**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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FORM 10-Q

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

**ForQuarter Ended:  June 30, 2005**

**CommissionFile Number:  1-16609**

**ALLIANCE  IMAGING,  INC.**

(Exact name of registrantas specified in its charter)

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

 

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

**(714)688-7100**Registrant’s telephonenumber, including area code

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934, during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.   Yes   x   No   o

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).   Yes   x   No   o

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of July 31, 2005:

Common Stock, $.01 par value, 49,553,926 shares

 

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**ALLIANCE IMAGING,  INC.FORM 10-Q**

**June 30,2005**

**Index**

|                                                                                                                                                 | ** ** | Page   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------|------------|
| PART I—FINANCIAL  INFORMATION                                                                                                         |       |   |       |   |   |
| Item  1—Financial  Statements:                                                                                                             |       |   |       |   |   |
| Condensed Consolidated Balance Sheets  December 31, 2004 and June 30, 2005 (Unaudited)                                                |       |   | 3          |   |   |
| Condensed Consolidated Statements of Operations and  Comprehensive Income  Quarter and six months ended June 30, 2004 and 2005 (Unaudited) |       |   | 4          |   |   |
| Condensed Consolidated Statements of Cash Flows  Six months ended June 30, 2004 and 2005 (Unaudited)                                       |       |   | 5          |   |   |
| Notes to Condensed Consolidated Financial Statements  (Unaudited)                                                                               |       |   | 6          |   |   |
| Item 2—Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                         |       |   | 15         |   |   |
| Item 3—Quantitative and Qualitative Disclosures about  Market Risk                                                                         |       |   | 24         |   |   |
| Item 4—Controls and Procedures                                                                                                             |       |   | 25         |   |   |
| PART II—OTHER  INFORMATION                                                                                                            |       |   |       |   |   |
| Item  1—Legal Proceedings                                                                                                                  |       |   | 26         |   |   |
| Item 2—Unregistered Sales of Equity Securities and Use  of Proceeds                                                                        |       |   | 26         |   |   |
| Item 3—Defaults Upon Senior Securities                                                                                                     |       |   | 26         |   |   |
| Item 4—Submission of Matters to a Vote of Security  Holders                                                                                |       |   | 26         |   |   |
| Item  5—Other  Information                                                                                                                 |       |   | 27         |   |   |
| Item 6—Exhibits                                                                                                                            |       |   | 27         |   |   |
| SIGNATURES                                                                                                                                      |       |   | 30         |   |   |

 

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**PART I— FINANCIAL INFORMATION**

**ITEM 1.**                FINANCIALSTATEMENTS

**ALLIANCE IMAGING, INC.CONDENSED CONSOLIDATEDBALANCE SHEETS(Unaudited)(in thousands)**
| ** **                                                   | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                   | ** ** | **2004**              | ** ** | **2005**          | ** ** |
| **ASSETS**                                                   |       |                  |       |              |       | ** ** |   |
| Current assets:                                              |       |                  |       |              |       |   |   |
| Cash and cash  equivalents                                   |       |                  | $          | 20,721            |       |   | $ | 20,057 |   |
| Accounts receivable, net  of allowance for doubtful accounts |       |                  | 50,146     |              |       | 49,871 |   |
| Deferred income taxes                                        |       |                  | 12,782     |              |       | 23,554 |   |
| Prepaid expenses and  other current assets                   |       |                  | 3,082      |              |       | 4,636 |   |
| Other receivables                                            |       |                  | 3,323      |              |       | 6,224 |   |
| Total current assets                                         |       |                  | 90,054     |              |       | 104,342 |   |
| Equipment, at cost                                           |       |                  | 727,232    |              |       | 726,096 |   |
| Less accumulated  depreciation                               |       |                  | (373,721   | )                 |       | (385,419 | ) |
| Equipment, net                                               |       |                  | 353,511    |              |       | 340,677 |   |
| Goodwill                                                     |       |                  | 122,992    |              |       | 122,992 |   |
| Other intangible assets,  net                                |       |                  | 28,249     |              |       | 26,889 |   |
| Deferred financing  costs, net                               |       |                  | 9,264      |              |       | 8,013 |   |
| Other assets                                                 |       |                  | 18,128     |              |       | 18,202 |   |
| Total assets                                                 |       |                  | $          | 622,198           |       |   | $ | 621,115 |   |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**               |       |                  |       |              |       |   |   |
| Current liabilities:                                         |       |                  |       |              |       |   |   |
| Accounts payable                                             |       |                  | $          | 20,518            |       |   | $ | 8,541 |   |
| Accrued compensation and  related expenses                   |       |                  | 15,661     |              |       | 14,282 |   |
| Accrued interest payable                                     |       |                  | 717        |              |       | 3,454 |   |
| Income taxes payable                                         |       |                  | 865        |              |       | 802 |   |
| Other accrued  liabilities                                   |       |                  | 22,177     |              |       | 25,979 |   |
| Current portion of  long-term debt                           |       |                  | 9,390      |              |       | 8,447 |   |
| Total current  liabilities                                   |       |                  | 69,328     |              |       | 61,505 |   |
| Long-term debt, net of  current portion                      |       |                  | 412,733    |              |       | 385,704 |   |
| Senior subordinated  notes                                   |       |                  | 153,541    |              |       | 153,541 |   |
| Minority interests and  other liabilities                    |       |                  | 4,164      |              |       | 3,789 |   |
| Deferred income taxes                                        |       |                  | 49,960     |              |       | 68,198 |   |
| Total liabilities                                            |       |                  | 689,726    |              |       | 672,737 |   |
| Commitments and contingencies (Note 11)                 |       |                  |       |              |       |   |   |
| Stockholders’ deficit:                                  |       |                  |       |              |       |   |   |
| Common stock                                                 |       |                  | 490        |              |       | 493 |   |
| Additional paid-in  deficit                                  |       |                  | (15,798    | )                 |       | (13,786 | ) |
| Accumulated  comprehensive (loss) income                     |       |                  | (278       | )                 |       | 1,323 |   |
| Accumulated deficit                                          |       |                  | (51,942    | )                 |       | (39,652 | ) |
| Total stockholders’  deficit                            |       |                  | (67,528    | )                 |       | (51,622 | ) |
| Total liabilities and stockholders’ deficit             |       |                  | $          | 622,198           |       |   | $ | 621,115 |   |

 

*See accompanying notes.*

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**ALLIANCE IMAGING, INC.CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONSAND COMPREHENSIVE INCOME(Unaudited)(in thousands, except per share amounts)**
| ** **                                                                                         | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                                                                         | ** ** | **June 30,**      | ** ** | **June 30,**              | ** ** |
| ** **                                                                                         | ** ** | **2004**               | ** ** | **2005**                       | ** ** | **2004** | ** ** | **2005** | ** ** |
| Revenues                                                                                           |       | $                      | 109,481    |                           | $          | 108,434 |   | $ | 215,127 |   | $ | 214,398 |   |
| Costs and  expenses:                                                                               |       |                   |       |                           |       |   |   |   |   |
| Cost of revenues,  excluding depreciation and amortization                                         |       | 54,536                 |       | 53,892                         |       | 107,808 |   | 107,828 |   |
| Selling, general  and administrative expenses                                                      |       | 11,752                 |       | 13,677                         |       | 23,920 |   | 25,363 |   |
| Employment agreement  costs                                                                        |       | 1,210                  |       | 92                             |       | 1,515 |   | 366 |   |
| Depreciation  expense                                                                              |       | 19,789                 |       | 20,463                         |       | 40,634 |   | 40,926 |   |
| Amortization  expense                                                                              |       | 879                    |       | 901                            |       | 1,755 |   | 1,782 |   |
| Interest expense,  net of interest income                                                          |       | 10,820                 |       | 9,508                          |       | 21,428 |   | 18,569 |   |
| Other (income)  and expense, net                                                                   |       | (161                   | )          | (55                            | )          | (127 | ) | (387 | ) |
| Total costs and  expenses                                                                          |       | 98,825                 |       | 98,478                         |       | 196,933 |   | 194,447 |   |
| Income before income taxes, minority interest  expense, and earnings from unconsolidated investees |       | 10,656                 |       | 9,956                          |       | 18,194 |   | 19,951 |   |
| Income tax  (benefit) expense                                                                      |       | (580                   | )          | 4,169                          |       | 2,526 |   | 8,301 |   |
| Minority interest  expense                                                                         |       | 647                    |       | 544                            |       | 1,432 |   | 956 |   |
| Earnings from  unconsolidated investees                                                            |       | (1,134                 | )          | (912                           | )          | (2,027 | ) | (1,596 | ) |
| Net income                                                                                         |       | $                      | 11,723     |                           | $          | 6,155 |   | $ | 16,263 |   | $ | 12,290 |   |
| Comprehensive  income, net of taxes:                                                               |       |                   |       |                           |       |   |   |   |   |
| Net income                                                                                         |       | $                      | 11,723     |                           | $          | 6,155 |   | $ | 16,263 |   | $ | 12,290 |   |
| Unrealized (loss)  gain on hedging transactions, net of taxes                                 |       | (123                   | )          | (1,144                         | )          | (123 | ) | 1,601 |   |
| Comprehensive  income                                                                              |       | $                      | 11,600     |                           | $          | 5,011 |   | $ | 16,140 |   | $ | 13,891 |   |
| Earnings per  common share:                                                                        |       |                   |       |                           |       |   |   |   |   |
| Basic                                                                                              |       | $                      | 0.24       |                           | $          | 0.12 |   | $ | 0.34 |   | $ | 0.25 |   |
| Diluted                                                                                            |       | $                      | 0.24       |                           | $          | 0.12 |   | $ | 0.34 |   | $ | 0.24 |   |
| Weighted average  number of shares of common stock and common stock equivalents:                   |       |                   |       |                           |       |   |   |   |   |
| Basic                                                                                              |       | 48,193                 |       | 49,286                         |       | 48,081 |   | 49,210 |   |
| Diluted                                                                                            |       | 48,480                 |       | 50,270                         |       | 48,397 |   | 50,290 |   |

 

*See accompanying notes.*

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**ALLIANCE IMAGING, INC.CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS(Unaudited)(in thousands)**
| ** **                                                                          | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                                      | ** ** | **2005** | ** ** |
| **Operating activities:**                                                           |       |                                          |       |   |   |
| Net income                                                                          |       | $                                             | 16,263     |   | $ | 12,290 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities:  |       |                                          |       |   |   |
| Provision for doubtful  accounts                                                    |       | 449                                           |       | 1,478 |   |
| Non-cash stock-based  compensation                                                  |       | 196                                           |       | 126 |   |
| Depreciation and  amortization                                                      |       | 42,389                                        |       | 42,708 |   |
| Amortization of deferred  financing costs                                           |       | 1,519                                         |       | 1,462 |   |
| Distributions (less  than) greater than equity in undistributed income of investees |       | (815                                          | )          | 271 |   |
| Deferred income taxes                                                               |       | 6,907                                         |       | 7,236 |   |
| Gain on sale of assets                                                              |       | (128                                          | )          | (387 | ) |
| Changes in operating assets and liabilities:                                        |       |                                          |       |   |   |
| Accounts receivable                                                                 |       | (4,568                                        | )          | (1,203 | ) |
| Prepaid expenses and  other current assets                                          |       | (952                                          | )          | (1,554 | ) |
| Other receivables                                                                   |       | (157                                          | )          | (2,901 | ) |
| Other assets                                                                        |       | (1,341                                        | )          | (2,243 | ) |
| Accounts payable                                                                    |       | (2,256                                        | )          | (11,977 | ) |
| Accrued compensation and  related expenses                                          |       | 3,760                                         |       | (1,379 | ) |
| Accrued interest payable                                                            |       | 103                                           |       | 2,737 |   |
| Income taxes payable                                                                |       | (5,034                                        | )          | (63 | ) |
| Other accrued  liabilities                                                          |       | 4,798                                         |       | 3,802 |   |
| Minority interests and  other liabilities                                           |       | (151                                          | )          | 342 |   |
| Net cash provided by  operating activities                                          |       | 60,982                                        |       | 50,745 |   |
| **Investing activities:**                                                           |       |                                          |       |   |   |
| Equipment purchases                                                                 |       | (43,846                                       | )          | (28,948 | ) |
| (Increase) decrease in  deposits on equipment                                       |       | (2,153                                        | )          | 3,419 |   |
| Proceeds from sale of  assets                                                       |       | 722                                           |       | 1,251 |   |
| Net cash used in  investing activities                                              |       | (45,277                                       | )          | (24,278 | ) |
| **Financing activities:**                                                           |       |                                          |       |   |   |
| Principal payments on  equipment debt                                               |       | (3,206                                        | )          | (2,972 | ) |
| Proceeds from equipment  debt                                                       |       | 368                                           |       | — |   |
| Proceeds from revolving  loan facility                                              |       | —                                        |       | 15,000 |   |
| Principal payments on  revolving loan facility                                      |       | —                                        |       | (15,000 | ) |
| Principal payments on  term loan facility                                           |       | (10,000                                       | )          | (25,000 | ) |
| Payments of debt  issuance costs                                                    |       | (120                                          | )          | (211 | ) |
| Proceeds from exercise  of employee stock options                                   |       | 340                                           |       | 1,052 |   |
| Net cash used in  financing activities                                              |       | (12,618                                       | )          | (27,131 | ) |
| Net increase (decrease)  in cash and cash equivalents                               |       | 3,087                                         |       | (664 | ) |
| Cash and cash  equivalents, beginning of period                                     |       | 20,931                                        |       | 20,721 |   |
| Cash and cash  equivalents, end of period                                           |       | $                                             | 24,018     |   | $ | 20,057 |   |
| **Supplemental disclosure of cash flow  information:**                              |       |                                          |       |   |   |
| Interest paid                                                                       |       | $                                             | 19,859     |   | $ | 14,580 |   |
| Income taxes paid, net  of refunds                                                  |       | 652                                           |       | 1,291 |   |
| **Supplemental disclosure of non-cash investing  and financing activities:**        |       |                                          |       |   |   |
| Net book value of assets  exchanged                                                 |       | $                                             | 223        |   | $ | 3,679 |   |
| Comprehensive (loss) income from hedging  transactions, net of taxes                |       | (123                                          | )          | 1,601 |   |

 

*See accompanying notes.*

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**ALLIANCE IMAGING, INC.NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTSJune 30, 2005(Unaudited)(dollars in thousands, except per share amounts)**

**1. Basisof Presentation, 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 ofthe Securities and Exchange Commission. Accordingly, they do not include all ofthe information and footnotes required by generally accepted accountingprinciples for 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 six-monthperiod ended June 30, 2005 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2005. Theaccompanying unaudited condensed consolidated financial statements should beread in conjunction with the audited consolidated financial statements andnotes to the consolidated financial statements for the year ended December 31,2004.

**Principlesof Consolidation**—The accompanying unaudited condensedconsolidated financial statements of the Company include the assets,liabilities, revenues and expenses of all majority owned subsidiaries overwhich the Company exercises control. Intercompany transactions have beeneliminated. Investments in non-consolidated affiliates are accounted for underthe equity method.

**Use of Estimates****—**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. Stock-Based Compensation**

The Company accounts for stock-based compensationawards using the intrinsic value method prescribed under Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”),and its related interpretations. Other than the awards discussed in Note 7,all other stock-based awards were granted with an exercise price equal to themarket value of the underlying common stock on the date of grant and nocompensation cost is reflected in net income from operations for those awards.

Statement of Financial Accounting Standard No. 123,“Accounting for Stock-Based Compensation” (“SFAS 123”) as amended by SFAS148, “Accounting for Stock-Based Compensation—Transition and Disclosure,”requires presentation of pro forma information regarding net income andearnings per share determined as if the Company has accounted for its employeestock options granted subsequent to December 31, 1994 under the fair valuemethod of that Statement. The fair value for these options was estimated as ofthe date of grant using the Black-Scholes option pricing model with thefollowing weighted-average assumptions for the second quarter of 2004 andsecond quarter of 2005, respectively: risk-free interest rates of 3.95% and3.96%; no dividend yield; volatility factors of the expected market price ofthe Company’s common stock of 37.5% and 56.4%; and a weighted-average expectedlife of the options of 6.50 years in each quarter. The Company used thefollowing weighted-average assumptions for the first six months of 2004 and2005, respectively: risk-free interest rates of 3.17% and 3.79%; no dividendyield; 

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volatility factors of theexpected market price of the Company’s common stock of 57.2% and 52.8%; and aweighted-average expected life of the options of 5.39 years and 5.52 years.The weighted-average fair value of options granted during the second quarter of2004 and 2005 was $1.81 and $6.20, respectively, and $1.98 and $6.11 in thefirst six months of 2004 and 2005, respectively.

The Black-Scholes option valuation model wasdeveloped for use in estimating the fair value of traded options, which have novesting restrictions and are fully transferable. In addition, option valuationmodels require the input of highly subjective assumptions including theexpected stock price volatility. Because the Company’s stock options havecharacteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in management’s opinion, the existing models do notnecessarily provide a reliable single measure of the fair value of its employeestock options.

Forpurposes of pro forma disclosures, the estimated fair value of the options isamortized to expense over the options’ expected vesting period. Hadcompensation cost for the Company’s stock option plan been determined based onthe estimated fair value at the grant dates for awards under the planconsistent with the fair value method of SFAS 123 utilizing theBlack-Scholes option-pricing model, the Company’s net income and basic anddiluted earnings per share for the periods ended below, would have approximatedthe pro forma amounts indicated below:
| ** **                                                                                                                 | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                 | ** ** | **2004**                              | ** ** | **2005**                                      | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net income:                                                                                                                |       |                                  |       |                                          |       |   |   |   |   |
| As reported                                                                                                                |       | $                                     | 11,723     |                                          | $          | 6,155 |   | $ | 16,263 |   | $ | 12,290 |   |
| Add: Non-cash  stock-based compensation expense included  in reported net income, net of related tax effects               |       | 58                                    |       | 38                                            |       | 116 |   | 75 |   |
| Deduct: Non- cash  stock-based compensation expense determined under fair value based method,  net of  related tax effects |       | (298                                  | )          | (367                                          | )          | (616 | ) | (725 | ) |
| Pro forma net  income                                                                                                      |       | $                                     | 11,483     |                                          | $          | 5,826 |   | $ | 15,763 |   | $ | 11,640 |   |
| Basic earnings  per share:                                                                                                 |       |                                  |       |                                          |       |   |   |   |   |
| As reported                                                                                                                |       | $                                     | 0.24       |                                          | $          | 0.12 |   | $ | 0.34 |   | $ | 0.25 |   |
| Pro forma                                                                                                                  |       | 0.24                                  |       | 0.12                                          |       | 0.33 |   | 0.24 |   |
| Diluted earnings  per share:                                                                                               |       |                                  |       |                                          |       |   |   |   |   |
| As reported                                                                                                                |       | 0.24                                  |       | 0.12                                          |       | 0.34 |   | 0.24 |   |
| Pro forma                                                                                                                  |       | 0.24                                  |       | 0.12                                          |       | 0.33 |   | 0.23 |   |

 

**3. RecentAccounting Pronouncements**

**Exchanges of Nonmonetary Assets—**InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedSFAS 153, “Exchanges of Nonmonetary Assets” (“SFAS 153”), which is anamendment of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,”(“APB 29”). This statement addresses the measurement of exchanges ofnonmonetary assets, and eliminates the exception from fair value measurementfor nonmonetary exchanges of similar productive assets as defined in paragraph 21(b) ofAPB 29, and replaces it with an exception for exchanges that do not havecommercial substance. This statement specifies that a nonmonetary exchange hascommercial substance if the future cash flows of the entity are expected tochange significantly as a result of the exchange. SFAS 153 is effectivefor nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,2005. The Company believes the adoption of SFAS 153 will not have amaterial impact on its consolidated financial position or results ofoperations.

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**Share Based Payment—**In December 2004,the FASB issued SFAS 123(R) (revised December 2004), “Share-BasedPayment” (“SFAS 123(R)”), which is a revision of SFAS 123 andsupersedes APB No. 25. This statement requires that the fair value at thegrant date resulting from all share-based payment transactions be recognized inthe financial statements. Further, SFAS 123(R) requires entities toapply a fair-value based measurement method in accounting for thesetransactions. This value is recorded over the vesting period. This statement iseffective for the first fiscal year beginning after June 15, 2005. TheCompany is currently evaluating the provisions of SFAS 123(R) and theimpact on its consolidated financial position and results of operations. TheCompany will adopt SFAS 123(R) for the fiscal year beginning January 1,2006.

**Asset Retirement Obligations—**In March 2005,the FASB issued FASB Interpretation No. 47, “Accounting for ConditionalAsset Retirement Obligations” (“FIN 47”), an interpretation of SFAS No. 143,“Accounting for Conditional Asset Retirement Obligations.” This interpretationclarifies that an entity is required to recognize a liability for the fairvalue of a conditional asset retirement obligation when incurred if theliability’s fair value can be reasonably estimated. This interpretation alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation. This statement iseffective for the first fiscal year beginning after December 15, 2005. TheCompany believes the adoption of FIN 47 will not have a material impact onits consolidated financial position or results of operations.

**Accounting Changes and Error Corrections—**InMay 2005, the FASB issued SFAS 154, “Accounting for Changes and ErrorCorrections” (“SFAS 154”), which is a replacement of APB Opinion No. 20,“Accounting Changes,” and SFAS 3, “Reporting Accounting Changes in InterimFinancial Statements.” This statement changes the requirements for theaccounting for and reporting of all voluntary changes in accounting principleand in the instance that a pronouncement does not include specific transitionprovisions. This statement requires retrospective application to prior periods’financial statements of changes in accounting principle, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. SFAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005. The Company believes the adoption of SFAS 154 will not have amaterial impact on its consolidated financial position or results ofoperations.

**Limited Partnerships—**In June 2005,the FASB issued Emerging Issues Task Force Issue No. 04-05, “DeterminingWhether a General Partner, or the General Partners as a Group, Controls aLimited Partnership or Similar Entity When the Limited Partners Have CertainRights”(“EITF 04-05”). EITF 04-05 clarifies how generalpartners in a limited partnership should determine whether they control alimited partnership. A general partner of a limited partnership is presumed tocontrol the limited partnership unless the limited partners have substantivekick-out rights or participating rights. For general partners of all newlimited partnerships formed and for existing limited partnerships for which thepartnership agreements are modified, EITF 04-05 is effective after June 29,2005. For general partners in all other limited partnerships, EITF 04-05is effective for the first period in fiscal years beginning after December 15,2005. The Company believes the adoption of EITF 04-05 will not havea material impact on its consolidated financial position or results ofoperations.

**Leasehold Improvements—**In June 2005,the FASB issued EITF 05-06, “Determining the Amortization Period forLeasehold Improvements” (“EITF 05-06”). EITF 05-06defines the useful life for leasehold improvements acquired in a businesscombination, or purchased significantly after, and not comtemplated at thebeginning of the lease term. EITF 05-06 is effective for leaseholdimprovements purchased or acquired in reporting periods after June 29,2005. The Company believes the adoption of EITF 05-06 will not havea material impact on its consolidated financial position or results ofoperations.

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**4. Goodwill and Intangible Assets**

Changesin the carrying amount of goodwill are as follows:
| Balance at  December 31, 2004       |   | $      | 122,992 |   |
|------------------------------------------|--------|--------|---------|--------|
| Additions to  goodwill during the period |   | — |    |
| Balance at June 30,  2005           |   | $      | 122,992 |   |

 

Intangibleassets consisted of the following:
| ** **                                    | ** ** | **December 31, 2004** | ** ** | **June 30, 2005** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **Gross**                       | ** ** | ** **                  | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Carrying**                    | ** ** | **Accumulated**             | ** ** | **Intangible** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Intangible** | ** ** |
| ** **                                    | ** ** | **Amount**                      | ** ** | **Amortization**            | ** ** | **Assets, net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Assets, net** | ** ** |
| Amortizing intangible  assets:                |       |                            |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Customer  contracts**                       |       | $                               | 40,426     |                        |       | $ | (15,528 | ) |   |   | $ | 24,898 |   |   | $ | 40,363 |   |   | $ | (16,988 | ) |   |   | $ | 23,375 |   |   |
| Other                                         |       | 3,272                           |       |                        | (2,010     | ) |   |   | 1,262 |   |   | 3,414 |   |   | (1,541 | ) |   |   | 1,873 |   |   |
| Total amortizing intangible assets            |       | $                               | 43,698     |                        |       | $ | (17,538 | ) |   |   | $ | 26,160 |   |   | $ | 43,777 |   |   | $ | (18,529 | ) |   |   | $ | 25,248 |   |   |
| Intangible assets not subject to amortization |       |                            |       |                        |       |   |   |   | $ | 2,089 |   |   |   |   |   |   |   |   |   | $ | 1,641 |   |   |
| Total other  intangible assets                |       |                            |       |                        |       |   |   |   | $ | 28,249 |   |   |   |   |   |   |   |   |   | $ | 26,889 |   |   |

 

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. The implied fair value for goodwill is determined basedon the fair value of assets and liabilities of the respective reporting units,in accordance with SFAS 142, “Goodwill and Other Intangible Assets,” basedon discounted cash flows, market multiples, or appraised values as appropriate.

Amortization expense for intangible assets subject toamortization was $879 and $901 for the quarters ended June 30, 2004 and2005, respectively, and $1,755 and $1,782 for the six months ended June 30,2004 and 2005, respectively. The intangible assets not subject to amortizationrepresent certificate of needs and regulatory authority rights which haveindefinite useful lives.

Estimatedannual amortization expense for each of the fiscal years ending December 31is presented below:
| 2005 |   | $     | 3,602  |   |
|------|--------|-------|--------|--------|
| 2006 |   | 3,586 |   |
| 2007 |   | 3,369 |   |
| 2008 |   | 3,156 |   |
| 2009 |   | 2,834 |   |

 

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**5.**   OtherAccrued Liabilities

Otheraccrued liabilities consisted of the following:
| ** **                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| Accrued systems  rental and maintenance costs |       | $        | 3,058      |     | $          | 5,629 |   |
| Accrued site  rental fees                     |       | 1,796    |       | 1,228    |       |
| Accrued property  and sales taxes payable     |       | 8,061    |       | 8,675    |       |
| Accrued  self-insurance expense               |       | 4,789    |       | 5,493    |       |
| Other accrued  expenses                       |       | 4,473    |       | 4,954    |       |
| Total                                         |       | $        | 22,177     |     | $          | 25,979 |   |

 

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

Long-termdebt consisted of the following:
| ** **                                 | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **2004**              | ** ** | **2005**          | ** ** |
| Term loan  facility                        |       |                  | $          | 409,875           |       |   | $ | 384,875 |   |
| Senior  subordinated notes                 |       |                  | 153,541    |              |       | 153,541 |   |
| Equipment debt                             |       |                  | 12,248     |              |       | 9,276 |   |
| Long-term debt,  including current portion |       |                  | 575,664    |              |       | 547,692 |   |
| Less current  portion                      |       |                  | 9,390      |              |       | 8,447 |   |
| Long-term debt                             |       |                  | $          | 566,274           |       |   | $ | 539,245 |   |

 

**7. Non-CashStock-Based Compensation**

In November 2000, the Company granted stockoptions to certain employees at exercise prices below the fair value of theCompany’s common stock, of which 35,000 options were outstanding at June 30,2005. 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. Compensationexpense of $33 will be recognized on a straight-line basis over the remainingvesting period of the options. The Company recorded non-cash stock-basedcompensation of $18 and $6, for the quarters ended June 30, 2004 and 2005,respectively, and $36 and $12, for the first six months of 2004 and 2005,respectively, with an offset to paid-in-capital deficit.

On June 20, 2001, the Company’s compensationcommittee authorized the Company to amend the option agreements under its 1999Equity Plan to reduce the performance targets for 1,899,600 performance optionsout of the 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. These options vest on the eighth anniversary of the grant date ifthe option holder is still an employee, but the vesting accelerates if theCompany meets the operating performance targets specified in the optionagreements. As a result of the amendments, if the Company achieves the reducedperformance targets but does not achieve the previous 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 respective amendmentexceeded the option’s exercise price. Under the first amendment, managementestimates that the Company could incur an additional $100 to $300 in theaggregate of these non-cash stock-based compensation charges over the next 6months. Under the second amendment, management estimates that the Company couldincur an additional $100 to $200 in the aggregate of these non-cash stock-basedcompensation charges over the next 4 years. These charges, however, may not beevenly distributed over 

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each of these respectiveperiods or over the four quarters in any one year, depending upon the timing ofemployee turnover and the number of shares subject to the options held bydeparting employees.

Forthe quarters ended June 30, 2004 and 2005, the Company recorded $80 and$57, respectively, in non-cash stock-based compensation as a result of theseamendments. For the six months ended June 30, 2004 and 2005, the Companyrecorded $160 and $114, respectively, in non-cash stock-based compensation as aresult of these amendments. Non-cashstock-based compensation is included as a component of selling, general andadministrative expenses.

**8. 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 hedge 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 2007. As of June 30, 2005, the fair value ofthe Company’s interest rate swap agreements was an accumulated income of$1,036. Under these arrangements, the Company receives three-month LondonInterbank Offered Rate (“LIBOR”) and pays a fixed rate of 3.15%, 3.89% and3.69%, respectively. The net effect of the hedges is to record interest expenseat fixed rates of 5.40%, 6.14% and 5.94%, respectively, as the debt incursinterest based on three-month LIBOR plus 2.25%. For the quarter and six months ended June 30, 2004, the Company didnot record any net settlement amount. For the quarter and six monthsended June 30, 2005, the Company recorded net settlement amounts of $268and $746, respectively. The Companyhas designated these swaps as cash flow hedges of variable future cash flowsassociated with its long-term debt. The Company recognized a loss, net of tax,of $123 and $560 based on the change in fair value of these instruments for thequarters ended June 30, 2004 and 2005, respectively. For the six monthperiod ended June 30, 2004 the Company recognized a loss, net of tax, of$123 based on the change in fair value of these instruments. For the six monthperiod ended June 30, 2005 the Company recognized a gain, net of tax, of$900 based on the change in fair value of these instruments. The Company willcontinue to record subsequent changes in the fair value of the swaps throughcomprehensive income during the period these instruments are designated ashedges.

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 June 30,2005, the fair value of the Company’s interest rate collar agreements was anaccumulated income of $1,168. For the quarter and six month period ended June 30,2005, the Company did not record any net settlement amount. The Company hasdesignated these collars as cash flow hedges of variable future cash flowsassociated with its long-term debt. For the quarter ended June 30, 2005,the Company recognized a loss, net of tax, of $584 based on the change in fairvalue of these instruments. For the six months ended June 30, 2005 theCompany recognized a gain, net of tax, of $701 based on the change in fairvalue of these instruments. The Company will record subsequent changes in thefair value of the collars through comprehensive income during the period theseinstruments 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 Actvities”(“SFAS 133”) and SFAS 138, “Accounting for Certain DerivativeInstruments and Hedging Actvities” (“SFAS 138”), an amendment of SFAS 133.On the date the Company enters into a derivative contract, managementdesignates the derivative as a hedge of the identified exposure. The Companydoes not enter into derivative instruments that do not qualify as cash flowhedges as described in SFAS 133 and SFAS 138. 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 

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documentation,the Company specifically identifies the firm commitment or forecastedtransaction that has been designated as a hedged item and states how thehedging instrument is expected to hedge the risks related to the hedged item.The Company formally measures effectiveness of its hedging relationships, bothat the hedge inception and on an ongoing basis, in accordance with its riskmanagement policy. The Company would discontinue hedge accounting prospectively(i) if it is determined that the derivative is no longer effective inoffsetting change in the cash flows of a hedged item, (ii) when thederivative expires or is sold, terminated or exercised, (iii) when the derivativeis designated as a hedge instrument, because it is probable that the forecastedtransaction will not occur, (iv) because a hedged firm commitment nolonger meets the definition of a firm commitment, or (v) if managementdetermines that designation of the derivative as a hedge instrument is nolonger appropriate. The Company’s derivatives are recorded on the balance sheetat their fair value. For derivatives accounted for as cash flow hedges anyunrealized gains or losses on fair value are included in comprehensive income(loss), net of tax.

**9. Income Taxes**

For the quarter and sixmonths ended June 30, 2005, the Company recorded a provision for incometaxes of $4,169 and $8,301, or 40.4% and 40.3% of the Company’s pretax income,respectively. The Company’s effective tax rate was higher than statutory ratesprimarily as a result of state income taxes. For the quarter ended June 30,2004, the Company recorded an income tax benefit of $580, or 5.2% of theCompany’s pretax income. For the six months ended June 30, 2004 theCompany recorded a provision for income taxes of $2,526, or 13.4% of theCompany’s pretax income. For the quarter and six months ended June 30,2004, the Company’s effective tax rate was lower than federal statutory ratesdue to the reversal of income tax reserves of $5,099 primarily related to thefavorable outcome of examinations of the Company’s 1998 and 1999 federal incometax returns and a favorable final IRS determination letter related to thetreatment of an income item in a federal income tax return of one of theCompany’s subsidiaries.

**10. Earnings Per Common Share**

Thefollowing table sets forth the computation of basic and diluted earnings pershare (amounts in thousands, except per share amounts):
| ** **                                                                                          | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2004**                              | ** ** | **2005**                                      | ** ** | **2004** | ** ** | **2005** | ** ** |
| Numerator:                                                                                          |       |                                  |       |                                          |       |   |   |   |   |
| Net income                                                                                          |       | $                                     | 11,723     |                                          | $          | 6,155 |   | $ | 16,263 |   | $ | 12,290 |   |
| Denominator:                                                                                        |       |                                  |       |                                          |       |   |   |   |   |
| Denominator for basic earnings per share                                                            |       |                                  |       |                                          |       |   |   |   |   |
| —weighted-average shares                                                                       |       | 48,193                                |       | 49,286                                        |       | 48,081 |   | 49,210 |   |
| Effect of dilutive securities:                                                                      |       |                                  |       |                                          |       |   |   |   |   |
| Employee stock options                                                                              |       | 287                                   |       | 984                                           |       | 316 |   | 1,080 |   |
| Denominator for diluted earnings per share                                                          |       |                                  |       |                                          |       |   |   |   |   |
| —adjusted  weighted-average shares                                                             |       | 48,480                                |       | 50,270                                        |       | 48,397 |   | 50,290 |   |
| Earnings per common share:                                                                          |       |                                  |       |                                          |       |   |   |   |   |
| Basic                                                                                               |       | $                                     | 0.24       |                                          | $          | 0.12 |   | $ | 0.34 |   | $ | 0.25 |   |
| Diluted                                                                                             |       | $                                     | 0.24       |                                          | $          | 0.12 |   | $ | 0.34 |   | $ | 0.24 |   |
| 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 |       | 3,372                                 |       | 1,223                                         |       | 3,456 |   | 766 |   |
| Average exercise price per share that exceeds  average market price of common stock                 |       | $                                     | 6.40       |                                          | $          | 11.74 |   | $ | 6.37 |   | $ | 12.40 |   |

 

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**11. Commitments and Contingencies**

The Company has applied the disclosure provisions ofFASB Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers,” to its agreements that contain guarantee or indemnification clauses.These disclosure provisions expand those required by FASB Statement No. 5,“Accounting for Contingencies,” by requiring a guarantor to disclose certaintype of guarantees, even if the likelihood of requiring the guarantor’sperformance is remote. The following is a description of arrangements in whichthe Company is the guarantor or indemnifies a party.

In the normal course ofbusiness, the Company has made certain guarantees and indemnities, under whichit may be required to make payments to a guaranteed or indemnified party, inrelation to certain transactions. The Company indemnifies other parties,including customers, lessors, and parties to other transactions with theCompany, with respect to certain matters. The Company has agreed to hold theother party harmless against losses arising from certain events as definedwithin the particular contract, which may include, for example, litigation orclaims arising from a breach of representations or covenants. In addition, theCompany has entered into indemnification agreements with its executive officersand directors and the Company’s bylaws contain similar indemnificationobligations. Under these arrangements, we are obligated to indemnify, to thefullest extent permitted under applicable law, our current or former officersand directors for various amounts incurred with respect to actions, suits orproceedings in which they were made, or threatened to be made, a party as aresult of acting as an officer or director.

It is not possible todetermine the maximum potential amount under these indemnification agreementsdue to the limited history of prior indemnification claims and the unique factsand circumstances involved in each particular agreement. Historically, paymentsmade related to these indemnifications have been immaterial. At June 30,2005 the Company has determined that no liability is necessary related to theseguarantees and indemnities.

The Company guarantees aportion of a loan on behalf of an unconsolidated investee under an agreementexecuted prior to 2002. The maximum potential future payment under thisfinancial guarantee is $253 at June 30, 2005. The Company has not recordedan obligation for this guarantee.

On May 5, 2005, theCompany was served with a complaint filed in Alameda County Superior Courtalleging wage claims on behalf of a putative class of an estimated 365 formerand current California employees of the Company. In Linda S. Jones, et al.v. Alliance Imaging, Inc., et al., the plaintiffs allege violations ofCalifornia’s wage, meal period, and break time laws and regulations. Plaintiffsseek recovery of unspecified economic damages, statutory penalties, punitivedamages, attorneys’ fees and costs of suit. The Company is currently evaluatingthe allegations of the complaint and is unable to predict the likely timing oroutcome of this lawsuit.

The Company from time to time is also involved in otherlitigation and regulatory matters incidental to the conduct of its business.The Company believes that resolution of such matters will not have a materialadverse effect on its consolidated results of operations or financial position.

**12. Investmentsin Unconsolidated Investees**

The Company has direct ownership in six investees at June 30,2005. The Company owns between 30 percent and 50 percent of theseinvestees, and provides management services under agreements with four of theseinvestees, expiring at various dates through 2024. These investees areaccounted for under the equity method since the Company does not exercisecontrol over the operations of these investees.

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Setforth below is certain financial data of these investees (amounts inthousands):
| ** **                    | ** ** | **June 30,** | ** ** |
|-------------------------------|------------|-------------------|------------|
| ** **                    | ** ** | **2004**          | ** ** | **2005** | ** ** |
| Combined Balance Sheet  Data: |       |              |       |   |   |
| Current assets                |       | $                 | 8,139      |   | $ | 14,518 |   |
| Noncurrent assets             |       | 23,571            |       | 24,361 |   |
| Current liabilities           |       | 8,693             |       | 3,192 |   |
| Noncurrent liabilities        |       | 11,674            |       | 16,848 |   |
|                               |            |                   |            |  |  |  |  |

 
| ** **                                      | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                      | ** ** | **2004**                              | ** ** | **2005**                                      | ** ** | **2004** | ** ** | **2005** | ** ** |
| Combined Operating Results:                     |       |                                  |       |                                          |       |   |   |   |   |
| Revenues                                        |       | $                                     | 7,534      |                                          | $          | 8,170 |   | $ | 14,364 |   | $ | 15,997 |   |
| Expenses                                        |       | 5,137                                 |       | 6,157                                         |       | 10,048 |   | 12,320 |   |
| Net income                                      |       | 2,397                                 |       | 2,013                                         |       | 4,316 |   | 3,677 |   |
| Equity in  earnings of unconsolidated investees |       | 1,134                                 |       | 912                                           |       | 2,027 |   | 1,596 |   |
|                                                 |            |                                       |            |                                               |            |  |  |  |  |  |  |  |  |

 

**13. Related-Party Transactions**

The Company recorded management fees payable toKohlberg Kravis Roberts & Co (“KKR”) of $163 and $325 for each of thequarters and for each of the six months ended June 30, 2004 and 2005, andwill continue to receive financial advisory services from KKR on an ongoingbasis. At June 30, 2004 and 2005, the Company has accrued $163 related tothese services.

Revenue from management agreements with unconsolidatedequity investees was $2,612 and $3,593 for the quarters ended June 30,2004 and 2005, respectively, and $5,367 and $7,299 for the six months ended June 30,2004 and 2005, respectively.

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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 services, basedupon annual revenue and number of diagnostic imaging systems deployed. Ourprincipal sources of revenue are derived from magnetic resonance imaging (MRI)and positron emission tomography and positron emission tomography/computedtomography (PET and PET/CT) services on a shared-service and full-time basis,primarily in partnership with hospitals or health systems. We also provideservices through a growing number of fixed sites. In the first six months of2005, MRI services and PET and PET/CT services generated 70% and 21% of ourrevenues, respectively. The remaining revenue was comprised of other diagnosticimaging services revenue, primarily computed tomography (CT), and managementcontract revenue. We provide imaging services primarily to hospitals and otherhealthcare providers. Our services normally include the use of our imagingsystems, technologists to operate the systems, equipment maintenance andupgrades, and management of day-to-day shared-service and fixed-site diagnosticimaging operations. We had 465 diagnostic imaging systems, including 352 MRIsystems and 57 PET or PET/CT systems and served over 1,000 clients in 43 statesat June 30, 2005. Of these 465 diagnostic imaging systems, 62 were locatedin fixed-sites, which constitutes systems installed in hospitals or otherbuildings on hospital campuses, medical groups’ offices or medical buildings,and retail sites. Of these fixed-sites, 55 systems and 3 systems were includedin our MRI and PET or PET/CT systems count, respectively.

Approximately 87% of ourrevenues for the first six months ended June 30, 2005 were generated byproviding services to hospitals and other healthcare providers, which we referto as wholesale revenues. Our wholesale revenues are typically generated fromcontracts that require our clients to pay us based on the number of scans weperform, although some pay us a flat fee for a period of time regardless of thenumber of scans we perform. These payments are due to us independent of ourclients’ receipt of reimbursement from third-party payors. We typically deliverour services for a set number of days per week through exclusive, long-termcontracts with hospitals and other healthcare providers. The contracts initialterms average approximately three years in length for mobile services andapproximately seven to ten years in length for fixed-site arrangements. Thesecontracts often contain automatic renewal provisions and certain contracts havecancellation clauses if the hospital or other healthcare provider purchasestheir own system. We price our contracts based on the type of system used, thescan volume, and the number of ancillary services provided. Pricing is alsoaffected by competitive pressures.

In November 2004, theCenters for Medicare and Medicaid Services announced a 21% reduction in PEThospital reimbursement rates effective January 1, 2005. Although theeffect of this rate reduction to date has not had a material adverse effect onour PET or PET/CT revenues, this could have a significant negative impact onour PET and PET/CT revenues in the future. Our healthcare provider clients onwhom we depend for the majority of our PET and PET/CT revenues generally relyon reimbursement from Medicare and other third-party payors. Becauseunfavorable reimbursement policies may constrict the profit margins of thehospitals and other healthcare providers we bill directly, we may need to lowerour fees to retain existing PET and PET/CT clients and attract new ones.

Approximately 13% of our revenues for the six monthsended June 30, 2005 were generated by providing services directly topatients from our sites located at or near hospitals or other healthcareprovider facilities, which we refer to as retail revenues. Our revenue fromthese sites is generated from direct billings to patients or their third-partypayors, which are recorded net of contractual discounts and other arrangementsfor providing services at discounted prices. We typically charge a higher priceper scan under retail billing than we do under wholesale billing.

Revenues from our fixed-sites are included in both ourwholesale and retail revenues.

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The principal components of our cost of revenues arecompensation paid to technologists and drivers, system maintenance costs,medical supplies, system transportation and technologists’ travel costs.Because a majority of these expenses are fixed, increased revenues as a resultof higher scan volumes per system significantly improves our margins whilelower scan volumes result in lower margins.

The principal components of selling, general andadministrative expenses are sales and marketing costs, corporate overheadcosts, provision for doubtful accounts, and non-cash stock-based compensationexpense.

We record minority interest expense and earnings fromunconsolidated investees related to our consolidated and unconsolidated subsidiaries,respectively. These subsidiaries primarily provide shared service andfixed-site diagnostic imaging services.

Prior to 2004, MRI industry-wide scan volumes wereadversely affected by relatively flat hospital growth rates of outpatientprocedures and inpatient admissions. In addition, the increase in patient co-payments,higher patient deductibles, and the uncertain U.S. employment climatecontributed to lower MRI industry wide scan volumes. In 2004, MRI industry-widescan volumes returned to a more normal growth rate primarily due to improvedhospital growth rates of outpatient procedures and inpatient admissions. In thefirst half of 2005, the growth rate of MRI industry-wide scan volumes hasslowed in part due to the increasing trend of third-party payors intensifyingtheir utilization management efforts to control MRI scan volume growth rate. Weexpect that this trend will continue through the second half of 2005.

Prior to 2004, we began tosee an increase in the competitive climate in the MRI industry, resulting in anincrease in activity by original equipment manufacturers, or OEM’s, sellingsystems directly to certain of our clients. Typically, OEM’s target our higherscan volume clients. This has caused an increase in the number of our higherscan volume clients deciding not to renew their contracts. We replace thesehigher volume scan clients typically with lower volume clients. During 2005,our MRI revenues modestly declined compared to 2004 levels and we believe thatMRI revenues will continue to modestly 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.

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**Results of Operations**

Thefollowing table shows our condensed consolidated statements of operations as apercentage of revenues:
| ** **                                                 | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                              | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
| Revenues                                                   |       | 100.0                                 | %          | 100.0                                     | %          | 100.0 | % | 100.0 | % |
| Costs and  expenses:                                       |       |                                  |       |                                      |       |   |   |   |   |
| Cost of revenues,  excluding depreciation and amortization |       | 49.8                                  |       | 49.7                                      |       | 50.1 |   | 50.3 |   |
| Selling, general  and administrative expenses              |       | 10.7                                  |       | 12.6                                      |       | 11.1 |   | 11.8 |   |
| Employment  agreement costs                                |       | 1.1                                   |       | 0.1                                       |       | 0.7 |   | 0.2 |   |
| Depreciation  expense                                      |       | 18.0                                  |       | 18.9                                      |       | 18.8 |   | 19.1 |   |
| Amortization  expense                                      |       | 0.8                                   |       | 0.8                                       |       | 0.8 |   | 0.8 |   |
| Interest expense,  net of interest income                  |       | 9.9                                   |       | 8.8                                       |       | 10.0 |   | 8.7 |   |
| Other (income)  and expense, net                           |       | (0.1                                  | )          | (0.1                                      | )          | (0.1 | ) | (0.2 | ) |
| Total costs and expenses                                   |       | 90.2                                  |       | 90.8                                      |       | 91.4 |   | 90.7 |   |
| Income before income taxes, minority interest  expense     |       | 9.8                                   |       | 9.2                                       |       | 8.6 |   | 9.3 |   |
| and earnings from unconsolidated  investees                |       |                                  |       |                                      |       |   |   |   |   |
| Income tax  (benefit) expense                              |       | (0.5                                  | )          | 3.8                                       |       | 1.2 |   | 3.9 |   |
| Minority interest  expense                                 |       | 0.6                                   |       | 0.5                                       |       | 0.7 |   | 0.4 |   |
| Earnings from  unconsolidated investees                    |       | (1.0                                  | )          | (0.8                                      | )          | (0.9 | ) | (0.7 | ) |
| Net income                                                 |       | 10.7                                  | %          | 5.7                                       | %          | 7.6 | % | 5.7 | % |

 

Thetable below provides scan-based MRI statistical information:
| ** **                           | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **June 30,**      | ** ** | **June 30,**              | ** ** |
| ** **                           | ** ** | **2004**               | ** ** | **2005**                       | ** ** | **2004** | ** ** | **2005** | ** ** |
| MRI statistics                       |       |                   |       |                           |       |   |   |   |   |
| Average number of total systems      |       | 343.7                  |       | 336.4                          |       | 342.8 |   | 334.3 |   |
| Average number of scan-based systems |       | 293.9                  |       | 285.2                          |       | 295.0 |   | 283.6 |   |
| Scans per system per day             |       | 9.72                   |       | 9.61                           |       | 9.61 |   | 9.53 |   |
| Total number scan-based MRI scans    |       | 207,398                |       | 195,479                        |       | 409,448 |   | 386,521 |   |
| Price per scan                       |       | $                      | 353.71     |                           | $          | 354.60 |   | $ | 354.01 |   | $ | 355.22 |   |
|                                      |            |                        |            |                                |            |  |  |  |  |  |  |  |  |

 

Thetable below provides PET and PET/CT statistical information:
| ** **                           | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **June 30,**      | ** ** | **June 30,**              | ** ** |
| ** **                           | ** ** | **2004**               | ** ** | **2005**                       | ** ** | **2004** | ** ** | **2005** | ** ** |
| PET and PET/CT  statistics           |       |                   |       |                           |       |   |   |   |   |
| Average number of systems            |       | 48.8                   |       | 52.4                           |       | 46.8 |   | 51.3 |   |
| Scans per system per day             |       | 4.99                   |       | 5.46                           |       | 5.01 |   | 5.28 |   |
| Total number of PET and PET/CT scans |       | 14,430                 |       | 17,025                         |       | 27,738 |   | 32,809 |   |
| Price per scan                       |       | $                      | 1,345      |                           | $          | 1,327 |   | $ | 1,335 |   | $ | 1,348 |   |
|                                      |            |                        |            |                                |            |  |  |  |  |  |  |  |  |

 

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Followingare the components of revenue:
| ** **                          | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **June 30,**      | ** ** | **June 30,**              | ** ** |
| ** **                          | ** ** | **2004**               | ** ** | **2005**                       | ** ** | **2004** | ** ** | **2005** | ** ** |
| Total MRI revenue                   |       | $                      | 80.3       |                           | $          | 76.2 |   | $ | 158.2 |   | $ | 150.9 |   |
| PET and PET/CT  revenue             |       | 19.5                   |       | 22.7                           |       | 37.2 |   | 44.5 |   |
| Other modalities  and other revenue |       | 9.7                    |       | 9.5                            |       | 19.7 |   | 19.0 |   |
| Total                               |       | $                      | 109.5      |                           | $          | 108.4 |   | $ | 215.1 |   | $ | 214.4 |   |

 

***Quarter Ended June 30, 2005 Compared to QuarterEnded June 30, 2004***

Revenue decreased $1.1 million, or 1.0%, to $108.4million in the second quarter of 2005 compared to $109.5 million in the secondquarter of 2004 as a result of higher PET and PET/CT revenue, offset by lowerMRI revenue and other modalities and other revenue. PET and PET/CT revenue inthe second quarter of 2005 increased $3.2 million, or 16.5%, compared to thesecond quarter of 2004. Total PET and PET/CT scan volumes increased 18.0% to17,025 scans in the second quarter of 2005 from 14,430 scans in the secondquarter of 2004, primarily as a result of an increase in the average number ofPET and PET/CT systems in operation. The average number of PET and PET/CTsystems in service increased to 52.4 systems in the second quarter of 2005from 48.8 systems in the second quarter of 2004. Scans per system per day alsoincreased 9.4%, to 5.46 scans per system per day in the second quarter of 2005,from 4.99 in the second quarter of 2004. These increases were offset by aslight decrease in the average price per PET and PET/CT scan of 1.3% to $1,327per scan in the second quarter of 2005 compared to $1,345 per scan in the secondquarter of 2004. MRI revenue in the second quarter of 2005 decreased $4.1million, or 5.2%, compared to the second quarter of 2004 primarily as a resultof a 5.7% decrease in our scan-based MRI scan volume. Scan-based MRI scanvolume decreased to 195,479 scans in the second quarter of 2005 from 207,398scans in the second quarter of 2004, primarily due to a decrease in the averagenumber of scan-based systems in service due to lower client demand.Scan-based systems in service decreased to 285.2 systems in the second quarterof 2005 from 293.9 systems in the second quarter of 2004 to adjust to modestlydeclining MRI scan volumes and to increase the efficiency of our MRI systems.Average scans per system per day also decreased by 1.1% to 9.61 in the secondquarter of 2005 from 9.72 in the second quarter of 2004. These decreases werepartially offset by a 0.3% increase in average price per MRI scan to $354.60per scan in the second quarter of 2005 compared to $353.71 per scan in thesecond quarter of 2004. Non-scan based MRI revenue totaled $6.9 million forboth the second quarter of 2005 and 2004. Other modalities and other revenuedecreased $0.2 million, or 2.1%, to $9.5 million in the second quarter of 2005compared to $9.7 million in the second quarter of 2004 primarily due to adecrease in CT revenue offset by an increase in management contract revenuefrom our management agreements and reimbursement of expenses fromunconsolidated investees.

We had 352 MRI systems at June 30, 2005 comparedto 361 MRI systems at June 30, 2004. We had 57 PET and PET/CT systems at June 30,2005 compared to 51 PET and PET/CT systems at June 30, 2004. We operated62 fixed-sites at June 30, 2005 compared to 57 fixed sites at June 30,2004.

Cost of revenues, excludingdepreciation and amortization, decreased $0.6 million, or 1.2%, to$53.9 million in the second quarter of 2005 compared to $54.5 millionin the second quarter of 2004. Management contract expenses increased $0.4million, or 19.3%, primarily as a result of an increase in expenses incurred onbehalf of unconsolidated investees. Equipment rental expense increased$0.3 million, or 28.4%, primarily due to a higher number of MRI rentalsystems in use. Compensation and related employee expenses decreased$0.9 million, or 3.4%, primarily due to lower average headcount in thesecond quarter of 2005 compared to the second quarter of 2004, which wasprimarily a result of a decrease in the average number of MRI systems in use.These decreases were partially offset by an increase in technologists’ wagerates, and an increase in payroll costs necessary to support the increase inthe average 

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numberof PET and PET/CT systems in operation. PET and PET/CT technologists generallyhave a higher hourly rate than MRI technologists. This decrease in compensationand related expenses was also partially offset by an increase in recruitingcosts. Medical supplies decreased $0.5 million, or 10.4%, primarily due to adecrease in film expense related to lower MRI scan volume and an increase in demandfor digital images. Medical supplies also decreased due to a reduction in perunit PET and PET/CT radiopharmaceutical costs, partially offset by the increasein volume of radiopharmaceutical purchased due to an increase in PET and PET/CTscans. All other cost of revenues, excluding depreciation and amortization,increased $0.1 million, or 0.3%. Cost of revenues, as a percentage of revenue,decreased to 49.7% in the second quarter of 2005 from 49.8% in the secondquarter of 2004 as a result of the factors described above.

Selling, general andadministrative expenses increased $1.9 million, or 16.4%, to $13.7 million inthe second quarter of 2005 compared to $11.8 million in the second quarter of2004. The provision for doubtful accounts increased $1.1 million in the secondquarter of 2005 to $1.1 million compared to zero in the second quarter of 2004,primarily as a result of the collection of higher than normal amounts of agedaccounts receivable in the second quarter of 2004. The provision for doubtfulaccounts was 1.0% of revenue in the second quarter of 2005 compared to zeropercent of revenue in the second quarter of 2004. Compensation and relatedemployee expenses increased $0.4 million, or 4.1%, primarily due to an increasein payroll and related costs associated with growth in sales and businessdevelopment personnel and the addition of regional and corporate support staff.The increase was also the result of higher recruiting costs primarily tofurther develop the sales, business development, human resources and financeinfrastructure and an increase in costs associated with national managementmeetings. These increases were partially offset by a decrease in managementincentive compensation. Professional services increased $0.4 million, or 130.6%,primarily due to professional service costs associated with our Form S-3shelf registration statement. All other selling, general and administrativeexpenses were relatively consistent in the second quarter of 2005 compared tothe second quarter of 2004. Selling, general and administrative expenses as apercentage of revenue were 12.6% and 10.7% in the second quarter of 2005 and2004, respectively.

We recorded employment agreementcosts of $0.1 million in the second quarter of 2005 related to payments underan amendment to an employment agreement with our former chairman of the board.We recorded employment agreement costs of $1.2 million in the second quarter of2004 related to an employment agreement with our former chief financial officerand payments under an amendment to an employment agreement with our formerchairman of the board. We do not expect to incur any further costs relating tothe employment agreement with our former chairman of the board.

Depreciation expense increased$0.6 million, or 3.4%, to $20.4 million in the second quarter of 2005 comparedto $19.8 million in the second quarter of 2004.

Amortization expense for boththe second quarter of 2005 and 2004 totaled $0.9 million.

Interest expense, net, decreased$1.3 million, or 12.1%, to $9.5 million in the second quarter of 2005 comparedto $10.8 million in the second quarter of 2004. This decrease was primarily aresult of lower average interest rates on our senior subordinated notes whichwere refinanced in December 2004 and lower average debt balances in thesecond quarter of 2005 versus the second quarter of 2004.

Income tax expense was$4.2 million in the second quarter of 2005, resulting in an effective taxrate of 40.4%. Our effective tax rates were higher than statutory rates in thesecond quarter of 2005 primarily as a result of state income taxes. In thesecond quarter of 2004, we recorded an income tax benefit of $0.6 million,which was 5.2% of our pretax income. This effective tax rate in the secondquarter of 2004 was lower than statutory rates primarily due to the reversal ofincome tax reserves of $5.1 million, or $0.11 per diluted share, net of tax,primarily related to the favorable outcome of examinations of our 1998 and 1999federal income tax returns and a favorable final IRS determination letterrelated to the treatment of an income item in a federal income tax return ofone of our subsidiaries.

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Minority interest expensedecreased $0.1 million, or 15.9%, to $0.5 million in the secondquarter of 2005 compared to $0.6 million in the second quarter of 2004.

Earnings from unconsolidated investees decreased by$0.2 million, or 19.5%, to $0.9 million in the second quarter of 2005 comparedto $1.1 million in the second quarter of 2004, primarily due to net losses in2005 from newly formed unconsolidated investees.

Our net income was$6.2 million, or $0.12 per share on a diluted basis, in the second quarterof 2005 compared to $11.7 million, or $0.24 per share on a diluted basis,in the second quarter of 2004.

***Six Months Ended June 30, 2005 Compared to June 30,2004***

Revenue decreased $0.7 million, or 0.3%, to $214.4million in the first six months of 2005 compared to $215.1 million in the firstsix months of 2004 as a result of higher PET and PET/CT revenue, offset bylower MRI revenue and other modalities and other revenue. PET and PET/CTrevenue in the first six months of 2005 increased $7.3 million, or 19.7%,compared to the first six months of 2004. Total PET and PET/CT scan volumesincreased 18.3% to 32,809 scans in the first six months of 2005 from 27,738scans in the first six months of 2004, primarily as a result of an increase inthe average number of PET and PET/CT systems in operation. The average numberof PET and PET/CT systems in service increased to 51.3 systems in the firstsix months of 2005 from 46.8 systems in the first six months of 2004. Scans persystem per day also increased 5.4%, to 5.28 scans per system per day in thefirst six months of 2005, from 5.01 in the first six months of 2004. Theaverage price per PET and PET/CT scan increased by 1.0% to $1,348 per scan inthe first six months of 2005 compared to $1,335 per scan in the first sixmonths of 2004. MRI revenue in the first six months of 2005 decreased $7.3million, or 4.7%, compared to the first six months of 2004 primarily as aresult of a 5.6% decrease in our scan-based MRI scan volume. Scan-based MRIscan volume decreased to 386,521 scans in the first six months of 2005 from409,448 scans in the first six months of 2004, primarily due to a decrease inthe average number of scan-based systems in service due to lower clientdemand. Scan-based systems in service decreased to 283.6 systems in the firstsix months of 2005 from 295.0 systems in the first six months of 2004 to adjustto modestly declining scan volumes and to increase the efficiency of our MRIsystems. Average scans per system per day also decreased by 1.0% to 9.53 in thefirst six months of 2005 from 9.61 in the first six months of 2004. Thesedecreases were partially offset by a 0.3% increase in average price per MRIscan to $355.22 per scan in the first six months of 2005 compared to $354.01per scan in the first six months of 2004 and a $0.3 million increase innon-scan based MRI revenue. Other modalities and other revenue decreased $0.7million, or 3.4%, to $19.0 million in the first six months of 2005 compared to$19.7 million in the first six months of 2004 primarily due to a decrease in CTrevenue offset by an increase in management contract revenue for our managementagreements and reimbursement of expenses from unconsolidated investees.

We had 352 MRI systems at June 30, 2005 comparedto 361 MRI systems at June 30, 2004. We had 57 PET and PET/CT systemsat June 30, 2005 compared to 51 PET and PET/CT systems at June 30,2004. We operated 62 fixed-sites at June 30, 2005 compared to 57 fixedsites at June 30, 2004.

Cost of revenues, excludingdepreciation and amortization, totaled $107.8 million in the first six monthsof 2005 and 2004. Management contract expenses increased $1.1 million, or 25.9%,primarily as a result of an increase in expenses incurred on behalf ofunconsolidated investees. Equipment rental expense increased $0.9 million, or61.7%, primarily due to a higher number of MRI rental systems in use.Maintenance and related costs increased $0.3 million, or 1.4%, primarily due toan increase in the average service cost per system, offset by a decrease incryogen expense as a result of a decrease in MRI systems in service and cryogensourcing discounts. Compensation and related employee expenses decreased$1.1 million, or 2.1%, primarily due to lower average headcount in thefirst six months of 2005 compared to the first six months of 2004, which wasprimarily a result of a decrease in the average number of MRI systems in use.These decreases were partially offset by an increase in technologists’ wagerates, and an 

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increasein payroll costs necessary to support the increase in the average number of PETand PET/CT systems in operation. PET and PET/CT technologists generally have ahigher hourly rate than MRI technologists. This decrease in compensation andrelated expenses was also partially offset by an increase in recruiting costs.Medical supplies decreased $0.7 million, or 7.8%, primarily due to a decreasein film expense related to lower MRI scan volume and an increase in demand fordigital images, as well as film purchasing sourcing discounts. Medical suppliesalso decreased due to a reduction in per unit PET and PET/CTradiopharmaceutical costs, partially offset by the increase in volume ofradiopharmaceutical purchased due to an increase in PET and PET/CT scans.Transportation expenses decreased $0.6 million, or 28.4%, primarily due to adecrease in power unit leases which were purchased at the end of the leaseterm. All other cost of revenues, excluding depreciation and amortization,increased $0.1 million, or 0.4%. Cost of revenues, as a percentage of revenue,increased to 50.3% in the first six months of 2005 from 50.1% in the first sixmonths of 2004 as a result of the factors described above.

Selling, general andadministrative expenses increased $1.5 million, or 6.0%, to $25.4 million inthe first six months of 2005 compared to $23.9 million in the first six monthsof 2004. The provision for doubtful accounts increased $1.0 million, or 229.3%,in the first six months of 2005 compared to the first six months of 2004,primarily as a result of the collection of higher than normal amounts of agedaccounts receivable in the first six months of 2004. The provision for doubtfulaccounts was 0.7% of revenue in the first six months of 2005 compared to 0.2%of revenue in the first six months of 2004. Compensation and related employeeexpenses increased $0.4 million, or 2.2%, primarily due to an increase inpayroll and related costs associated with growth in sales and businessdevelopment personnel and the addition of regional and corporate support staff.The increase was also the result of higher recruiting costs primarily tofurther develop the sales, business development, human resources and financeinfrastructure and an increase in costs associated with national managementmeetings. These increases were partially offset by a decrease in managementincentive compensation. Professional services increased $0.3 million, or 35.9%,primarily due to professional service costs associated with our Form S-3shelf registration statement. All other selling, general and administrativeexpenses decreased $0.2 million, or 6.0%, in the first six months of 2005compared to the first six months of 2004. Selling, general and administrativeexpenses as a percentage of revenue were 11.8% and 11.1% in the first sixmonths of 2005 and 2004, respectively.

We recorded employment agreementcosts of $0.4 million in the first six months of 2005 related to payments underan amendment to an employment agreement with our former chairman of the board.We recorded employment agreement costs of $1.5 million in the first six monthsof 2004 related to an employment agreement with our former chief financialofficer and payments under an amendment to an employment agreement with ourformer chairman of the board. We do not expect to incur any further costsrelating to the employment agreement with our former chairman of the board.

Depreciation expense increased$0.3 million, or 0.7%, to $40.9 million in the first six months of 2005compared to $40.6 million in the first six months of 2004.

Amortization expense for boththe first six months of 2005 and 2004 totaled $1.8 million.

Interest expense, net, decreased$2.8 million, or 13.3%, to $18.6 million in the first six months of 2005compared to $21.4 million in the first six months of 2004. This decrease wasprimarily a result of lower average interest rates on our senior subordinatednotes which were refinanced in December 2004 as well as lower average debtbalances in the first six months of 2005 versus the first six months of 2004.

Income tax expense was$8.3 million in the first six months of 2005, resulting in an effectivetax rate of 40.3%. Our effective tax rates were higher than statutory rates forthe first six months of 2005 primarily as a result of state income taxes. Inthe first six months of 2004, we recorded a provision for income taxes of $2.5million, which was 13.4% of our pretax income. This effective tax rate was lowerthan statutory rates for the first six months of 2004 primarily due to thereversal of income tax reserves of $5.1 million, or $0.11 per diluted share,net of tax, primarily related to the favorable outcome of examinations of our1998 and 

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1999federal income tax returns and a favorable final IRS determination letterrelated to the treatment of an income item in a federal income tax return ofone of our subsidiaries.

Minority interest expense decreased $0.4 million,or 33.2%, to $1.0 million in the first six months of 2005 compared to$1.4 million in the first six months of 2004.

Earnings from unconsolidated investees decreased by$0.4 million, or 21.2%, to $1.6 million in the first six months of 2005compared to $2.0 million in the first six months of 2004, primarily due to netlosses in 2005 from newly formed unconsolidated investees.

Our net income was$12.3 million, or $0.24 per share on a diluted basis, in the first sixmonths of 2005 compared to $16.3 million, or $0.34 per share on a dilutedbasis, in the first six months of 2004.

**Liquidity and Capital Resources**

Our primary source of liquidity is cash provided byoperating activities. We generated $50.7 million and $61.0 million of cash flowfrom operating activities in the first six months of 2005 and 2004,respectively. Our ability to generate cash flow is affected by numerousfactors, including demand for MRI and PET and PET/CT scans, the price we cancharge our clients for providing our services and the costs to us of providingthose services. Our ability to generate cash flow from operating activities isalso dependent upon the collections of our accounts receivable. Provision fordoubtful accounts increased by $1.1 million in the first six months of 2005compared to the first six months of 2004. The number of days of revenueoutstanding for our accounts receivable was 45 days and 46 days as of June 30,2005 and 2004, respectively. In addition, as of June 30, 2005, we had$64.4 million available borrowings under our revolving line of credit.

Our primary use ofcapital resources is to fund capital expenditures. We used cash of $24.3million and $45.3 million for investing activities in the first six months of2005 and 2004, respectively. We incur capital expenditures for the purposes of:

·       purchasingnew systems;

·       replacingless advanced systems with new systems; and

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

Capital expenditures totaled $28.9 million and $43.8million in the first six months of 2005 and 2004, respectively. During thefirst six months of 2005, we purchased 7 MRI systems, 7 PET or PET/CT systems,3 CT systems and three other systems. We traded-in or sold 33 total systems forthe six months ended June 30, 2005. Our decision to purchase a new systemis typically predicated on obtaining new or extending existing clientcontracts, which serve as the basis of demand for the new system. We expect topurchase additional systems in 2005 and finance substantially all of thesepurchases with our available cash, cash from operating activities, ourrevolving line of credit, and equipment leases. Based upon the client demanddescribed above, which dictates the type of equipment purchased, we expectcapital expenditures to total approximately $85 to $90 million in 2005.

We believe that, based on current levels ofoperations, our cash flow from operating activities, together with otheravailable sources of liquidity, including borrowings available under ourrevolving loan facility, will be sufficient over the next one to two years tofund anticipated capital expenditures and make required payments of principaland interest on our debt.

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**RecentAccounting Pronouncements**

In December 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standard No. 153, “Exchanges of Nonmonetary Assets” (“SFAS 153”),which is an amendment of Accounting Principals Board Opinion No. 29, “Accountingfor Nonmonetary Transactions,” (“APB 29”). This statement addresses themeasurement of exchanges of nonmonetary assets, and eliminates the exceptionfrom fair value measurement for nonmonetary exchanges of similar productiveassets as defined in paragraph 21(b) of APB 29, and replaces itwith an exception for exchanges that do not have commercial substance. Thisstatement specifies that a nonmonetary exchange has commercial substance if thefuture cash flows of the entity are expected to change significantly as aresult of the exchange. SFAS 153 is effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005. Webelieve the adoption of SFAS 153 will not have a material impact on ourconsolidated financial position or results of operations.

In December 2004, theFASB issued SFAS 123(R) (revised December 2004), “Share-BasedPayment” (“SFAS 123(R)”), which is a revision of SFAS 123 andsupersedes APB No. 25. This statement requires that the fair value at thegrant date resulting from all share-based payment transactions be recognized inthe financial statements. Further, SFAS 123(R) requires entities toapply a fair-value based measurement method in accounting for thesetransactions. This value is recorded over the vesting period. This statement iseffective for the first fiscal year beginning after June 15, 2005. We arecurrently evaluating the provisions of SFAS 123(R) and the impact onour consolidated financial position and results of operations. We will adoptSFAS123(R) for the fiscal year beginning January 1, 2006.

In March 2005, theFASB issued FASB Interpretation No. 47, “Accounting for Conditional AssetRetirement Obligations” (“FIN 47”), an interpretation of SFAS No. 143,“Accounting for Conditional Asset Retirement Obligations.” This interpretationclarifies that an entity is required to recognize a liability for the fairvalue of a conditional asset retirement obligation when incurred if theliability’s fair value can be reasonably estimated. This interpretation alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation. This statement iseffective for the first fiscal year beginning after December 15, 2005. Webelieve the adoption of FIN 47 will not have a material impact on ourconsolidated financial position or results of operations.

In May 2005, the FASBissued SFAS 154, “Accounting for Changes and Error Corrections” (“SFAS 154”),which is a replacement of APB Opinion No. 20, “Accounting Changes,” andSFAS 3, “Reporting Accounting Changes in Interim Financial Statements.”This statement changes the requirements for the accounting for and reporting ofall voluntary changes in accounting principle and in the instance that apronouncement does not include specific transition provisions. This statementrequires retrospective application to prior periods’ financial statements ofchanges in accounting principle, unless it is impracticable to determine eitherthe period-specific effects or the cumulative effect of the change. SFAS 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005. We believe the adoption of SFAS 154will not have a material impact on our consolidated financial position orresults of operations.

In June 2005, theFASB issued Emerging Issues Task Force Issue No. 04-05, “DeterminingWhether a General Partner, or the General Partners as a Group, Controls aLimited Partnership or Similar Entity When the Limited Partners Have CertainRights”(“EITF 04-05”). EITF 04-05 clarifies how generalpartners in a limited partnership should determine whether they control alimited partnership. A general partner of a limited partnership is presumed tocontrol the limited partnership unless the limited partners have substantivekick-out rights or participating rights. For general partners of all newlimited partnerships formed and for existing limited partnerships for which thepartnership agreements are modified, EITF 04-05 is effective after June 29,2005. For general partners in all other limited partnerships, EITF 04-05is effective for the first period in fiscal years beginning after December 15,2005. We believe 

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theadoption of EITF 04-05 will not have a material impact on ourconsolidated financial position or results of operations.

In June 2005, theFASB issued EITF 05-06, “Determining the Amortization Period forLeasehold Improvements” (“EITF 05-06”). EITF 05-06defines the useful life for leasehold improvements acquired in a businesscombination, or purchased significantly after, and not comtemplated at the beginningof the lease term. EITF 05-06 is effective for leaseholdimprovements purchased or acquired in reporting periods after June 29, 2005.We believe the adoption of EITF 05-06 will not have a materialimpact on our consolidated financial position or results of operations.

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

Certain statementscontained in Management’s Discussion and Analysis of Financial Condition andResults of Operations, particularly in the section entitled “Liquidity andCapital Resources”, and elsewhere in this quarterly report on Form 10-Q,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 healthcare regulatoryenvironment, our ability to keep pace with technological developments withinour industry, and other risks and uncertainties, including those enumerated anddescribed under “Risk Factors” in our Form 10-K/A, as filed with theSecurities and Exchange Commission, for the fiscal year ended December 31,2004. The foregoing should not be construed as an exhaustive list of allfactors which could cause actual results to differ materially from thoseexpressed in forward-looking statements made by us.

**ITEM3.**                QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

We sell our servicesexclusively in the United States and receive payment for our servicesexclusively in United States dollars. As a result, our financial results areunlikely to be affected by factors such as changes in foreign currency exchangerates or weak economic conditions in foreign markets.

Our interest expense issensitive to changes in the general level of interest rates in the UnitedStates, particularly because the majority of our indebtedness has interestrates which are variable. The recorded carrying amount of our long-term debtunder our existing credit agreement approximates fair value as these borrowingshave variable rates that reflect currently available terms and conditions forsimilar debt. To decrease the risk associated with interest rate increases, weentered into multiple interest rate swap and collar agreements for a portion ofour variable rate debt. These swaps and collars are designated as cash flowhedges of variable future cash flows associated with our long-term debt.

The swap agreements havenotional amounts of $56.8 million, $46.8 million and $48.4 million at June 30,2005. 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 of thehedges is to record interest expense at fixed rates of 5.40%, 6.14% and 5.94%respectively, as the debt incurs interest based on three-month LIBOR plus2.25%. For the quarter and six months ended June 30, 2005 we recorded netinterest expense on the 

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swapagreements of $0.3 million and $0.7 million, respectively. For the quarter andsix months ended June 30, 2004, we did not record any net interest expenseon the swap agreements. The swap agreements mature during 2007.

We have also entered intomultiple interest rate collar agreements which have a total notional amount of$178.0 million. Under the terms of these agreements, we have purchased a cap onthe interest rate of 4.00% and have sold a floor of 2.25%. For the quarter andsix months ended June 30, 2005, we did not record any net settlement onthese collar agreements. The collar agreements mature at various dates between January 2007and January 2008.

The swap and collaragreements have been designated as cash flow hedges of variable future cashflows associated with our long term debt. In accordance with SFAS 133, theswaps and collars are recorded at fair value. On a quarterly basis, the fairvalue of the swaps and collars will be determined based on quoted market pricesand, assuming perfect effectiveness, the difference between the fair value andthe book value of the swaps and collars will be recognized in comprehensiveincome, a component of shareholders’ equity. Any ineffectiveness of the swapsand collars is required to be recognized in earnings.

The outstanding interestrate swaps and collars expose us to credit risk in the event that thecounterparties to the agreements do not or cannot meet their obligations. Thenotional amount is used to measure interest to be paid or received and does notrepresent the amount of exposure to credit loss. The loss would be limited tothe amount that would have been received, if any, over the remaining life ofthe swap and collar agreements. The counterparties to the swaps and collars aremajor financial institutions and we expect the counterparties to be able toperform their obligations under the swaps and collars. We use derivativefinancial instruments for hedging purposes only and not for trading orspeculative purposes.

Our interest income issensitive to changes in the general level of interest rates in the United States,particularly because the majority of our investments are in cash equivalents.The recorded carrying amounts of cash and cash equivalents approximate fairvalue due to their short-term maturities.

**ITEM4.**                CONTROLS ANDPROCEDURES

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our Exchange Act reports is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management necessarily was required to apply itsjudgment in evaluating the cost benefit relationship of possible controls andprocedures. Also, we have investments in certain unconsolidated entities. As wedo not control or manage these entities, our disclosure controls and procedureswith respect to such entities are more limited than those we maintain withrespect to our consolidated subsidiaries. These unconsolidated entities are notconsidered material to our consolidated financial position or results ofoperations.

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.

There were no changes inthe Company’s internal control over financial reporting occurring during thefiscal quarter covered by this report which have materially affected or arereasonably likely to materially affect the Company’s internal control overfinancial reporting.

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**PART II—OTHERINFORMATION**

**ITEM 1.**                LEGALPROCEEDINGS

On May 5, 2005, Alliance Imaging, Inc. wasserved with a complaint filed in Alameda County Superior Court alleging wageclaims on behalf of a putative class of an estimated 365 former and currentCalifornia employees of Alliance Imaging, Inc. In Linda S. Jones, et al.v. Alliance Imaging, Inc., et al., the plaintiffs allege violations ofCalifornia’s wage, meal period, and break time laws and regulations. Plaintiffsseek recovery of unspecified economic damages, statutory penalties, punitivedamages, attorneys’ fees and costs of suit. We are currently evaluating theallegations of the complaint and are unable to predict the likely timing oroutcome of this lawsuit.

From time to time, we arealso involved in other 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 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

(a)          The Annual Meeting ofStockholders of Alliance Imaging, Inc. was held on May 24, 2005.

(b)         The following nomineeswere elected as Class I Directors for a three-year term expiring at the2008 Annual Meeting: Adam H. Clammer, Neil F. Dimick, and Paul S.Viviano. The Class III Directors, Michael W. Michelson, James C.Momtazee and Edward L. Samek, whose terms expire at the 2007 AnnualMeeting, and the Class II Directors, James H. Greene Jr. and Anthony B.Helfet, whose terms expire at the 2006 Annual Meeting, continue to serve on ourBoard of Directors.

(c)          Certainmatters voted upon at the meeting and the votes cast with respect to suchmatters are as follows:

**Proposaland Vote Tabulation**
| ** **                                                                                                                                | ** ** | **Votes Cast** | ** ** | ** **  | ** ** | **Broker**  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------|------------|-------------|------------|
| ** **                                                                                                                                | ** ** | **For**             | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-votes** | ** ** |
| Approval of the  appointment of Deloitte & Touche LLP as independent auditors for the  fiscal year ending December 31, 2005 |       | 44,188,115          |       | 88,070      |       |        | 700        |   |   |   | — |   |   |
|                                                                                                                                           |            |                     |            |             |            |             |            |  |  |  |  |  |  |

 

**Election ofDirectors**
| **Director**    | ** ** | ** ** | ** ** | **Votes Received** | ** ** | **Votes Withheld** | ** ** |
|-----------------|------------|------------|------------|-------------------------|------------|-------------------------|------------|
| Adam H. Clammer |       |       | 37,997,901 |                    |       |                    | 6,278,984  |   |   |
| Neil F. Dimick  |       |       | 43,610,661 |                    |       |                    | 666,224    |   |   |
| Paul S. Viviano |       |       | 39,116,425 |                    |       |                    | 5,160,460  |   |   |

 

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**ITEM 5.**                OTHERINFORMATION

Not applicable.

**ITEM 6.**                EXHIBITS

(a)          Exhibits
| Exhibit   No. | ** ** | **Description** |
|---------------|------------|-----------------|
|          | 3.1        |            |   | Amended and  Restated Certificate of Incorporation of Alliance.(7) |
|          | 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 10 3¤8%  Senior Subordinated Notes due 2011.(5) |
|          | 4.2        |            |   | Credit Agreement  dated as of November 2, 1999, as amended.(5) |
|          | 4.3        |            |   | Specimen  certificate for shares of common stock, $.01 par value, of Alliance.(7) |
|          | 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.(13) |
|          | 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.(13) |
|          | 4.7        |            |   | Third Amendment  dated as of December 29, 2004 to Credit Agreement.(13) |
|          | 10.1       |            |   | The 1999 Equity  Plan for Employees of Alliance and Subsidiaries including the forms of option  agreements used thereunder, as amended.(5) |
|          | 10.2       |            |   | The Alliance 1997  Stock Option Plan, including form of option agreement used thereunder, as  amended.(5) |
|          | 10.3       |            |   | The Three Rivers  Holding Corp. 1997 Stock Option Plan, as amended.(5) |
|          | 10.4       |            |   | Alliance  Directors’ Deferred Compensation Plan, as amended.(6) |
|          | 10.5       |            |   | 2003 Incentive  Plan (9) |
|          | 10.6       |            |   | Employment  Agreement dated as of July 23, 1997 between Alliance and Richard N.  Zehner.(1) |
|          | 10.7       |            |   | Agreement Not to  Compete dated as of July 23, 1999 between Alliance and Richard N. Zehner.(1) |
|          | 10.8       |            |   | Amendment to  Employment Agreement dated as of July 23, 1997 between Alliance and  Richard N. Zehner.(2) |
|          | 10.9       |            |   | Amendment to  Employment Agreement dated as of December 31, 1997 between Alliance and  Richard N. Zehner.(3) |
|          | 10.10      |            |   | Second Amendment  to Employment Agreement dated as of February 5, 1998 between Alliance  and Richard N. Zehner.(3) |
|          | 10.11      |            |   | Employment  Agreement dated as of January 19, 1998 between Alliance and Kenneth S.  Ord.(4) |
|          | 10.12      |            |   | Agreement Not to  Compete dated as of January 19, 1998 between Alliance and Kenneth S. Ord.(4) |
|          | 10.15      |            |   | Employment  Agreement dated as of April 29, 1998 between Alliance and Russell D.  Phillips, Jr.(3) |
|          | 10.16      |            |   | Agreement Not to  Compete dated as of April 29, 1998 between Alliance andRussell D.  Phillips, Jr.(3) |
|          | 10.17      |            |   | Employment  Agreement dated as of January 1, 2003 between Alliance and Paul S.  Viviano.(9) |
|          | 10.18      |            |   | Agreement Not to  Compete dated as of January 1, 2003 between Alliance andPaul S. Viviano.(9) |

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|        | 10.19 |   |   | Stock  Subscription Agreement dated as of January 2, 2003 between Alliance and  Paul S. Viviano.(9)                                                                       |
|--------|-------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.20 |   |   | Stock  Subscription Agreement dated as of February 3, 2003 between Alliance and  Paul S. Viviano.(9)                                                                      |
|   | 10.21 |   |   | Form of  Stockholder’s Agreement.(5)                                                                                                                                 |
|   | 10.23 |   |   | Registration  Rights Agreement dated as of November 2, 1999.(5)                                                                                                           |
|   | 10.24 |   |   | Management  Agreement, dated as of November 2, 1999, between Alliance and Kohlberg  Kravis Roberts & Co., LLP.(5)                                                |
|   | 10.25 |   |   | Amendment  No. 1 to Management Agreement, effective as of January 1, 2000,  between Alliance and Kohlberg Kravis Roberts & Co., LLP.(5)                     |
|   | 10.26 |   |   | Form of  Indemnification Agreement.(6)                                                                                                                                    |
|   | 10.27 |   |   | Amendment to  Employment Agreement, Non-Qualified Stock Option Agreement and Non-Compete  Agreement, dated as of May 21, 2003,between Alliance andRichard N.  Zehner.(10) |
|   | 10.29 |   |   | Amendment to  Employment Agreement and Stockholders’ Agreement, dated March 29, 2004  by and between Alliance, Viewer Holdings, LLC and Kenneth S. Ord.(12)          |
|   | 10.30 |   |   | Amended and Restated  Employment Agreement dated as of May 9, 2005 between Alliance and Paul  S. Viviano.(15)                                                             |
|   | 10.31 |   |   | Agreement Not to  Compete dated as of May 9, 2005 between Alliance and Paul S.  Viviano.(15)                                                                         |
|   | 10.32 |   |   | Employment  Agreement dated as of May 9, 2005 between Alliance and Andrew P.  Hayek.(15)                                                                             |
|   | 10.33 |   |   | Agreement Not to  Compete dated as of May 9, 2005 between Alliance and Andrew P.  Hayek.(15)                                                                              |
|   | 21.1  |   |   | List of  subsidiaries.(14)                                                                                                                                                     |
|   | 31    |   |   | Certifications of  Chief Executive Officer and Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.(16)                                    |
|   | 32    |   |   | Certifications of  Chief Executive Officer and Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.(16)                                    |

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(1)          Incorporated by referenceto exhibits filed with the Company’s Registration Statement on Form S-2,No. 333-33817. 

(2)          Incorporated byreference herein to the indicated Exhibit in response to Item 14(a)(3), “Exhibits”of the Company’s Annual Report on Form 10-K for the year ended December 31,1997 (File No. 000-16334).

(3)          Incorporated byreference herein to the indicated Exhibit in response to Item 14(a)(3), “Exhibits”of the Company’s Annual Report on Form 10-K for the year ended December 31,1998 (File No. 000-16334).

(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 March 31,1998 (File No. 000-16334). 

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

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

(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 June 30,2001 (File No. 001-16609).

(8)          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).

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(9)          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).

(10)   Incorporated by reference toexhibits filed in response to Item 6, “Exhibits” of the Company’s QuarterlyReport on Form 10-Q for the quarter ended June 30, 2003 (File No. 001-16609).

(11)   Incorporated by referenceherein to the indicated Exhibit response in Item 15(a)(3), “Exhibits” ofthe Company’s Annual Report on Form 10-K for the year ended December 31,2003 (File No. 001-16609).

(12)   Incorporated by reference toexhibits filed in response to Item 6, “Exhibits” of the Company’s QuarterlyReport on Form 10-Q for the quarter ended March 31, 2004 (File No. 001-16609).

(13)   Incorporated by reference toexhibits filed in response to Item 9.01(c), “Exhibits” of the Company’s CurrentReport on Form 8-K, dated December 29, 2004 (File No. 001-16609).

(14)   Incorporated by referenceherein to the indicated Exhibit response in Item 15(a)(1), “Exhibits” ofthe Company’s Annual Report on Form 10-K for the year ended December 31,2004 (File No. 001-16609).

(15)   Incorporated by reference toexhibits filed in response to Item 6, “Exhibits” of the Company’s QuarterlyReport on Form 10-Q for the quarter ended March 31, 2005 (File No. 001-16609).

(16)   Filed herewith

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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 9, 2005 | By:                         | /s/ PAUL S. VIVIANO |
|                |                        | Paul S. Viviano |
| * *            | * *                    | *Chairman of the Board and Chief Executive Officer  (Principal Executive Officer)* |
| August 9, 2005 | By:                         | /s/ R. BRIAN HANSON |
|                |                        | R. Brian Hanson |
| * *            | * *                    | *Executive Vice President and Chief Financial  Officer (Principal Financial Officer)* |
| August 9, 2005 | By:                         | /s/ HOWARD K. AIHARA |
|                |                        | Howard K. Aihara |
| * *            | * *                    | *Vice President and Corporate Controller (Principal  Accounting Officer)* |

 

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