 5,671 |   |   |
| Comprehensive  income, net of taxes:                                                               |       |                                           |       |   |   |   |   |   |   |
| Net income                                                                                         |       |                                           | $          | 5,333 |   |   |   | $ | 5,671 |   |   |
| Unrealized gain  (loss) on hedging transactions, net of taxes                                      |       |                                           | 552        |   |   |   | (269 | ) |   |
| Comprehensive  income                                                                              |       |                                           | $          | 5,885 |   |   |   | $ | 5,402 |   |   |
| Earnings per  common share:                                                                        |       |                                           |       |   |   |   |   |   |   |
| Basic                                                                                              |       |                                           | $          | 0.11 |   |   |   | $ | 0.11 |   |   |
| Diluted                                                                                            |       |                                           | $          | 0.11 |   |   |   | $ | 0.11 |   |   |
| Weighted average  number of shares of common stock and common stock equivalents:                   |       |                                           |       |   |   |   |   |   |   |
| Basic                                                                                              |       |                                           | 49,608     |   |   |   | 49,955 |   |   |
| Diluted                                                                                            |       |                                           | 49,974     |   |   |   | 51,088 |   |   |

 

*See accompanying notes.*

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**ALLIANCE IMAGING, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(in thousands)**

| ** **                                                                         | ** ** | **Quarter Ended  March 31,**         | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                       | ** ** | **2007** | ** ** |
| ** **                                                                         | ** ** | **(as restated,  see Note 13)** | ** ** | **(as restated,  see Note 13)** | ** ** |
| **Operating activities:**                                                          | ** ** |                                           | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income                                                                         |       |                                           | $          | 5,333 |   |   |   | $ | 5,671 |   |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                           |       |   |   |   |   |   |   |
| Provision for  doubtful accounts                                                   |       |                                           | 761        |   |   |   | 832 |   |   |
| Share-based  payment                                                               |       |                                           | 715        |   |   |   | 898 |   |   |
| Depreciation and  amortization                                                     |       |                                           | 22,245     |   |   |   | 22,011 |   |   |
| Amortization of  deferred financing costs                                          |       |                                           | 396        |   |   |   | 397 |   |   |
| Adjustment of  swaps to fair value                                                 |       |                                           | (442       | ) |   |   | 672 |   |   |
| Distributions less  than than equity in undistributed income of investees          |       |                                           | (489       | ) |   |   | (421 | ) |   |
| Deferred income  taxes                                                             |       |                                           | 3,419      |   |   |   | 2,844 |   |   |
| Excess tax benefit  from share-based payment arrangements                          |       |                                           | —     |   |   |   | (254 | ) |   |
| Loss (gain) on  sale of assets                                                     |       |                                           | 728        |   |   |   | (320 | ) |   |
| Changes in operating assets and liabilities:                                       |       |                                           |       |   |   |   |   |   |   |
| Accounts  receivable                                                               |       |                                           | (5,439     | ) |   |   | (3,307 | ) |   |
| Prepaid expenses  and other current assets                                         |       |                                           | 850        |   |   |   | 464 |   |   |
| Other receivables                                                                  |       |                                           | (2,003     | ) |   |   | (1,831 | ) |   |
| Other assets                                                                       |       |                                           | (306       | ) |   |   | (1,128 | ) |   |
| Accounts payable                                                                   |       |                                           | (9,718     | ) |   |   | (4,228 | ) |   |
| Accrued  compensation and related expenses                                         |       |                                           | 121        |   |   |   | (1,260 | ) |   |
| Accrued interest  payable                                                          |       |                                           | 2,996      |   |   |   | 2,657 |   |   |
| Income taxes  payable                                                              |       |                                           | 151        |   |   |   | (637 | ) |   |
| Other accrued  liabilities                                                         |       |                                           | 339        |   |   |   | 333 |   |   |
| Minority interests  and other liabilities                                          |       |                                           | (168       | ) |   |   | 1,299 |   |   |
| Net cash provided  by operating activities                                         |       |                                           | 19,489     |   |   |   | 24,692 |   |   |
| **Investing activities:**                                                          | ** ** |                                           | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Equipment  purchases                                                               |       |                                           | (24,331    | ) |   |   | (24,764 | ) |   |
| Decrease in  deposits on equipment                                                 |       |                                           | 5,734      |   |   |   | 13,455 |   |   |
| Proceeds from sale  of assets                                                      |       |                                           | 427        |   |   |   | 1,392 |   |   |
| Net cash used in  investing activities                                             |       |                                           | (18,170    | ) |   |   | (9,917 | ) |   |
| **Financing activities:**                                                          | ** ** |                                           | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Principal payments  on equipment debt                                              |       |                                           | (1,129     | ) |   |   | (855 | ) |   |
| Proceeds from  equipment debt                                                      |       |                                           | —     |   |   |   | 138 |   |   |
| Principal payments  on term loan facility                                          |       |                                           | —     |   |   |   | (600 | ) |   |
| Principal payments  on revolving loan facility                                     |       |                                           | (12,500    | ) |   |   | (7,000 | ) |   |
| Proceeds from  revolving loan facility                                             |       |                                           | 8,500      |   |   |   | 7,000 |   |   |
| Payments of debt  issuance costs                                                   |       |                                           | (137       | ) |   |   | (127 | ) |   |
| Proceeds from  exercise of employee stock options                                  |       |                                           | 270        |   |   |   | 556 |   |   |
| Excess tax benefit  from share-based payment arrangements                          |       |                                           | —     |   |   |   | 254 |   |   |
| Net cash used in  financing activities                                             |       |                                           | (4,996     | ) |   |   | (634 | ) |   |
| Net (decrease)  increase in cash and cash equivalents                              |       |                                           | (3,677     | ) |   |   | 14,141 |   |   |
| Cash and cash  equivalents, beginning of period                                    |       |                                           | 13,421     |   |   |   | 16,440 |   |   |
| Cash and cash  equivalents, end of period                                          |       |                                           | $          | 9,744 |   |   |   | $ | 30,581 |   |   |
| **Supplemental disclosure of cash  flow information:**                             | ** ** |                                           | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Interest paid                                                                      |       |                                           | $          | 6,977 |   |   |   | $ | 6,587 |   |   |
| Income taxes paid,  net of refunds                                                 |       |                                           | 128        |   |   |   | 937 |   |   |
| **Supplemental disclosure of  non-cash investing and financing activities:**       | ** ** |                                           | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net book value of  assets exchanged                                                |       |                                           | $          | 4,442 |   |   |   | $ | 938 |   |   |
| Capital lease  obligations assumed for the purchase of equipment debt              |       |                                           | 1,839      |   |   |   | — |   |   |
| Equipment debt  transferred to unconsolidated investee                             |       |                                           | (2,379     | ) |   |   | — |   |   |
| Comprehensive  income from hedging transactions, net of taxes                      |       |                                           | 552        |   |   |   | (269 | ) |   |

 

*See accompanying notes.*

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**ALLIANCE IMAGING,INC.**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**March 31, 2007**

**(Unaudited)**

**(Dollarsin thousands, except per share amounts)**

**1.   Basis ofPresentation, Principles of Consolidation, and Use of Estimates**

**Basis of Presentation—**The accompanyingunaudited condensed consolidated financial statements have been prepared byAlliance Imaging, Inc. (the “Company”) in accordance with accountingprinciples generally accepted in the United States of America and with theinstructions to Form 10-Q and Article 10 of Regulation S-X of theSecurities and Exchange Commission. Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. In the opinion of management, alladjustments (including normal recurring accruals) considered necessary for afair presentation have been included. Operating results for the quarter ended March 31,2007 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2007. The accompanying unaudited condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and notes to the consolidatedfinancial statements for the year ended December 31, 2006.

**Principles of Consolidation—**Theaccompanying unaudited condensed consolidated financial statements of theCompany include the assets, liabilities, revenues and expenses of all majorityowned subsidiaries over which the Company exercises control. Intercompanytransactions have been eliminated. The Company records minority interestexpense related to its consolidated subsidiaries which are not owned.Investments in non-consolidated investees are accounted for under the equitymethod. At March 31, 2006 and 2007, the Company had $229 and $3,877,respectively, in accounts payable related to deposits on equipment.

**Use ofEstimates—**The preparation of condensed consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the amounts reported in the condensed consolidated financialstatements and accompanying notes. Actual results could differ from thoseestimates.

**2.   Share-BasedCompensation**

The Company adopted Statement of Financial AccountingStandards No. 123(R) (revised December 2004), “Share-Based Payment” (“SFAS123(R)”), in the fiscal year beginning January 1, 2006, using themodified prospective application transition method. Under SFAS 123(R), theCompany now records in its consolidated statements of operations (i) compensationcost for options granted, modified, repurchased or cancelled on or after January 1,2006 under the provisions of SFAS 123(R) and (ii) compensationcost for the unvested portion of options granted prior to January 1, 2006over their remaining vesting periods using the amounts previously measuredunder SFAS 123 for pro forma disclosure purposes.

In November 2005, theFinancial Accounting Standards Board (“FASB”) issued FASB Staff PositionFAS123R-3, Transition Election to Accounting for the Tax Effects ofShare-Based Payment Awards (“FSP”). The Company has elected to follow thealternative transition method as described in the FSP for computing itsadditional paid-in capital pool. In addition, the Company treats thetax deductions from stock options as being realized when they reduce taxespayable in accordance with the principles and timing under therelevant tax law.

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***Stock Option Plans and Awards***

On November 2, 1999, in connection with a seriesof transactions contemplated by an Agreement and Plan of Merger between ViewerAcquisition Corp and the Company in November 1999, the Company adopted anemployee stock option plan (the “1999 Equity Plan”) pursuant to which optionsand awards with respect to a total of 6,325,000 shares of the Company’s commonstock became available for grant. As of March 31, 2007, a total of 548,740shares are available for grant under the 1999 Equity Plan (excluding certainrestricted stock awards granted during the first quarter of 2007, theeffectiveness of which are conditioned on shareholder approval of an increasein the number of shares of common stock that may be issued under the 1999Equity Plan at the Annual Meeting of Stockholders on May 30, 2007 (the “AnnualMeeting”)). Options are granted with exercise prices equal to fair value of theCompany’s common stock at the date of grant, except as noted below. All optionshave 10-year terms. A portion of the options vest in equal incrementsover five years and a portion vest after eight years (subject to accelerationif certain financial performance targets are achieved). The Company settlesstock option exercises with newly issued shares of common stock.

The Company is using the Black-Scholes optionpricing model to value the compensation expense associated with stock-basedawards. The fair value of each option award is estimated on the date of grantusing the Black-Scholes option pricing model that uses the assumptionsnoted in the table below. In addition, forfeitures are estimated whenrecognizing compensation expense, and the estimate of forfeitures will beadjusted over the requisite service period to the extent that actualforfeitures differ, or are expected to differ, from such estimates. Changes inestimated forfeitures will be recognized through a cumulative catch-upadjustment in the period of change and will also impact the amount ofcompensation expense to be recognized in future periods. The Company recordsnon-cash share-based compensation for stock options granted with exerciseprices below the fair value of the Company’s common stock at the date of grantand for certain stock options subject to amended performance targets under the1999 Equity Plan, as discussed below.

Thefollowing weighted average assumptions were used in the estimated grant datefair value calculations for stock option awards:

| ** **                        | ** ** | **Quarter Ended  March 31,** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | **2006**                               | ** ** | **2007** | ** ** |
| Risk free  interest rate          |       | 4.55                                   | %          | 4.74 | % |
| Expected dividend  yield          |       | 0.00                                   | %          | 0.00 | % |
| Expected stock  price volatility  |       | 56.7                                   | %          | 60.4 | % |
| Average expected life  (in years) |       | 6.69                                   |       | 6.61 |   |

 

The expected stock price volatility rates are based ona blend of the historical volatility of the Company’s common stock and peerimplied volatility. The risk free interest rates are based on the U.S. Treasuryyield curve in effect at the time of grant for periods corresponding with theexpected life of the option or award. The average expected life represents theweighted average period of time that options or awards granted are expected tobe outstanding, as calculated using the simplified method described in theSecurities and Exchange Commission’s Staff Accounting Bulletin No. 107.

In November 2000, the Company granted stockoptions to certain employees at exercise prices below the fair value ofthe Company’s common stock, of which 35,000 options were outstanding at March 31,2007. The exercise prices of these options and the fair value of the Company’scommon stock on the grant date were $5.60 and $9.52 per share, respectively.

Under the 1999 Equity Plan, a portion of the optionsgranted are “performance options.” These options vest on the eighth anniversaryof the grant date if the option holder is still an employee, but the 

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vesting accelerates if theCompany meets the operating performance targets specified in the optionagreements. On June 20, 2001, the Company’s compensation committeeauthorized the Company to amend the option agreements under its 1999 EquityPlan to reduce the performance targets for 1,899,600 performance options out ofthe 2,284,222 performance options outstanding. On May 18, 2004, theCompany’s compensation committee authorized the Company to make a secondamendment to the option agreements under its 1999 Equity Plan to further reducethe performance targets for all of the 1,914,500 performance optionsoutstanding. As a result of the amendment, if the Company achieves the reducedperformance targets but does not achieve the original performance targets, andan option holder terminates employment prior to the eighth anniversary of theoption grant date, the Company would be required to record a non-cash stock-basedcompensation charge equal to the amount by which the actual value of the sharessubject to the performance option on the date of the amendment exceeded theoption’s exercise price.

Thefollowing table summarizes the Company’s stock option activity:

| ** **                                                            | ** ** | ** **         | ** ** | ** **              | ** ** | **Weighted-**   | ** ** | ** **    | ** ** |
|-----------------------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|-----------------|------------|---------------|------------|
| ** **                                                            | ** ** | ** **         | ** ** | ** **              | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                                                            | ** ** | ** **         | ** ** | **Weighted-**           | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                                                            | ** ** | **Number of** | ** ** | **Average**             | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                                                            | ** ** | **Shares**         | ** ** | **Exercise Price** | ** ** | **Term**        | ** ** | **Value**     | ** ** |
| Outstanding at  December 31, 2006                                |       | 4,094,325          |       |                    | $          | 5.93            |       |          |       |   |   |   |   |   |   |   |
| Granted                                                               |       | 655,500            |       |                    | 7.28       |            |       |          |       |   |   |   |   |   |   |
| Exercised                                                             |       | (168,670           | )          |                    | 3.28       |            |       |          |       |   |   |   |   |   |   |
| Canceled                                                              |       | (378,075           | )          |                    | 5.64       |            |       |          |       |   |   |   |   |   |   |
| Outstanding at  March 31, 2007                                   |       | 4,203,080          |       |                    | $          | 6.27            |       |          |       | 7.43 |   |   |   | $ | 10,336 |   |   |
| Vested and expected to vest in the future at March 31, 2007 |       | 3,657,973          |       |                    | $          | 6.21            |       |          |       | 7.25 |   |   |   | $ | 9,217 |   |   |
| Exercisable at  March 31, 2007                                   |       | 1,613,998          |       |                    | $          | 5.71            |       |          |       | 5.86 |   |   |   | $ | 4,877 |   |   |

 

The weighted average grant-date fair value of optionsgranted during the quarters ended March 31, 2006 and 2007 was $2.58 pershare and $4.57 per share, respectively. The total intrinsic value of optionsexercised during the quarters ended March 31, 2006 and 2007 was $91 and$668, respectively. The total cash received from employees as a result of stockoption exercises was $270 and $556 for the quarters ended March 31, 2006and 2007, respectively.

Thefollowing table summarizes the Company’s unvested stock option activity:

| ** **                          | ** ** | ** ** | ** ** | **Weighted**        | ** ** |
|-------------------------------------|------------|------------|------------|---------------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Average**         | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **                          | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Unvested at  December 31, 2006 |       | 2,830,441  |       |                | $          | 3.54 |   |   |
| Granted                             |       | 655,500    |       |                | 4.57       |   |   |
| Vested                              |       | (525,709   | )          |                | 3.69       |   |   |
| Canceled                            |       | (371,150   | )          |                | 3.20       |   |   |
| Unvested at  March 31, 2007    |       | 2,589,082  |       |                | $          | 3.82 |   |   |

 

At March 31, 2007,the total unrecognized fair value compensation cost related to unvested stockoptions granted to both employees and non-employees was $6,005, which isexpected to be recognized over a remaining weighted-average period of 3.63years. The valuation model applied in this calculation utilizes highlysubjective assumptions that could potentially change over time, including theexpected forfeiture rate and performance targets. Therefore the amount ofunrecognized compensation expense noted above does not necessarily representthe value that will ultimately be realized by the Company in the statements 

8

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ofoperations. The total fair value of shares vested during the quarters ended March 31,2006 and 2007 was $857, and $1,941, respectively.

***Restricted Stock Awards***

The 1999 Equity Plan, as amended and restated, permitsthe award of restricted stock, restricted stock units, stock bonus awards andperformance-based awards. During 2007, the Company granted 625,000 restrictedstock awards (“award”) to certain employees of the Company, with an effectivegrant date of January 1, 2007. These awards cliff vest after three years,provided that the employee remains continuously employed through the issuancedate. The effectiveness of these awards is conditioned on shareholder approvalof an increase in the number of shares of common stock that may be issued underthe 1999 Equity Plan at the Annual Meeting. For the quarter ended March 31,2007 the Company recorded non-cash share-based compensation expense related tothese grants of $246.

The weighted average grant-date fair value of restrictedstock granted during the quarter ended March 31, 2007 was $6.65 per share.

Thefollowing table summarizes the Company’s unvested restricted stock activity:

| ** **                          | ** ** | ** ** | ** ** | **Weighted**        | ** ** |
|-------------------------------------|------------|------------|------------|---------------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Average**         | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **                          | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Unvested at  December 31, 2006 |       | —     |       |                |       |   |   |
| Granted                             |       | 625,000    |       |                | $          | 6.65 |   |   |
| Vested                              |       | —     |       |                |       |   |   |
| Canceled                            |       | —     |       |                |       |   |   |
| Unvested at  March 31, 2007    |       | 625,000    |       |                | $          | 6.65 |   |   |

 

At March 31, 2007,the total unrecognized fair value compensation cost related to restricted stockawards granted to employees was $2,784, which is expected to be recognized overa remaining weighted-average period of 2.68 years. The valuation model appliedin this calculation utilizes highly subjective assumptions that couldpotentially change over time, including the expected forfeiture rate. Thereforethe amount of unrecognized compensation expense noted above does notnecessarily represent the value that will ultimately be realized by the Companyin the statements of operations.

***Stock Bonus Award***

During 2006 and 2007, the Company granted stock bonusawards (“award”) to certain employees of the Company. On the issuance date, theCompany shall issue a number of shares of the Company’s common stock (“shares”),equal to the bonus award divided by the fair market value of the shares at thattime, provided that the employee remains continuously employed through theissuance date. For the quarters ended March 31, 2006 and 2007 the Companyrecorded non-cash share based compensation expense related to these grants of$125 and $167, respectively.

At March 31, 2007,the total unrecognized fair value compensation cost related to the stock bonusawards granted to employees was $1,208, which is expected to be recognized overa remaining weighted-average period of 1.98 years. The valuation model appliedin this calculation utilizes highly subjective assumptions that couldpotentially change over time, including the expected forfeiture rate. Thereforethe amount of unrecognized compensation expense noted above does notnecessarily represent the value that will ultimately be realized by the Companyin the statements of operations.

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**3.   RecentAccounting Pronouncements**

**Uncertainty in Income Taxes—**InJuly 2006, the FASB issued FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes,” (“FIN 48”), an interpretation of FASBStatement No. 109, “Accounting for Income Taxes,” (“FASB 109”). FIN 48clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB 109. ThisInterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006. The cumulative effect, if any, ofapplying FIN 48 is to be reported as an adjustment to the opening balance ofretained earnings in the year of adoption. The impact of the Company’sreassessment of its tax positions in accordance with FIN 48 did not have amaterial effect on the results of operations, financial condition or liquidity.See further discussion of FIN 48 at Note 8.

**Fair Value Measurements—**InSeptember 2006, the FASB issued SFAS 157, “Fair Value Measurements” (“SFAS 157”),which enhances the existing guidance for measuring assets and liabilities usingfair value. This statement provides a single definition of fair value,establishes a framework for measuring fair value, and expands disclosures aboutfair value measurements. SFAS 157 emphasizes fair value as a market-basedmeasurement instead of an entity-specific measurement. The statement sets out afair value hierarchy with the highest priority being quoted prices in active markets.SFAS 157 is effective for fiscal years beginning after November 15,2007 and interim periods within those fiscal years. The Company is currentlyevaluating the provisions of SFAS 157 and the impact on its consolidatedfinancial position and results of operations. The Company will adoptSFAS 157 for the fiscal year beginning January 1, 2008.

**FairValue Option for Financial Assets and Liabilities—**In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities, including an amendment of FASB Statement No. 115”(“SFAS 159”), which permits entities to choose to measure many financialinstruments and certain other items at fair value. The objective is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. This Statement is expected to expand the use of fair valuemeasurement, which is consistent with the Board’s long-term measurementobjectives for accounting for financial instruments. SFAS 159 is effective forfiscal years beginning after November 15, 2007 and interim periods withinthose fiscal years. The Company is currently evaluating the provisions of SFAS159 and the impact on our consolidated financial position and results ofoperations. The Company will adopt SFAS 159 for the fiscal year beginning January 1,2008.

**4.   Goodwilland Intangible Assets**

Changesin the carrying amount of goodwill are as follows:

| Balance at  December 31, 2006       |   | $      | 150,069 |   |
|------------------------------------------|--------|--------|---------|--------|
| Additions to  goodwill during the period |   | — |    |
| Balance at  March 31, 2007          |   | $      | 150,069 |   |

 

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Intangibleassets consisted of the following:

| ** **                                          | ** ** | **December 31, 2006** | ** ** | **March 31, 2007**  | ** ** |
|-----------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                          | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Intangible  Assets, net** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Intangible  Assets, net** | ** ** |
| Amortizing intangible  assets:                      |       |                            |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Customer contracts                                  |       |                            | $          | 51,063                        |       |   |   | $ | (22,909 | ) |   |   | $ | 28,154 |   |   |   | $ | 51,063 |   |   |   | $ | (23,930 | ) |   |   | $ | 27,133 |   |   |
| Other                                               |       |                            | 7,175      |                          |       |   | (2,726 | ) |   |   | 4,449 |   |   |   | 6,905 |   |   |   | (2,915 | ) |   |   | 3,990 |   |   |
| Total amortizing intangible assets                  |       |                            | $          | 58,238                        |       |   |   | $ | (25,635 | ) |   |   | $ | 32,603 |   |   |   | $ | 57,968 |   |   |   | $ | (26,845 | ) |   |   | $ | 31,123 |   |   |
| Intangible assets  not subject to amortization |       |                            |       |                          |       |   |   |   |   |   | $  | 3,179 |   |   |   |   |   |   |   |   |   |   |   | $  | 3,449 |   |   |
| Total other intangible  assets                      |       |                            |       |                          |       |   |   |   |   |   | $ | 35,782 |   |   |   |   |   |   |   |   |   |   |   | $ | 34,572 |   |   |

 

The Company reviews the recoverability of the carryingvalue of goodwill on an annual basis or more frequently when an event occurs orcircumstances change to indicate an impairment of these assets has possiblyoccurred. Goodwill is allocated to the Company’s various reporting units whichrepresent the Company’s geographical regions. The Company compares the fairvalue of the reporting unit to its carrying amount to determine if there ispotential impairment.

Amortization expense for intangible assets subject toamortization was $1,244 and $1,210 for the quarters ended March 31, 2006and 2007, respectively. The intangible assets not subject to amortizationrepresent certificates of need and regulatory authority rights which haveindefinite useful lives.

Estimated annualamortization expense for each of the fiscal years ending December 31, ispresented below:

| 2007 |   | $     | 4,680  |   |
|------|--------|-------|--------|--------|
| 2008 |   | 4,466 |   |
| 2009 |   | 4,145 |   |
| 2010 |   | 4,076 |   |
| 2011 |   | 3,934 |   |

 

**5.   OtherAccrued Liabilities**

Other accrued liabilitiesconsisted of the following:

| ** **                                    | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                    | ** ** | **2006**              | ** ** | **2007**           | ** ** |
| Accrued systems  rental and maintenance costs |       |                  | $          | 2,596              |       |   |   | $ | 2,107 |   |   |
| Accrued site  rental fees                     |       |                  | 1,507      |               |       |   | 1,642 |   |   |
| Accrued property  and sales taxes payable     |       |                  | 12,055     |               |       |   | 12,561 |   |   |
| Accrued  self-insurance expense               |       |                  | 6,915      |               |       |   | 7,120 |   |   |
| Other accrued  expenses                       |       |                  | 9,258      |               |       |   | 9,215 |   |   |
| Total                                         |       |                  | $          | 32,331             |       |   |   | $ | 32,645 |   |   |

 

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**6.   Long-TermDebt and Senior Subordinated Credit Facility**

Long-term debt consistedof the following:

| ** **                                 | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                 | ** ** | **2006**              | ** ** | **2007**           | ** ** |
| Term loan  facility                        |       |                  | $          | 367,200            |       |   | $ | 366,600 |   |
| Senior  subordinated notes                 |       |                  | 153,541    |               |       | 153,541 |   |
| Equipment debt                             |       |                  | 8,684      |               |       | 7,967 |   |
| Long-term debt,  including current portion |       |                  | 529,425    |               |       | 528,108 |   |
| Less current  portion                      |       |                  | 2,858      |               |       | 2,704 |   |
| Long-term debt                             |       |                  | $          | 526,567            |       |   | $ | 525,404 |   |

 

In April 2007, the Company entered into a fifthamendment to its Credit Agreement which granted consent to the sale of asignificant interest in the Company. See Note 11 for further informationregarding this transaction.

**7.   Derivatives**

In the second quarter of 2004, the Company enteredinto interest rate swap agreements, with notional amounts of $56,813, $46,813and $48,438 to manage the future cash interest payments associated with aportion of the Company’s variable rate bank debt. These agreements are threeyears in length and mature in the second and fourth quarters of 2007. As of March 31,2006 and 2007, the fair value of the Company’s interest rate swap agreementswas $3,266 and $1,055, respectively. Under these arrangements, the Companyreceives three-month London Interbank Offered Rate (“LIBOR”) and pays a fixedrate of 3.15%, 3.89% and 3.69%, respectively. The net effect is to recordinterest expense at fixed rates of 5.65%, 6.39% and 6.19%, respectively, as thedebt incurs interest based on three-month LIBOR plus 2.50%. For the quarterended March 31, 2006 the Company paid a net settlement amount of $306. Forthe quarter ended March 31, 2007, the Company received a net settlementamount of $704. Changes in the fair value of the swap agreements are recordedin interest expense each period, as these transactions do not qualify for hedgeaccounting treatment. For the quarters ended March 31, 2006 and 2007, theCompany recognized interest expense of $672 and a reduction to interest expenseof $442, based on the change in fair value of these instruments, respectively.The Company will continue to record subsequent changes in the fair value of theswaps through interest expense.

In the first quarter of 2005, the Company entered intomultiple interest rate collar agreements for its variable rate bank debt. Thetotal underlying notional amount of the debt was $178,000. Under thesearrangements the Company has purchased a cap on the interest rate of 4.00% andhas sold a floor of 2.25%. The Company paid a net purchase price of $1,462 forthese collars. These agreements are two and three years in length and mature atvarious dates between January 2007 and January 2008. As of March 31,2006 and 2007, the fair value of the Company’s interest rate collar agreementswas $3,446 and $1,810, respectively. For the quarters ended March 31, 2006and 2007, the Company received a net settlement amount of $68 and $629,respectively. The Company has designated these collars as cash flow hedges ofvariable future cash flows associated with its long-term debt. For the quartersended March 31, 2006 and 2007 the Company recognized $552 and ($269), netof tax, respectively, in other comprehensive income (loss) based on thechange in fair value of these instruments. The Company will record subsequentchanges in the fair value of the collars through comprehensive income duringthe period these instruments are designated as hedges.

The Company accounts forderivative instruments and hedging activities in accordance with the provisionsof SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”(“SFAS 133”) and SFAS 138, “Accounting for Certain DerivativeInstruments and Hedging Activities” (“SFAS 138”), an 

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amendment of SFAS 133. On the date theCompany enters into a derivative contract, management may designate thederivative as a hedge of the identified exposure. The Company formallydocuments all relationships between hedging instruments and hedged items, aswell as the risk-management objective and strategy for undertaking varioushedge transactions. In this documentation, the Company specifically identifiesthe firm commitment or forecasted transaction that has been designated as ahedged item and states how the hedging instrument is expected to hedge therisks related to the hedged item. The Company formally measures effectivenessof its hedging relationships, both at the hedge inception and on an ongoingbasis, in accordance with its risk management policy. The Company woulddiscontinue hedge accounting prospectively (i) if it is determined thatthe derivative is no longer effective in offsetting change in the cash flows ofa hedged item, (ii) when the derivative expires or is sold, terminated orexercised, (iii) because it is probable that the forecasted transactionwill not occur, (iv) because a hedged firm commitment no longer meets thedefinition of a firm commitment, or (v) if management determines thatdesignation of the derivative as a hedge instrument is no longer appropriate.The Company’s derivatives are recorded on the balance sheet at their fairvalue. For derivatives accounted for as cash flow hedges any unrealized gainsor losses on fair value are included in comprehensive income, net of tax,assuming perfect effectiveness. Any ineffectiveness is recognized in earnings.

**8.   Income Taxes**

For the quarter ended March 31, 2006 and 2007,the Company recorded a provision for income taxes of $3,651 and $3,952, or 40.6%and 41.1% of the Company’s pretax income, respectively. The Company’s effectivetax rates were higher than the federal statutory rates primarily as a result ofstate income taxes.

FIN 48 clarifies the accounting for uncertainty inincome taxes recognized in an enterprise’s financial statements in accordancewith FASB 109. This Interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. FIN 48 alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition. FIN 48 is effectivefor fiscal years beginning after December 15, 2006. The cumulative effect,if any, of applying FIN 48 is to be reported as an adjustment to the openingbalance of retained earnings in the year of adoption. The impact of the Company’sreassessment of its tax positions in accordance with FIN 48 did not have amaterial effect on the results of operations, financial condition or liquidity.

As of January 1, 2007, the Company has recorded aliability of $1,495 for unrecognized tax benefits related to various federaland state income tax matters. This entire amount would reduce the Company’seffective income tax rate if recognized.

The Company recognizes accrued interest and penaltiesrelated to unrecognized tax benefits in income tax expense. As of January 1,2007, the Company had approximately $176 in accrued interest and penaltieswhich is included as a component of the $1,495 unrecognized tax benefit notedabove. The liability for the payment of interest and penalties did notmaterially change as of March 31, 2007.

Alliance Imaging, Inc.and its subsidiaries are subject to U.S. federal income tax as well as incometax of multiple state tax jurisdictions. The Company is currently open to audit under the statute oflimitations by the Internal Revenue Service for the years ending December 31,2003 through 2006. The Company and its subsidiaries state income tax returnsare open to audit under the statute of limitations for the years ending December 31,2002 through 2006. The Company does not anticipate a significant changeto the total amount of unrecognized tax benefits within the next 12 months.

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**9.**   EarningsPer Common Share

Thefollowing table sets forth the computation of basic and diluted earnings pershare (amounts in thousands, except per share amounts):

| ** **                                                                                          | ** ** | **Quarter Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                          | ** ** | **2006**                               | ** ** | **2007** | ** ** |
| Numerator:                                                                                          |       |                                   |       |   |   |
| Net income                                                                                          |       | $                                      | 5,333      |   | $ | 5,671 |   |
| Denominator:                                                                                        |       |                                   |       |   |   |
| Denominator for basic earnings per share—weighted-average  shares                              |       | 49,608                                 |       | 49,955 |   |
| Effect of dilutive securities:                                                                      |       |                                   |       |   |   |
| Employee stock options                                                                              |       | 366                                    |       | 1,133 |   |
| Denominator for diluted earnings per share—adjusted  weighted-average shares                   |       | 49,974                                 |       | 51,088 |   |
| Earnings per  common share:                                                                         |       |                                   |       |   |   |
| Basic                                                                                               |       | $                                      | 0.11       |   | $ | 0.11 |   |
| Diluted                                                                                             |       | $                                      | 0.11       |   | $ | 0.11 |   |
| Stock options  excluded from the computation of diluted per share amounts:                          |       |                                   |       |   |   |
| Weighted-average  shares for which the exercise price exceeds average market price of common  stock |       | 1,130                                  |       | 1,030 |   |
| Average exercise price  per share that exceeds average market price of common stock                 |       | $                                      | 11.76      |   | $ | 9.91 |   |

 

**10.   Commitments andContingencies**

The Company has applied the disclosure provisions ofFASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others,” to its agreements that contain guarantee orindemnification clauses. These disclosure provisions expand those required byFASB Statement No. 5, “Accounting for Contingencies,” by requiring aguarantor to disclose certain type of guarantees, even if the likelihood ofrequiring the guarantor’s performance is remote. The following is a descriptionof arrangements in which the Company is the guarantor or indemnifies a party.

In the normal course of business, the Company has madecertain guarantees and indemnities, under which it may be required to makepayments to a guaranteed or indemnified party, in relation to certaintransactions. The Company indemnifies other parties, including customers,lessors, and parties to other transactions with the Company, with respect tocertain matters. The Company has agreed to hold the other party harmlessagainst losses arising from certain events as defined within the particularcontract, which may include, for example, litigation or claims arising from abreach of representations or covenants. In addition, the Company has enteredinto indemnification agreements with its executive officers and directors andthe Company’s bylaws contain similar indemnification obligations. Under thesearrangements, we are obligated to indemnify, to the fullest extent permittedunder applicable law, our current or former officers and directors for variousamounts incurred with respect to actions, suits or proceedings in which theywere made, or threatened to be made, a party as a result of acting as an officeror director.

It is not possible to determine the maximum potentialamount under these indemnification agreements due to the limited history ofprior indemnification claims and the unique facts and circumstances involved ineach particular agreement. Historically, payments made related to these 

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indemnifications have beenimmaterial. At March 31, 2007 the Company has determined that no liabilityis necessary related to these guarantees and indemnities.

The Company guarantees a portion of a loan on behalfof an unconsolidated investee under an agreement executed prior to 2002. Themaximum potential future payment under this financial guarantee is $99 at March 31,2007. The Company has not recorded an obligation for this guarantee.

On May 5, 2005, Alliance Imaging, Inc. wasserved with a complaint filed in Alameda County Superior Court alleging wageand hour claims on behalf of a putative class of approximately 400 former andcurrent California employees of the Company. On August 19, 2005, theplaintiffs filed an amended complaint, which the Company answered on September 23,2005. In this suit, captioned Linda S. Jones, et al. v. Alliance Imaging, Inc.,et al., the plaintiffs alleged violations of California’s wage, meal period,and break time laws and regulations. Plaintiffs sought recovery of unspecifiedeconomic damages, statutory penalties, attorneys’ fees, and costs of suit. Theparties are currently taking discovery to develop facts relevant to the namedplaintiffs’ expected motion for certification of one or more classes. On orabout March 10, 2006, plaintiffs filed a second amended complaint adding acause of action for conversion and a plea for punitive damages. The Companyfiled a demurrer seeking to strike the new claim and plea. On July 19,2006, the Company and the Plaintiffs entered into a tentative settlement of theClass Action Complaint pursuant to which the Company agreed to pay $2,500in exchange for dismissal with prejudice of all claims brought on behalf of theputative class under the Class Action Complaint. On September 8,2006, the settlement was preliminarily approved by the court and a conditionalclass was certified for purposes of seeking class approval of the settlement.On October 2, 2006, notice was mailed to the conditional class membersoutlining the terms of the settlement and providing all class members with anopportunity to opt out of the settlement prior to the final approval hearingscheduled for November 27, 2006. Two putative class members opted out ofthe class, and there were no objections submitted. The final approval hearingwas held on November 27, 2006 as scheduled, and the Court granted finalapproval of the settlement. The settlement amount was distributed by the classsettlement administrator on February 16, 2007. The case will be dismissedupon the parties’ compliance with the settlement agreement. The Court scheduleda hearing for a final accounting of the settlement distribution on June 25,2007.

The Company from time totime is involved in routine litigation and regulatory matters incidental to theconduct of its business. The Company believes that resolution of such matterswill not have a material adverse effect on its consolidated results ofoperations or financial position.

**11.   Related-PartyTransactions**

The Company recorded management fees payable toKohlberg Kravis Roberts & Co (“KKR”) of $163 for the quarters ended March 31, 2006 and 2007. At March 31,2006 and 2007, the Company has accrued $163 related to these services. The Company will pay $30 for financialadvisory services from KKR through April 16, 2007. KKR will no longerprovide financial advisory services after April 16, 2007.

On April 16, 2007, funds managed by OaktreeCapital Management, LLC (“Oaktree”) and MTS Health Investors, LLC (“MTS”) purchasedapproximately 24,829,005 shares of the Company’s common stock from a fundmanaged by an affiliate of KKR. Upon completion of the transaction, fundsmanaged by Oaktree and MTS owned in the aggregate approximately 49.4% and KKRowned less than 3% of the outstanding shares of common stock of the Company.

Revenue from managementagreements with unconsolidated equity investees was $4,356 and $3,955 for thequarters ended March 31, 2006 and 2007, respectively.

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**12.   Investments in Unconsolidated Investees**

The Company has direct ownership in fourunconsolidated investees at March 31, 2007. The Company owns between 33.3percent and 50 percent of these investees, expiring at various dates through2023. At March 31, 2007 the Company also has ownership in anunconsolidated investee of Alliance Oncology (“AO”), a consolidated jointventure of the Company. AO owns 50% of this investee and provides managementservices under an agreement which expires in 2025. All of these investees areaccounted for under the equity method since the Company does not exercisecontrol over the operations of these investees.

Setforth below is certain financial data of these investees (amounts inthousands):

| ** **                    | ** ** | **December 31,** | ** ** | **March  31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|--------------------------|------------|
| ** **                    | ** ** | **2006**              | ** ** | **2007**                 | ** ** |
| Combined Balance  Sheet Data: |       |                  |       |                     |       |   |   |   |   |
| Current assets                |       |                  | $          | 10,033                   |       |   |   | $ | 10,929 |   |   |
| Noncurrent assets             |       |                  | 26,182     |                     |       |   | 24,834 |   |   |
| Current  liabilites           |       |                  | 7,741      |                     |       |   | 7,795 |   |   |
| Noncurrent liabilites         |       |                  | 11,822     |                     |       |   | 10,467 |   |   |
|                               |            |                       |            |                          |            |  |  |  |  |  |  |

 

| ** **                                      | ** ** | **Quarters Ended  March  31,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                      | ** ** | **2007** | ** ** |
| Combined  Operating Results:                    |       |                                          |       |   |   |
| Revenues                                        |       | $                                             | 10,281     |   | $ | 9,157 |   |
| Expenses                                        |       | 7,999                                         |       | 6,178 |   |
| Net income                                      |       | 2,283                                         |       | 2,979 |   |
| Equity in earnings of  unconsolidated investees |       | 1,040                                         |       | 3,484 |   |
|                                                 |            |                                               |            |  |  |  |  |

 

**13.**   Restatementof Previously Issued Financial Statements

Subsequent to the filingof its Quarterly Report on Form 10-Q for the fiscal quarter endedMarch 31, 2007, the Company identified an error with respect to theaccounting for interest rate swap agreements. As discussed in Note 7, the swapagreements were executed in 2004 and mature at various dates in 2007. Sinceinception, the Company had recorded the unrealized gains and losses in fairvalue of the swap agreements as a component of other comprehensive income(loss). The Company has determined that these transactions do not meet therequirements for hedge accounting treatment and any unrealized gains or lossesshould have been recognized in the results of operations as interest expense.

*Effects ofRestatement*

To correct this error, the Company has restated theaccompanying condensed consolidated balance sheet as of March 31, 2007, andits condensed consolidated statements of operations and comprehensive incomeand its condensed consolidated statements of cash flows for the quarters endedMarch 31, 2007 and 2006, and the notes to the condensed consolidatedfinancial statements for such periods as appropriate. The Company corrected theaccompanying Condensed Consolidated Balance Sheet as of December 31, 2006 inits Annual Report on Form 10-K/A filed on August 1, 2007.

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Thefollowing is a summary of the corrections described above:

**NETINCOME, COMPREHENSIVE INCOME, AND EARNINGS PER COMMON SHARE**(in thousands, exceptper share amounts)

| ** **                                                                  | ** ** | **Quarter Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                  | ** ** | **2006**                               | ** ** | **2007** | ** ** |
| Net income as previously  reported                                          |       | $                                      | 5,068      |   | $ | 6,074 |   |
| Adjustments:                                                                |       |                                   |       |   |   |
| Interest expense, net of  related tax effects                               |       | 265                                    |       | (403 | ) |
| Net income as restated                                                      |       | $                                      | 5,333      |   | $ | 5,671 |   |
| Comprehensive income as previously reported:                                |       | $                                      | 5,885      |   | $ | 5,402 |   |
| Adjustments:                                                                |       |                                   |       |   |   |
| Adjustments to net  income as restated                                      |       | 265                                    |       | (403 | ) |
| Unrealized (loss) gain  on hedging transactions, net of related tax effects |       | (265                                   | )          | 403 |   |
| Comprehensive income as  restated                                           |       | $                                      | 5,885      |   | $ | 5,402 |   |
| Earnings per common  share as previously reported:                          |       |                                   |       |   |   |
| Basic                                                                       |       | $                                      | 0.10       |   | $ | 0.12 |   |
| Diluted                                                                     |       | $                                      | 0.10       |   | $ | 0.12 |   |
| Earnings per common  share as restated:                                     |       |                                   |       |   |   |
| Basic                                                                       |       | $                                      | 0.11       |   | $ | 0.11 |   |
| Diluted                                                                     |       | $                                      | 0.11       |   | $ | 0.11 |   |

 

**CONDENSED CONSOLIDATEDBALANCE SHEET(in thousands)**

| ** **                        | ** ** | **As previously** | ** ** | ** **      | ** ** | **As**       | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------|------------|--------------|------------|
| ** **                        | ** ** | **reported**           | ** ** | **Adjustments** | ** ** | **restated** | ** ** |
| ***As of March 31, 2007***   |       |                   |       |            |       |         |       |   |   |   |   |
| Accumulated  comprehensive income |       |                   | $          | 1,730           |       |         |       | $ | (643 | ) |   | $ | 1,087 |   |
| Accumulated  deficit              |       |                   | (6,731     | )               |       |         | 643        |   |   | $ | (6,088 | ) |
|                                   |            |                        |            |                 |            |              |            |  |  |  |  |  |  |  |

 

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**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE (LOSS) INCOME(in thousands, except per share amounts)**

| ** **                                                                                         | ** ** | **As previously** | ** ** | ** **      | ** ** | **As**       | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------|------------|--------------|------------|
| ** **                                                                                         | ** ** | **reported**           | ** ** | **Adjustments** | ** ** | **restated** | ** ** |
| ***Quarter Ended March 31,  2007***                                                           |       |                   |       |            |       |         |       |   |   |   |   |
| Interest expense, net of  interest income                                                          |       |                   | $          | 9,402           |       |         |       | $ | 672 |   |   | $ | 10,074 |   |
| Total costs and expenses                                                                           |       |                   | 102,074    |            |       |         | 672        |   |   | 102,746 |   |
| Income before income  taxes, minority interest expense, and earnings from unconsolidated investees |       |                   | 7,332      |            |       |         | (672       | ) |   | 6,660 |   |
| Income tax expense                                                                                 |       |                   | 4,221      |            |       |         | (269       | ) |   | 3,952 |   |
| Net income                                                                                         |       |                   | 6,074      |            |       |         | (403       | ) |   | 5,671 |   |
| Unrealized (loss) gain  on hedging transactions, net of taxes                                      |       |                   | (672       | )               |       |         | 403        |   |   | (269 | ) |
| Earnings per common share:                                                                         |       |                   |       |            |       |         |       |   |   |   |   |
| Basic                                                                                              |       |                   | 0.12       |            |       |         | (0.01      | ) |   | 0.11 |   |
| Diluted                                                                                            |       |                   | 0.12       |            |       |         | (0.01      | ) |   | 0.11 |   |
| ***Quarter Ended March 31,  2006***                                                           |       |                   |       |            |       |         |       |   |   |   |   |
| Interest expense, net of  interest income                                                          |       |                   | $          | 10,216          |       |         |       | $ | (442 | ) |   | $ | 9,774 |   |
| Total costs and expenses                                                                           |       |                   | 107,301    |            |       |         | (442       | ) |   | 106,859 |   |
| Income before income  taxes, minority interest expense, and earnings from unconsolidated investees |       |                   | 8,042      |            |       |         | 442        |   |   | 8,484 |   |
| Income tax expense                                                                                 |       |                   | 3,474      |            |       |         | 177        |   |   | 3,651 |   |
| Net income                                                                                         |       |                   | 5,068      |            |       |         | 265        |   |   | 5,333 |   |
| Unrealized gain (loss)  on hedging transactions, net of taxes                                      |       |                   | 817        |            |       |         | (265       | ) |   | 552 |   |
| Earnings per common share:                                                                         |       |                   |       |            |       |         |       |   |   |   |   |
| Basic                                                                                              |       |                   | 0.10       |            |       |         | 0.01       |   |   | 0.11 |   |
| Diluted                                                                                            |       |                   | 0.10       |            |       |         | 0.01       |   |   | 0.11 |   |

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)**

| ** **                                                               | ** ** | **As previously** | ** ** | ** **      | ** ** | **As**       | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|-----------------|------------|--------------|------------|
| ** **                                                               | ** ** | **reported**           | ** ** | **Adjustments** | ** ** | **restated** | ** ** |
| ***Quarter Ended March 31,  2007***                                 |       |                   |       |            |       |         |       |   |   |   |   |   |   |
| Net income                                                               |       |                   | $          | 6,074           |       |         |       | $ | (403 | ) |   |   | $ | 5,671 |   |   |
| Adjustment of swaps to  fair value                                       |       |                   | —     |            |       |         | 672        |   |   |   | 672 |   |   |
| Deferred income taxes                                                    |       |                   | 3,113      |            |       |         | (269       | ) |   |   | 2,844 |   |   |
| Supplemental disclosure of non-cash investing and  financing activities: |       |                   |       |            |       |         |       |   |   |   |   |   |   |
| Comprehensive loss from  hedging transactions, net of taxes              |       |                   | (672       | )               |       |         | 403        |   |   |   | (269 | ) |   |
| ***Quarter Ended March 31,  2006***                                 |       |                   |       |            |       |         |       |   |   |   |   |   |   |
| Net income                                                               |       |                   | $          | 5,068           |       |         |       | $ | 265 |   |   |   | $ | 5,333 |   |   |
| Adjustment of swaps to  fair value                                       |       |                   | —     |            |       |         | (442       | ) |   |   | (442 | ) |   |
| Deferred income taxes                                                    |       |                   | 3,242      |            |       |         | 177        |   |   |   | 3,419 |   |   |
| Supplemental disclosure of non-cash investing and  financing activities: |       |                   |       |            |       |         |       |   |   |   |   |   |   |
| Comprehensive income  from hedging transactions,  net of taxes           |       |                   | 817        |            |       |         | (265       | ) |   |   | 552 |   |   |

 

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**ITEM 2.**                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

**Overview**

We are a leading nationalprovider of shared-service and fixed-site diagnostic imaging and therapeuticservices, based upon annual revenue and number of diagnostic imaging systemsdeployed. Our principal sources of revenue are derived from magnetic resonanceimaging (MRI) and positron emission tomography and positron emissiontomography/computed tomography (PET and PET/CT). We provide imaging and therapeuticservices primarily to hospitals and other healthcare providers on a shared andfull-time service basis. We also provide services through a growing number offixed sites primarily to hospitals or health systems. Our services normallyinclude the use of our imaging systems, technologists to operate the systems,equipment maintenance and upgrades and management of day-to-day shared-serviceand fixed-site diagnostic imaging operations. We also provide non scan-basedservices, which includes only the use of our imaging systems under a short-termcontract. For the quarter ended March 31, 2007, MRI services and PET andPET/CT services generated 60% and 31% of our revenue, respectively. Theremaining revenue was comprised of other modality diagnostic imaging servicesrevenue, primarily computed tomography (CT), and management contract revenue.We had 494 diagnostic imaging systems, including 326 MRI systems and 77 PET orPET/CT systems and served over 1,000 clients in 43 states at March 31,2007. Of these 494 diagnostic imaging systems, 72 were located in fixed-sites,which constitutes systems installed in hospitals or other buildings on hospitalcampuses, including modular buildings, systems installed inside medical groups’offices, or medical buildings, and free-standing fixed-sites, which includessystems installed in a medical office building, ambulatory surgical center, orother retail space. Of these 72 fixed-sites, 61 were MRI fixed sites, four werePET or PET/CT fixed-sites and seven were other modality fixed sites.

Approximately 90% of ourrevenues for the quarter ended March 31, 2007 were generated by providingservices to hospitals and other healthcare providers, which we refer to aswholesale revenues. Our wholesale revenues are typically generated from contractsthat require our clients to pay us based on the number of scans we perform onpatients on our clients’ behalf, although some pay us a flat fee for a periodof time regardless of the number of scans we perform. These payments are due tous independent of our clients’ receipt of reimbursement from third-partypayors. We typically deliver our services for a set number of days per weekthrough exclusive, long-term contracts with hospitals and other healthcareproviders. The initial terms of these contracts average approximately threeyears in length for mobile services and approximately five to 10 years inlength for fixed-site arrangements. These contracts often contain automaticrenewal provisions and certain contracts have cancellation clauses if thehospital or other healthcare provider purchases their own system. We price ourcontracts based on the type of system used, the scan volume, and the number ofancillary services provided. Pricing is also affected by competitive pressures.

Approximately 10% of ourrevenues for the quarter ended March 31, 2007 were generated by providingservices directly to patients from our sites located at or near hospitals orother healthcare provider facilities, which we refer to as retail revenue. Ourrevenue from these sites is generated from direct billings to patients or theirthird-party payors, including Medicare, which are recorded net of contractualdiscounts and other arrangements for providing services at discounted prices.We typically charge a higher price per scan under retail billing than we dounder wholesale billing.

Fixed sites can be structured aseither wholesale or retail arrangements. Revenues from these fixed-sitesare included in our wholesale or retail revenues, as applicable.

On February 8, 2006, theDeficit Reduction Act of 2005 (“DRA”) was signed into law by President GeorgeW. Bush. The DRA imposes caps on Medicare payment rates for certain imagingservices, including MRI and PET, furnished in physician’s offices and othernon-hospital based settings. Under the 

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cap,payments for specified imaging services cannot exceed the hospital outpatientpayment rates for those services. This change applies to services furnished onor after January 1, 2007. The limitation is applicable to the technicalcomponents of the services only, which is the payment we receive for theservices for which we bill directly under the Medicare Physician Fee Schedule.The technical reimbursement under the Physician Fee Schedule generally allowsfor higher reimbursement than under the hospital outpatient prospective paymentsystem, or HOPPS. The implementation of this reimbursement reduction containedin the DRA will have a significant effect on our financial condition andresults of operations in 2007.

On July 18, 2006, the U.S.House of Representatives Energy and Commerce Committee’s Subcommittee on Healthconducted a hearing regarding quality and utilization of imaging services andthe provisions of the DRA that directly effect Medicare payment for imagingservices. Many members of Congress have expressed concern about the impact ofthe DRA, and both the U.S. House of Representatives and the U.S. Senateintroduced bills that would have delayed the effective date of the DRA for twoyears. The bills were not passed and therefore, they did not become law. TheDRA provisions as currently structured became effective January 1, 2007.

On November 1, 2006, theCenters for Medicare and Medicaid Services, or CMS, issued a finaldetermination of Medicare Part B HOPPS reimbursement rates for PET andPET/CT imaging procedures, effective January 1, 2007. For 2007, thenational rate for PET scans was reduced from the rate of $1,150 per scan in2006 to $855 per scan. In addition, for 2007, the national rate for PET/CTscans was reduced from the rate of $1,250 per scan in 2006 to $950 per scan.

For full year 2006, we estimatethat approximately 5.6% of our revenue was billed directly to the Medicareprogram. If the DRA had been in effect for full year 2006, we estimate thereduction in Medicare revenue due to the DRA reimbursement rate decrease wouldhave reduced revenue by approximately $9.7 million. Additionally, the PET andPET/CT Medicare HOPPS reduction would have reduced revenue by approximately$2.8 million. Combined, the DRA and PET and PET/CT Medicare HOPPS ratereductions would have negatively impacted our 2006 revenue and will negativelyimpact our 2007 revenue by a total of $12.5 million and $14 million,respectively. We expect that the entire 2007 revenue decrease will directlynegatively affect revenue and earnings.

As a result of the 2007reductions in Medicare reimbursement rates resulting from the implementation ofthe DRA and revised PET and PET/CT reimbursements under HOPPS, the Company mayface increased PET and PET/CT wholesale pricing pressure.

In addition, the DRA alsocodifies the reduction in reimbursement for multiple images on contiguous bodyparts. The DRA mandates payment at 100% of the technical component of thehigher-priced imaging procedure and 50% for the technical component of eachadditional imaging procedure for multiple images of contiguous body partswithin a family of codes performed in the same session. Initially, CMSannounced that it would phase in this reimbursement reduction over a two-yearperiod, resulting in a 25% reduction for each additional imaging procedure oncontiguous body parts in 2006 and an additional 25% reduction in 2007. On November 1,2006, however, CMS announced that it would not implement the additional 25%reduction in 2007. The implementation of this reimbursement reduction did nothave a material impact on our consolidated financial position or results ofoperations for the year ended December 31, 2006 or the first quarter of2007. We continue to believe that the implementation of this reimbursementreduction will not have a material impact on our consolidated financialposition or results of operations in the future.

The principal components of ourcost of revenues are compensation paid to technologists and drivers, systemmaintenance costs, medical supplies, system transportation and technologists’travel costs. Because a majority of these expenses are fixed, increasedrevenues as a result of higher scan volumes per system significantly improvesour margins while lower scan volumes result in lower margins.

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The principal components ofselling, general and administrative expenses are sales and marketing costs,corporate overhead costs, provision for doubtful accounts, and non-cashshare-based compensation.

We record minority interestexpense and earnings from unconsolidated investees related to our consolidatedand unconsolidated subsidiaries, respectively. These subsidiaries primarilyprovide shared-service and fixed-site diagnostic imaging and therapeuticservices.

In 2006 and 2007, the growthrate of MRI industry wide scan volumes has slowed in part due to weak hospitalvolumes as reported by several investor-owned hospital companies, a growingnumber of medical groups adding imaging capacity within their practice setting,the increasing trend of third-party payors intensifying their utilizationmanagement efforts to control MRI scan volume growth rate and additionalpatient-related cost-sharing programs. We expect that this trend will continuethroughout 2007.

Inrecent years, we began to see an increase in the competitive climate in the MRIindustry, resulting in an increase in activity by original equipmentmanufacturers, or OEM’s, selling systems directly to certain of our clients.Typically, OEM’s target our higher scan volume clients. This increase inactivity by OEM’s has resulted in overcapacity of systems in the marketplace,especially related to medical groups adding imaging capacity within theirpractice setting. This has caused an increase in the number of our higher scanvolume clients deciding not to renew their contracts. We replace these highervolume scan clients typically with lower volume clients. In the first quarterof 2007, our MRI revenues declined compared to 2006 levels and we believe thatMRI revenues will continue to decline in future years.

**Seasonality**

We experience seasonalityin the revenues and margins generated for our services. First and fourthquarter revenues are typically lower than those from the second and thirdquarters. First quarter revenue is affected primarily by fewer calendar daysand inclement weather, typically resulting in fewer patients being scannedduring the period. Fourth quarter revenue is affected primarily by holiday andclient and patient vacation schedules and inclement weather, also resulting infewer scans during the period. The variability in margins is higher than thevariability in revenues due to the fixed nature of our costs.

**Results of Operations**

The discussion and analysis set forth below has beenamended to reflect the restatement as described in the Explanatory Note to theamended Quarterly Report on Form 10 Q/A and in Note 13 of the Notes to the CondensedConsolidated Financial Statements included elsewhere in this Quarterly Report.For this reason, the data set forth in this section may not be comparable todiscussions and data in our previously filed Quarterly Report.

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The following table showsour consolidated statements of income as a percentage of revenues for each ofthe quarters ended March 31:

| ** **                                                                                        | ** ** | **2006** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Revenues                                                                                          |       | 100.0    | %          | 100.0    | %          |
| Costs and  expenses:                                                                              |       |     |       |     |       |
| Cost of revenues, excluding depreciation and  amortization                                        |       | 51.9     |       | 51.3     |       |
| Selling, general and administrative expenses                                                      |       | 11.9     |       | 13.5     |       |
| Severance and related costs                                                                       |       | 0.4      |       | 0.1      |       |
| Depreciation expense                                                                              |       | 18.2     |       | 19.0     |       |
| Amortization expense                                                                              |       | 1.1      |       | 1.1      |       |
| Interest expense, net of interest income                                                          |       | 8.5      |       | 9.2      |       |
| Other (income) and expense, net                                                                   |       | 0.6      |       | (0.3     | )          |
| Total costs and expenses                                                                          |       | 92.6     |       | 93.9     |       |
| Income before income taxes, minority interest  expense and earnings from unconsolidated investees |       | 7.4      |       | 6.1      |       |
| Income tax expense                                                                                |       | 3.2      |       | 3.6      |       |
| Minority interest expense                                                                         |       | 0.5      |       | 0.5      |       |
| Earnings from unconsolidated investees                                                            |       | (0.9     | )          | (3.2     | )          |
| Net income                                                                                        |       | 4.6      | %          | 5.2      | %          |

 

Thetable below provides MRI statistical information for each of the quarters endedMarch 31:

| ** **                                    | ** ** | **2006** | ** ** | **2007** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| MRI statistics                                |       |     |       |     |       |
| Average number of total systems               |       | 328.1    |       | 310.6    |       |
| Average number of scan-based systems          |       | 279.7    |       | 256.6    |       |
| Scans per system per day (scan-based systems) |       | 9.36     |       | 9.12     |       |
| Total number of scan-based MRI scans          |       | 182,422  |       | 162,800  |       |
| Price per scan                                |       | $        | 358.60     |     | $          | 360.69 |   |
|                                               |            |          |            |          |            |  |  |

 

Thetable below provides PET and PET/CT statistical information for each of thequarters ended March 31:

| ** **                           | ** ** | **2006** | ** ** | **2007** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| PET and PET/CT  statistics           |       |     |       |     |       |
| Average number of systems            |       | 67.1     |       | 69.9     |       |
| Scans per system per day             |       | 5.82     |       | 6.29     |       |
| Total number of PET and PET/CT scans |       | 24,464   |       | 27,713   |       |
| Price per scan                       |       | $        | 1,312      |     | $          | 1,221 |   |
|                                      |            |          |            |          |            |  |  |

 

Followingare the components of revenue (in millions):

| ** **                          | ** ** | **2006** | ** ** | **2007** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Total MRI revenue                   |       | $        | 71.9       |     | $          | 65.5 |   |
| PET and PET/CT  revenue             |       | 32.3     |       | 34.2     |       |
| Other modalities  and other revenue |       | 11.1     |       | 9.7      |       |
| Total                               |       | $        | 115.3      |     | $          | 109.4 |   |

 

| ** **                                                                       | ** ** | **2006** | ** ** | **2007** | ** ** |
|----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Total  fixed-revenue (in millions) for each of the quarters ended March 31: |       | $        | 17.8       |     | $          | 18.1 |   |
|                                                                                  |            |          |            |          |            |  |  |

 

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***Quarter Ended March 31,2007 Compared to Quarter Ended March 31, 2006***

Revenue decreased $5.9million, or 5.1%, to $109.4 million in the first quarter of 2007 compared to$115.3 million in the first quarter of 2006 primarily due to a decrease in MRIrevenue and other modalities and other revenue, offset by an increase in PETand PET/CT revenues. Scan-based MRI revenue decreased $6.7 million in the firstquarter of 2007, or 10.2%, compared to the first quarter of 2006, from $65.4million in the first quarter of 2006 to $58.7 million in the first quarter of2007. This decrease is primarily a result of a 10.8% decrease in our scan-basedMRI scan volume. Scan-based MRI scan volume decreased to 162,800 scans in thefirst quarter of 2007 from 182,422 scans in the first quarter of 2006, primarilydue to a decrease in the average number of scan-based systems in service due tolower client demand. Scan-based systems in service decreased to 256.6 systemsin the first quarter of 2007 from 279.7 systems in the first quarter of 2006 toadjust to modestly declining scan volumes and to increase the efficiency of ourmobile MRI systems. Average scans per system per day also decreased by 2.6% to9.12 in first quarter of 2007 from 9.36 in first quarter of 2006. Thesedecreases were partially offset by a 0.6% increase in the average price per MRIscan to $360.69 per scan in first quarter of 2007 compared to $358.60 per scanin first quarter of 2006 and an increase in non-scan based MRI revenue of $0.3million in the first quarter of 2007 over the same period in 2006. Othermodalities and other revenue decreased $1.4 million, or 12.3%, to $9.7 millionin the first quarter of 2007 compared to $11.1 million in the first quarter of2006 primarily due to a decrease in other fixed-site modality revenue, primarilyrelated to the Company’s decision to close 11 unprofitable fixed-sites, adecrease in management contract revenue from our management agreements and adecrease in reimbursement of expenses from unconsolidated investees. PET andPET/CT revenue in the first quarter of 2007 increased $1.9 million, or 5.7%,compared to the first quarter of 2006. Total PET and PET/CT scan volumesincreased 13.3% to 27,713 scans in the first quarter of 2007 from 24,464 scansin the first quarter of 2006, primarily as a result of growth in our core PETbusiness. The average number of PET and PET/CT systems in service increased to69.9 systems in the first quarter of 2007 from 67.1 systems in the firstquarter of 2006. Scans per system per day increased 8.1%, to 6.29 scans per systemper day in the first quarter of 2007 from 5.82 scans per system per day in thefirst quarter of 2006. These PET and PET/CT increases were partially offset bya 6.9% decline in the average price per PET and PET/CT scan, to $1,221 per scanin the first quarter of 2007 compared to $1,312 per scan in the first quarterof 2006. The decline in PET and PET/CT average price per scan is primarily dueto the impact of the DRA and HOPPS reimbursement rate reductions which becameeffective January 1, 2007.

We had 326 MRI systems at March 31,2007 compared to 345 MRI systems at March 31, 2006. We had 77 PET andPET/CT systems at March 31, 2007 compared to 74 PET and PET/CT systems at March 31,2006. We operated 72 fixed sites at March 31, 2007, compared to 73 fixedsites at March 31, 2006.

Cost of revenues,excluding depreciation and amortization, decreased $3.7 million, or 6.2%,to $56.2 million in the first quarter of 2007 compared to$59.9 million in the first quarter of 2006. Compensation and relatedemployee expenses decreased $1.8 million, or 6.3%, primarily as a resultof labor efficiencies and a lower average headcount of MRI technologists as aresult of a decrease in the average number of MRI systems in use. Outsidemedical services decreased $0.7 million, or 26.6%, primarily as a result of adecrease in radiologist service costs associated with lower MRI scan volume andlower scans per system per day. Equipment rental expense decreased $0.6million, or 39.0%, primarily due to a lower number of rental systems in use tosupport current clients as a result of improved route efficiency. Medicalsupplies decreased $0.5 million, or 8.0%, primarily as a result of a decreasein film costs related to lower MRI scan volume. Radiopharmaceutical costs,which are used as a component of a PET and PET/CT scan, also decreased due tosourcing discounts, partially offset by an increase in radiopharmaceuticalcosts due to an increase in the number of PET and PET/CT scans. Managementcontract expenses decreased $0.3 million, or 10.7%, primarily as a result of adecrease in expenses incurred on behalf of unconsolidated investees. Fuelexpenses decreased $0.2 million, or 15.0%, primarily due to 

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improvedroute efficiency. Maintenance and related costs increased $0.9 million, or 8.2%,primarily due to an increase in the number of PET/CT systems in service, whichhave a higher average service cost per system than MRI systems, offset by adecrease in cryogen expense as a result of a decrease in the number of MRIsystems in service. All other cost of revenues, excluding depreciation andamortization, decreased $0.5 million, or 8.8%. Cost of revenues, as apercentage of revenue, decreased to 51.3% in the first quarter of 2007 from51.9% in the first quarter of 2006 as a result of the factors described above.

Selling, general and administrative expenses increased$1.0 million, or 7.1%, to $14.7 million in the first quarter of 2007 comparedto $13.7 million in the first quarter of 2006. Professional services increased$1.0 million, or 71.7%, due to an increase in legal costs and consultingservices. Non-cash share-based compensation increased $0.2 million in the firstquarter of 2007 from the first quarter of 2006 due to new share-based paymentgrants during the first quarter of 2007. All other selling, general andadministrative expenses decreased $0.2 million, or 1.4%. Selling, general andadministrative expenses as a percentage of revenue were 13.5% and 11.9% in thefirst quarter of 2007.

We recorded severance and related costs of $0.1 millionin the first quarter of 2007 and $0.5 million in the first quarter of 2006primarily for severance costs associated with reductions-in-force due to ourconsolidation of five geographic regions to four geographic regions in thefirst quarter of 2006.

Depreciation expense decreased $0.2 million, or 1.0%,to $20.8 million in the first quarter of 2007 compared to $21.0 million in thefirst quarter of 2006.

Amortization expense was $1.2 million in both thefirst quarter of 2007 and the first quarter of 2006.

Interest expense, net, increased $0.3 million, or 3.1%,to $10.1 million in the first quarter of 2007 compared to $9.8 million in thefirst quarter of 2006. Variability in the fair value of our interest rate swapsexecuted in 2004 accounted for a $1.1 million increase in interest expense.This increase was off by a decrease in interest expense due to higher averagedebt balances during 2006 as a result of the pay down of debt in the secondhalf of 2006. These decreases were partially offset by higher average interestrates in the first quarter of 2007 on our variable rate term loans. Theincrease in interest rates on our variable rate term loans was partially offsetby the execution of various interest rate swap and collar agreements in 2004and 2005 to manage against future interest rate increases on a portion of ourvariable rate term loans.

Income tax expense was $4.0 million and $3.7 millionin the first quarter of 2007 and 2006, respectively, resulting in effective taxrates of 41.1% and 40.6% in the first quarter of 2007 and 2006, respectively.Our effective tax rates were higher than the federal statutory ratesprincipally as a result of state income taxes.

Minority interest expense was $0.5 million in thefirst quarter of 2007 and 2006.

Earnings from unconsolidated investees increased by$2.4 million, or 235.1%, to $3.5 million in the first quarter of 2007 comparedto $1.0 million in the first quarter of 2006, primarily due to a $2.0 million gain on sale from asale/leaseback transaction in one of the Company’s unconsolidated investees aswell as an increase in earnings of unconsolidated investees.

Our net income was $5.7 million,or $0.11 per share on a diluted basis, in the first quarter of 2007 compared to$5.3 million, or $0.11 per share on a diluted basis, in the first quarterof 2006.

**Liquidity andCapital Resources**

Our primary source ofliquidity is cash provided by operating activities. We generated $24.7 millionand $19.5 million of cash flow from operating activities in the first quartersof 2007 and 2006, respectively. Our ability to generate cash flow is affectedby numerous factors, including demand for MRI, PET and other diagnostic imagingservices. Our ability to generate cash flow from operating activities is alsodependent upon the collections of our accounts receivable. The provision fordoubtful accounts increased 

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by $0.1million in the first quarter of 2007 compared to the first quarter of 2006. Ournumber of days of revenue outstanding for our accounts receivable was 49 daysand 46 days as of March 31, 2007 and 2006, which we believe is among themore favorable in the healthcare service industry. In addition, as ofMarch 31, 2007, we had $64.1 million of available borrowings under ourrevolving line of credit.

Ourprimary use of capital resources is to fund capital expenditures. We used cashof $9.9 million and $18.2 million for investing activities in the quartersended March 31, 2007 and 2006, respectively. We incur capital expendituresfor the purposes of:

·       purchasingnew systems;

·       replacingless advanced systems with new systems;

·       providingupgrades of our MRI and PET and PET/CT systems and upgrading our corporateinfrastructure for future growth.

Capital expenditurestotaled $24.8 million and $24.3 million in the quarters ended March 31,2007 and 2006, respectively. During the first quarter of 2007, we purchased 7MRI systems, 7 PET/CT systems and 3 CT systems. We traded-in or sold 1 MRIsystem and 3 PET systems for the quarter ended March 31, 2007. Ourdecision to purchase a new system is typically predicated on obtaining new orextending existing client contracts, which serve as the basis of demand for thenew system. We expect to purchase additional systems in 2007 and financesubstantially all of these purchases with our available cash, cash fromoperating activities, our revolving line of credit, and equipment leases. Basedupon the client demand described above, which dictates the type of equipmentpurchased, we expect capital expenditures to total approximately $75 to $85million in 2007.

We believe that, based oncurrent levels of operations, our cash flow from operating activities, togetherwith other available sources of liquidity, including borrowings available underour revolving loan facility, will be sufficient over the next one to two yearsto fund anticipated capital expenditures and make required payments ofprincipal and interest on our debt.

**Recent Accounting Pronouncements**

In July 2006, the FASB issued FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes,” (“FIN 48”), an interpretation of FASBStatement No. 109, “Accounting for Income Taxes,” (“FASB 109”). FIN 48clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB 109. ThisInterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006. The cumulative effect, if any, ofapplying FIN 48 is to be reported as an adjustment to the opening balanceof retained earnings in the year of adoption. The impact of our reassessment oftax positions in accordance with FIN 48 did not have a material effect on ourresults of operations, financial condition or liquidity.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurements,” (“SFAS157”), which enhances the existing guidance for measuring assets andliabilities using fair value. This statement provides a single definition offair value, establishes a framework for measuring fair value, and expandsdisclosures about fair value measurements. SFAS 157 emphasizes fair value as amarket-based measurement instead of an entity-specific measurement. Thestatement sets out a fair value hierarchy with the highest priority beingquoted prices in active markets. SFAS 157 is effective for fiscal yearsbeginning after November 15, 2007 and interim periods within those fiscalyears. We are currently evaluating the provisions of SFAS 157 and the impact onour consolidated financial position and results of operations. We will adoptSFAS 157 for the fiscal year beginning January 1, 2008.

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February 2007, theFASB issued Statement of Financial Accounting Standards No. 159, “The FairValue Option for Financial Assets and Financial Liabilities, including anamendment of FASB Statement No. 115” (“SFAS 159”), which permits entitiesto choose to measure many financial instruments and certain other items at fairvalue. The objective is to improve financial reporting by providing entitieswith the opportunity to mitigate volatility in reported earnings caused bymeasuring related assets and liabilities differently without having to applycomplex hedge accounting provisions. This Statement is expected to expand theuse of fair value measurement, which is consistent with the Board’s long-termmeasurement objectives for accounting for financial instruments. SFAS 159 iseffective for fiscal years beginning after November 15, 2007 and interimperiods within those fiscal years. We are currently evaluating the provisionsof SFAS 159 and the impact on our consolidated financial position and resultsof operations. We will adopt SFAS 159 for the fiscal year beginning January 1,2008.

**CautionaryStatement Pursuant to the Private Securities Litigation Reform Act of 1995**

Certain statementscontained in Management’s Discussion and Analysis of Financial Condition and Resultsof Operations, particularly in the section entitled “Liquidity and CapitalResources”, and elsewhere in this quarterly report on Form 10-Q/A,are “forward-looking statements,” within the meaning of the safe harborprovisions of the Private Securities Litigation Reform Act of 1995. Statementswhich address activities, events or developments that we expect or anticipatewill or may occur in the future, including such things as results of operationsand financial condition, capital expenditures, the consummation of acquisitionsand financing transactions and the effect of such transactions on our businessand our plans and objectives for future operations and expansion are examplesof forward-looking statements. In some cases you can identify these statementsby forward-looking words like “may”, “will”, “should”, “expect”, “anticipate”, “believe”,“estimate” “predict”, “continue” or similar words. These forward-lookingstatements are subject to risks and uncertainties which could cause actualoutcomes and results to differ materially from our expectations, forecasts andassumptions. These risks and uncertainties include factors affecting ourleverage, including fluctuations in interest rates, the risk that thecounter-parties to our interest rate swap agreements fail to satisfy theirobligations under these agreements, our ability to incur financing, the effectof operating and financial restrictions in our debt instruments, the accuracyof our estimates regarding our capital requirements, the effect of intenselevels of competition in our industry, changes in the rates or methods of thirdparty reimbursements for diagnostic imaging services, changes in the healthcareregulatory environment, our ability to keep pace with technologicaldevelopments within our industry, and other risks and uncertainties, includingthose enumerated and described under “Risk Factors” in our Form 10-K/A,as filed with the Securities and Exchange Commission, for the fiscal year endedDecember 31, 2006. The foregoing should not be construed as an exhaustivelist of all factors which could cause actual results to differ materially fromthose expressed in forward-looking statements made by us.

**ITEM 3.**                QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We sell our services exclusively in the United Statesand receive payment for our services exclusively in United States dollars. As aresult, our financial results are unlikely to be affected by factors such aschanges in foreign currency exchange rates or weak economic conditions inforeign markets.

Our interest expense is sensitive to changes in thegeneral level of interest rates in the United States, particularly because themajority of our indebtedness has interest rates which are variable. Therecorded carrying amount of our long-term debt under our existing creditagreement approximates fair value as these borrowings have variable rates thatreflect currently available terms and conditions for similar debt. To decreasethe risk associated with interest rate increases, we entered into multipleinterest rate swap and collar agreements for a portion of our variable ratedebt. The collars are designated as cash flow hedges of variable future cashflows associated with our long-term debt.

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During 2004 we entered into swap agreements which havenotional amounts of $56.8 million, $46.8 million and $48.4 million at March 31,2007. Under the terms of these agreements, we receive three-month LIBOR and paya fixed rate of 3.15%, 3.89%, and 3.69%, respectively. The net effect is torecord interest expense at fixed rates of 5.65%, 6.39% and 6.19% respectively,as the debt incurs interest based on three-month LIBOR plus 2.50%. Changes inthe fair value of the swap agreements are recorded in interest expense eachperiod. For the quarter ended March 31, 2007, we received a net settlement amount of $0.7 million. For the quarter ended March 31,2006 we paid a net settlement amount of $0.3 million. The swapagreements mature during the second and fourth quarters of 2007.

During 2005 we entered into multiple interest ratecollar agreements which have a notional amount of $178.0 million. Under theterms of these agreements, we have purchased a cap on the interest rate of4.00% and have sold a floor of 2.25%. For the quarters ended March 31,2007 and 2006 we received a net settlement amount of $0.6 million and $0.1million, respectively, on these collar agreements. The collar agreements matureat various dates between January 2007 and January 2008.

The collar agreements have been designated as cashflow hedges of variable future cash flows associated with our long term debt.In accordance with SFAS 133, the collars are recorded at fair value. On aquarterly basis, the fair value of the collars will be determined based onquoted market prices and, assuming perfect effectiveness, the differencebetween the fair value and the book value of the collars will be recognized incomprehensive income, a component of shareholders’ equity. Any ineffectivenessof the collars is required to be recognized in earnings.

The outstanding interest rate swaps and collars exposeus to credit risk in the event that the counterparties to the agreements do notor cannot meet their obligations. The notional amount is used to measureinterest to be paid or received and does not represent the amount of exposureto credit loss. The loss would be limited to the amount that would have beenreceived, if any, over the remaining life of the swap and collar agreements.The counterparties to the swaps and collars are major financial institutionsand we expect the counterparties to be able to perform their obligations underthe swaps and collars.

Our interest income issensitive to changes in the general level of interest rates in the UnitedStates, particularly because the majority of our investments are in cashequivalents. The recorded carrying amounts of cash and cash equivalentsapproximate fair value due to their short-term maturities.

**ITEM 4.**                CONTROLSAND PROCEDURES

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in ourExchange Act reports is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating thecost benefit relationship of possible controls and procedures. Also, we haveinvestments in certain unconsolidated entities. As we do not control or managethese entities, our disclosure controls and procedures with respect to suchentities are more limited than those we maintain with respect to ourconsolidated subsidiaries. These unconsolidated entities are not consideredmaterial to our consolidated financial position or results of operations.

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As required by SEC Rule 13a-15(b),we carried out an evaluation under the supervision and with the participationof our management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures as of the end of the quarter covered by this report.Based on the foregoing, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective at thereasonable assurance level.

In connection withthe restatement and the filing of this Form 10-Q/A, we, with the participationof management, including our Chief Executive Officer and our Chief FinancialOfficer, re-evaluated our disclosure controls and procedures.  In performing the re-evaluation, weconsidered the effects of the restatement that resulted from the error in theaccounting for interest rate swap agreements. Based on the foregoingre-evaluation of our disclosure controls and procedures as of the end of thequarter covered by this report, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective atthe reasonable assurance level.

There have been no changes in the Company’s internalcontrol over financial reporting occurring during the fiscal quarter covered bythis report which have materially affected or are reasonably likely tomaterially affect the Company’s internal control over financial reporting.

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**PART II—OTHER INFORMATION**

**ITEM 1.**                LEGALPROCEEDINGS

On May 5, 2005, Alliance Imaging, Inc. wasserved with a complaint filed in Alameda County Superior Court alleging wageand hour claims on behalf of a putative class of approximately 400 former andcurrent California employees of our company. On August 19, 2005, theplaintiffs filed an amended complaint, which we answered on September 23,2005. In this suit, captioned Linda S. Jones, et al. v. Alliance Imaging, Inc.,et al., the plaintiffs alleged violations of California’s wage, meal period,and break time laws and regulations. Plaintiffs sought recovery of unspecifiedeconomic damages, statutory penalties, attorneys’ fees, and costs of suit. Onor about March 10, 2006, plaintiffs filed a second amended complaint(later further amended by a third amended complaint) adding a cause of actionfor conversion and a plea for punitive damages. We filed a demurrer and motionto strike seeking to dismiss the new claim and plea. On July 19, 2006, weand the Plaintiffs entered into a tentative settlement of the class actioncomplaint pursuant to which we agreed to pay $2.5 million in exchange for adismissal with prejudice of all claims brought on behalf of the putative classunder the class action complaint. On September 8, 2006, the settlement waspreliminarily approved by the court and a conditional class was certified forpurposes of seeking class approval of the settlement. On October 2, 2006,notice was mailed to the conditional class members outlining the terms of thesettlement and providing all class members with an opportunity to opt out ofthe settlement prior to the final approval hearing scheduled for November 27, 2006.Two putative class members opted out of the class, and there were no objectionssubmitted. The final approval hearing was held on November 27, 2006 asscheduled, and the Court granted final approval of the settlement. Thesettlement amount was distributed by the class settlement administrator on February 16,2007. The case will be dismissed upon the parties’ compliance with thesettlement agreement. The Court scheduled a hearing for a final accounting ofthe settlement distribution on June 25, 2007.

From time to time, we areinvolved in routine litigation incidental to the conduct of our business. Webelieve that none of this litigation pending against us will have a materialadverse effect on our business.

**ITEM 1A.**        RISKFACTORS

We have included inPart I, Item 1A of our Annual Report on Form 10-K/A forthe year ended December 31, 2006, a description of certain risks anduncertainties that could affect our business, future performance or financialcondition. Among these risk factors are risk factors entitled:

·       “Lossof key executives and failure to attract qualified managers and sales personscould limit our growth and negatively impact our operations”; and

·       “Weare controlled by a single stockholder who will be able to exert significantinfluence over matters requiring stockholder approval, including change ofcontrol transactions”.

These two risk factors areamended and superseded by the risk factors set forth below. The other riskfactors disclosed in our Form 10-K/A shall remain in full force andaffect.

**Loss of keyexecutives and failure to attract qualified managers and sales persons could limitour growth and negatively impact our operations.**

We depend upon our management team to a substantialextent. In particular, we depend upon Mr. Viviano, our Chief ExecutiveOfficer and the Chairman of our Board of Directors for his skills, experience andknowledge of our company and industry contacts. Effective April 16, 2007,Mr. Viviano entered into an amendment to his employment agreement whichextends its term to April 16, 2010, subject to automatic extensions on aquarterly basis after the initial term has been completed. Mr. Viviano canprevent a quarterly extension by giving notice of a desire to modify orterminate the agreement at least thirty days prior to the quarterly extensiondate. In addition, we do not have key employee insurance 

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policies covering any ofour management team. The loss of Mr. Viviano or other members of ourmanagement team could have a material adverse effect on our business, resultsof operations or financial condition.

As we grow, we willincreasingly require field managers and sales persons with experience in ourindustry to operate our diagnostic equipment. It is impossible to predict theavailability of qualified field managers and sales persons or the compensationlevels that will be required to hire them. The loss of the services of anymember of our senior management or our inability to hire qualified fieldmanagers and sales persons at economically reasonable compensation levels couldadversely affect our ability to operate and grow our business.

**Two of ourstockholders and their affiliates beneficially own almost half of ouroutstanding shares of common stock and have the contractual right to designatemembers of our board of directors and board committees, and will therefore beable to exert significant influence over us, including with respect to changeof control transactions.**

On April 16, 2007, OCM Principal OpportunitiesFund IV, L.P., MTS Health Investors II, L.P., and affiliated funds, which werefer to as the Oaktree Parties, acquired approximately 49% of our outstandingshares of common stock from a fund controlled by an affiliate of KohlbergKravis Roberts & Co., L.P. Following the acquisition, the Oaktree Partiesbeneficially own approximately 49.4% of our outstanding shares of common stock.In connection with the acquisition, the Oaktree Parties obtained the right todesignate three of the seven members of our board of directors, two of the fourmembers of our Compensation Committee (including the chairperson), two of thefour members of our Nominating and Corporate Governance Committee, and one ofthe three members of our Finance Committee.

As a result of thearrangements described above, the Oaktree Parties have the ability to exertsignificant influence of our management and operations, as well as matters requiringstockholder approval, including approving mergers, consolidations or sales ofall or substantially all of our assets. This concentration of ownership mayalso delay or prevent a change of control of our company or reduce the priceinvestors might be willing to pay for our common stock. The interests of the OaktreeParties may conflict with the interests of other holders of our common stock.

**ITEM 2.**                UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

**ITEM 3.**                DEFAULTSUPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

**ITEM 5.**                OTHERINFORMATION

Not applicable.

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**ITEM 6.**                EXHIBITS

(a) Exhibits
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                           | ** ** | **Description** |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.1              |       | Amended and Restated Certificate of Incorporation of  Alliance.(3)                                                                                                                                                                                                                   |
| 3.2              |       | Amended and Restated By-laws of Alliance.(7)                                                                                                                                                                                                                                         |
| 4.1              |       | Indenture dated as of April 10, 2001 by and  between the Registrant and the Bank of New York with respect to $260 million  aggregate principal amount of 103¤8%  Senior Subordinated Notes due 2011.(1)                                                                    |
| 4.2              |       | Credit Agreement dated as of November 2, 1999,  as amended.(1)                                                                                                                                                                                                                  |
| 4.3              |       | Specimen certificate for shares of common stock,  $.01 par value, of Alliance.(3)                                                                                                                                                                                                    |
| 4.4              |       | Second Amendment dated as of June 10, 2002 to  Credit Agreement.(8)                                                                                                                                                                                                             |
| 4.5              |       | Indenture dated as of December 29, 2004 by and  between the Registrant and the Bank of New York with respect to $150 million  aggregate principal amount of 71¤4%  Senior Subordinated Notes due 2012 and 71¤4% Series B  Senior Subordinated Notes due 2012.(6) |
| 4.6              |       | Supplemental Indenture dated as of December 14,  2004 by and between Registrant and the Bank of New York with respect to 103¤8%  Senior Subordinated Notes due 2011.(6)                                                                                                    |
| 4.7              |       | Third Amendment dated as of December 29, 2004  to Credit Agreement.(6)                                                                                                                                                                                                          |
| 4.8              |       | Fourth Amendment dated as of December 19, 2005  to Credit Agreement.(8)                                                                                                                                                                                                         |
| 4.9              |       | Fifth Amendment dated as of April 16, 2007 to  Credit Agreement.(17)                                                                                                                                                                                                            |
| 10.1             |       | The 1999 Equity Plan for Employees of Alliance and  Subsidiaries.(11)                                                                                                                                                                                                                |
| 10.2             |       | Forms of option agreements under the 1999 Equity  Plan for Employees of Alliance and Subsidiaries.(1)                                                                                                                                                                                |
| 10.3             |       | Alliance Directors’ Deferred Compensation Plan, as  amended.(2)                                                                                                                                                                                                                 |
| 10.4             |       | Employment Agreement dated as of January 1,  2003 between Alliance and Paul S. Viviano.(5)                                                                                                                                                                                      |
| 10.5             |       | Agreement Not to Compete dated as of January 1,  2003 between Alliance and Paul S. Viviano.(5)                                                                                                                                                                                  |
| 10.6             |       | Stock Subscription Agreement dated as of  January 2, 2003 between Alliance and Paul S. Viviano.(5)                                                                                                                                                                              |
| 10.7             |       | Stock Subscription Agreement dated as of  February 3, 2003 between Alliance and Paul S. Viviano.(5)                                                                                                                                                                             |
| 10.8             |       | Form of Stockholder’s Agreement.(1)                                                                                                                                                                                                                                        |
| 10.9             |       | Registration Rights Agreement dated as of  November 2, 1999.(1)                                                                                                                                                                                                                 |
| 10.10            |       | Management Agreement, dated as of November 2,  1999, between Alliance and Kohlberg Kravis Roberts & Co., LLP.(1)                                                                                                                                                       |
| 10.11            |       | Amendment No. 1 to Management Agreement,  effective as of January 1, 2000, between Alliance and Kohlberg Kravis  Roberts & Co., LLP.(1)                                                                                                                           |
| 10.12            |       | Form of Indemnification Agreement.(2)                                                                                                                                                                                                                                           |
| 10.13            |       | Amended and Restated Employment Agreement dated as  of May 9, 2005 between Alliance and Paul S. Vivano.(7)                                                                                                                                                                      |
| 10.14            |       | Agreement Not to Compete dated as of May 9,  2005 between Alliance and Paul S. Vivano.(7)                                                                                                                                                                                       |
| 10.15            |       | Employment Agreement dated as of May 9, 2005 between  Alliance and Andrew P. Hayek.(7)                                                                                                                                                                                          |
| 10.16            |       | Agreement Not to Compete dated as of May 9,  2005 between Alliance and Andrew P. Hayek.(7)                                                                                                                                                                                      |
| 10.17            |       | Employment Agreement dated as of December 1,  2005 between Alliance and Howard K. Aihara.(9)                                                                                                                                                                                    |

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| 10.18 |   | Agreement Not to Compete dated as of  December 1, 2005 between Alliance and Howard K. Aihara.(9)                                                                                                                                                                                                         |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.19 |   | 2006 Executive Incentive Plan †(10)                                                                                                                                                                                                                                                                      |
| 10.20 |   | Summary of compensation award to Nicholas A.  Poan(12)                                                                                                                                                                                                                                                        |
| 10.21 |   | Forms of Restricted Stock Award Agreement under the  1999 Equity Plan for Employees of Alliance and Subsidiaries, as amended and  Restated(15)                                                                                                                                                                |
| 10.22 |   | Form of Stock Bonus Award Agreement under the  1999 Equity Plan for Employees of Alliance and Subsidiaries, as amended and  Restated(15)                                                                                                                                                                 |
| 10.23 |   | Summary of compensation award to Michael F.  Frisch(13)                                                                                                                                                                                                                                                       |
| 10.24 |   | Summary of compensation award to Eli Glovinsky(15)                                                                                                                                                                                                                                                            |
| 10.25 |   | Schedule of Executive Officer Compensation(15)                                                                                                                                                                                                                                                                |
| 10.26 |   | Schedule of Non-Employee Director Compensation(15)                                                                                                                                                                                                                                                            |
| 10.27 |   | Underwriting Agreement, dated November 20,  2006, by and among Alliance Imaging, Inc., the selling stockholder named  therein and Citigroup Global Markets Inc. and Merrill Lynch, Pierce,  Fenner & Smith Incorporated, as representatives of the several  underwriters named therein(14) |
| 10.28 |   | Governance and Standstill Agreement, dated as of  March 16, 2007, among Alliance Imaging, Inc., OCM Principal  Opportunities Fund IV, LP., and MTS Health Investors II, L.P.(16)                                                                                                                    |
| 10.29 |   | Form of Executive Severance Agreement(16)                                                                                                                                                                                                                                                                |
| 10.30 |   | Assignment, dated as of April 16, 2007, to  Registration Rights Agreement, dated as of November 2, 1999.(17)                                                                                                                                                                                        |
| 10.31 |   | Amendment No. 2 to Management Agreement, dated  as of April 16, 2007, between Alliance and Kohlberg, Kravis  Roberts & Co., LLP.(17)                                                                                                                                                       |
| 10.32 |   | Amendment of Employment Agreement, dated as of  April 16, 2007, between Paul S. Viviano and Alliance  Imaging, Inc.(17)                                                                                                                                                                             |
| 10.33 |   | Amendment of Employment Agreement, dated as of  April 16, 2007, between Howard K. Aihara and Alliance  Imaging, Inc.(17)                                                                                                                                                                            |
| 21.1  |   | List of subsidiaries.(15)                                                                                                                                                                                                                                                                                     |
| 31    |   | Certifications of Chief Executive Officer and Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.(18)                                                                                                                                                                   |
| 32    |   | Certifications of Chief Executive Officer and Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(18)                                                                                                                                                                    |

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(1)          Incorporated byreference to exhibits filed with the Company’s Registration Statement on Form S-4,No. 333-60682, as amended.

(2)          Incorporated byreference to exhibits filed with the Company’s Registration Statement on Form S-1,No. 333-64322, as amended.

(3)          Incorporated byreference to exhibits filed in response to Item 6, “Exhibits” of the Company’sQuarterly Report on Form 10-Q for the quarter ended June 30,2001 (File No. 001-16609).

(4)          Incorporated byreference to exhibits filed in response to Item 6, “Exhibits” of the Company’sQuarterly Report on Form 10-Q for the quarter ended June 30,2002 (File No. 001-16609).

(5)          Incorporated byreference herein to the indicated Exhibit response in Item 15(a)(3), “Exhibits”of the Company’s Annual Report on Form 10-K for the year ended December 31,2002 (File No. 001-16609).

(6)          Incorporated byreference to exhibits filed in response to Item 9.01(c), “Exhibits” of theCompany’s Current Report on Form 8-K, dated December 29, 2004(File No. 001-16609).

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(7)          Incorporated byreference to exhibits filed in response to Item 6, “Exhibits” of the Company’sQuarterly Report on Form 10-Q for the quarter ended March 31,2005 (File No. 001-16609).

(8)          Incorporated byreference to exhibits filed in response to Item 9.01(d) , “Exhibits” ofthe Company’s Current Report on Form 8-K, dated December 22,2005 (File No. 001-16609).

(9)          Incorporated byreference herein to the indicated Exhibit response in Item 15(a)(1), “Exhibits”of the Company’s Annual Report on Form 10-K for the year ended December 31,2005 (File No. 001-16609).

(10) Incorporated by reference to exhibits filed in response to Item 6, “Exhibits”of the Company’s Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2006 (File No. 001-16609).

(11) Incorporated by reference to Appendix A to the Company’s ProxyStatement on Schedule 14A relating to its 2006 Annual Meeting (File No. 001-16609).

(12) Incorporated by reference to Item 1.01, of the Company’s CurrentReport on Form 8-K, dated October 17, 2006 (File No. 001-16609).

(13) Incorporated by reference to Item 5.02(c) of the Company’sCurrent Report on Form 8-K, dated November 13, 2006 (File No. 001-16609)

(14) Incorporated by reference to Exhibit 1.1 of the Company’sCurrent Report on Form 8-K, dated November 22, 2006 (File No. 001-16609)

(15) Incorporated by reference herein to the indicated Exhibit responsein Item 15(a)(3), “Exhibits” of the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2006 (File No. 001-16609).

(16) Incorporated by reference to Item 9.01(d), “Exhibits”, of theCompany’s Current Report on Form 8-K, dated March 16, 2007(File No. 001-16609)

(17) Incorporated by reference to Item 9.01(d), “Exhibits”, of theCompany’s Current Report on Form 8-K, dated April 16, 2007(File No. 001-16609)

(18) Filed herewith

† Portions of this Exhibit have been redacted dueto a request for confidential treatment.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                |   | **ALLIANCE, IMAGING, INC.**                             |
|----------------|--------|---------------------------------------------------------|
| August 1, 2007 | By:    | /s/ PAUL S. VIVIANO                                     |
|           |   | Paul S. Viviano                                         |
| * *       |   | *Chairman of the Board and Chief Executive Officer*     |
| * *       |   | *(Principal Executive Officer)*                         |
| August 1, 2007 | By:    | /s/ HOWARD K. AIHARA                                    |
|           |   | Howard K. Aihara                                        |
| * *       |   | *Executive Vice President and Chief Financial  Officer* |
| * *       |   | *(Principal Financial Officer)*                         |
| August 1, 2007 | By:    | /s/ NICHOLAS A. POAN                                    |
|           |   | Nicholas A. Poan                                        |
| * *       |   | *Senior Vice President, Finance, Corporate*             |
| * *       |   | *Controller and Chief Accounting Officer*               |
| * *       |   | *(Principal Accounting Officer)*                        |

 

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