**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, 2007**

**CommissionFile Number:  1-16609**

**ALLIANCE  IMAGING,  INC.**

(Exact name of registrant as 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 executiveoffice)**

**(714) 688-7100**

**(Registrant’s telephone number,including area code)**

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

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

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

 

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

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of July 31, 2007:

Common Stock, $.01 par value, 50,893,396 shares

 

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**ALLIANCEIMAGING, INC.FORM 10-QJune 30, 2007Index**
|                                        | ** **                                                                                                                                       | ** ** | **Page** |
|----------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I—FINANCIAL INFORMATION |                                                                                                                                             |       |
|                                   | Item 1—Financial Statements:                                                                                                                | 3          |     |
|                                   | Condensed Consolidated  Balance Sheets   December 31, 2006 and June 30, 2007 (Unaudited)                                               | 3          |     |
|                                   | Condensed Consolidated  Statements of Operations and Comprehensive Income   Quarter and six months ended June 30, 2006 and 2007 (Unaudited) | 4          |     |
|                                   | Condensed Consolidated  Statements of Cash Flows   Six months ended June 30, 2006 and 2007 (Unaudited)                                      | 5          |     |
|                                   | Notes to Condensed  Consolidated Financial Statements (Unaudited)                                                                                | 6          |     |
|                                   | Item 2—Management’s  Discussion and Analysis of Financial Condition and Results of   Operations                                        | 17         |     |
|                                   | Item 3—Quantitative and  Qualitative Disclosures about Market Risk                                                                          | 27         |     |
|                                   | Item 4—Controls and Procedures                                                                                                              | 28         |     |
| PART II—OTHER INFORMATION    |                                                                                                                                             |       |
|                                   | Item 1—Legal Proceedings                                                                                                                    | 29         |     |
|                                   | Item 1A—Risk Factors                                                                                                                        | 29         |     |
|                                   | Item 2—Unregistered Sales of  Equity Securities and Use of Proceeds                                                                         | 30         |     |
|                                   | Item 3—Defaults Upon Senior  Securities                                                                                                     | 30         |     |
|                                   | Item 4—Submission of Matters  to a Vote of Security Holders                                                                                 | 30         |     |
|                                   | Item 5—Other Information                                                                                                                    | 31         |     |
|                                   | Item 6—Exhibits                                                                                                                             | 31         |     |
| SIGNATURES                             | 35                                                                                                                                               |       |
|                                        |                                                                                                                                                  |            |          |  |

 

2

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**PART I—FINANCIALINFORMATION**

**ITEM 1. FINANCIALSTATEMENTS**

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

| ** **                                                   | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                   | ** ** | **2006**              | ** ** | **2007**          | ** ** |
| **ASSETS**                                                   |       |                  |       |              |       | ** ** |   |
| Current assets:                                              |       |                  |       |              |       |   |   |
| Cash and cash  equivalents                                   |       |                  | $          | 16,440            |       |   | $ | 36,507 |   |
| Accounts receivable, net  of allowance for doubtful accounts |       |                  | 51,569     |              |       | 57,096 |   |
| Deferred income taxes                                        |       |                  | 20,199     |              |       | 24,538 |   |
| Prepaid expenses and  other current assets                   |       |                  | 4,211      |              |       | 6,067 |   |
| Other receivables                                            |       |                  | 8,096      |              |       | 7,832 |   |
| Total current assets                                         |       |                  | 100,515    |              |       | 132,040 |   |
| Equipment, at cost                                           |       |                  | 769,967    |              |       | 772,482 |   |
| Less accumulated  depreciation                               |       |                  | (425,790   | )                 |       | (432,877 | ) |
| Equipment, net                                               |       |                  | 344,177    |              |       | 339,605 |   |
| Goodwill                                                     |       |                  | 150,069    |              |       | 150,069 |   |
| Other intangible assets,  net                                |       |                  | 35,782     |              |       | 33,384 |   |
| Deferred financing  costs, net                               |       |                  | 6,947      |              |       | 6,337 |   |
| Other assets                                                 |       |                  | 27,036     |              |       | 17,159 |   |
| Total assets                                                 |       |                  | $          | 664,526           |       |   | $ | 678,594 |   |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**               |       |                  |       |              |       |   |   |
| Current liabilities:                                         |       |                  |       |              |       |   |   |
| Accounts payable                                             |       |                  | $          | 14,525            |       |   | $ | 11,768 |   |
| Accrued compensation and  related expenses                   |       |                  | 16,993     |              |       | 13,092 |   |
| Accrued interest payable                                     |       |                  | 4,320      |              |       | 4,419 |   |
| Income taxes payable                                         |       |                  | 637        |              |       | — |   |
| Other accrued  liabilities                                   |       |                  | 32,331     |              |       | 28,926 |   |
| Current portion of  long-term debt                           |       |                  | 2,858      |              |       | 3,042 |   |
| Total current  liabilities                                   |       |                  | 71,664     |              |       | 61,247 |   |
| Long-term debt, net of  current portion                      |       |                  | 373,026    |              |       | 374,348 |   |
| Senior subordinated  notes                                   |       |                  | 153,541    |              |       | 153,541 |   |
| Minority interests and  other liabilities                    |       |                  | 4,376      |              |       | 5,365 |   |
| Deferred income taxes                                        |       |                  | 78,893     |              |       | 87,691 |   |
| Total liabilities                                            |       |                  | 681,500    |              |       | 682,192 |   |
| Commitments and contingencies (Note 10)                      |       |                  |       |              |       |   |   |
| Stockholders’ deficit:                                  |       |                  |       |              |       |   |   |
| Common stock                                                 |       |                  | 499        |              |       | 503 |   |
| Additional paid-in  deficit                                  |       |                  | (7,070     | )                 |       | (3,616 | ) |
| Accumulated  comprehensive income                            |       |                  | 1,356      |              |       | 825 |   |
| Accumulated deficit                                          |       |                  | (11,759    | )                 |       | (1,310 | ) |
| Total stockholders’  deficit                            |       |                  | (16,974    | )                 |       | (3,598 | ) |
| Total liabilities and stockholders’ deficit             |       |                  | $          | 664,526           |       |   | $ | 678,594 |   |

 

*See accompanying notes.*

3

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

| ** **                                                                                         | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                                                                         | ** ** | **June 30,**      | ** ** | **June 30,**              | ** ** |
| ** **                                                                                         | ** ** | **2006**               | ** ** | **2007**                       | ** ** | **2006** | ** ** | **2007** | ** ** |
| Revenues                                                                                           |       | $                      | 115,305    |                           | $          | 111,756 |   | $ | 230,648 |   | $ | 221,162 |   |
| Costs and  expenses:                                                                               |       |                   |       |                           |       |   |   |   |   |
| Cost of revenues,  excluding depreciation and amortization                                         |       | 62,593                 |       | 58,152                         |       | 122,460 |   | 114,329 |   |
| Selling, general  and administrative expenses                                                      |       | 13,611                 |       | 14,543                         |       | 27,367 |   | 29,271 |   |
| Severance and related  costs                                                                       |       | 47                     |       | 164                            |       | 536 |   | 240 |   |
| Depreciation  expense                                                                              |       | 20,919                 |       | 20,788                         |       | 41,920 |   | 41,589 |   |
| Amortization  expense                                                                              |       | 1,229                  |       | 1,194                          |       | 2,473 |   | 2,404 |   |
| Interest expense,  net of interest income                                                          |       | 10,022                 |       | 10,388                         |       | 19,796 |   | 20,462 |   |
| Other (income)  and expense, net                                                                   |       | (256                   | )          | (211                           | )          | 472 |   | (531 | ) |
| Total costs and  expenses                                                                          |       | 108,165                |       | 105,018                        |       | 215,024 |   | 207,764 |   |
| Income before income taxes, minority interest  expense, and earnings from unconsolidated investees |       | 7,140                  |       | 6,738                          |       | 15,624 |   | 13,398 |   |
| Income tax  expense                                                                                |       | 3,556                  |       | 3,241                          |       | 7,207 |   | 7,193 |   |
| Minority interest  expense                                                                         |       | 495                    |       | 471                            |       | 1,035 |   | 992 |   |
| Earnings from  unconsolidated investees                                                            |       | (1,977                 | )          | (1,752                         | )          | (3,017 | ) | (5,236 | ) |
| Net income                                                                                         |       | $                      | 5,066      |                           | $          | 4,778 |   | $ | 10,399 |   | $ | 10,449 |   |
| Comprehensive  income, net of taxes:                                                               |       |                   |       |                           |       |   |   |   |   |
| Net income                                                                                         |       | $                      | 5,066      |                           | $          | 4,778 |   | $ | 10,399 |   | $ | 10,449 |   |
| Unrealized gain  (loss) on hedging transactions, net of taxes                                      |       | 273                    |       | (262                           | )          | 825 |   | (531 | ) |
| Comprehensive  income                                                                              |       | $                      | 5,339      |                           | $          | 4,516 |   | $ | 11,224 |   | $ | 9,918 |   |
| Earnings per  common share:                                                                        |       |                   |       |                           |       |   |   |   |   |
| Basic                                                                                              |       | $                      | 0.10       |                           | $          | 0.09 |   | $ | 0.21 |   | $ | 0.21 |   |
| Diluted                                                                                            |       | $                      | 0.10       |                           | $          | 0.09 |   | $ | 0.21 |   | $ | 0.20 |   |
| Weighted average  number of shares of common stock and common stock equivalents:                   |       |                   |       |                           |       |   |   |   |   |
| Basic                                                                                              |       | 49,758                 |       | 50,462                         |       | 49,684 |   | 50,210 |   |
| Diluted                                                                                            |       | 50,232                 |       | 51,609                         |       | 50,107 |   | 51,353 |   |

 

*See accompanying notes.*

4

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

| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                      | ** ** | **2007** | ** ** |
| **Operating activities:**                                                          | ** ** | ** **                                    |       | ** ** |   |
| Net income                                                                         |       | $                                             | 10,399     |   | $ | 10,449 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |                                          |       |   |   |
| Provision for doubtful  accounts                                                   |       | 1,593                                         |       | 2,334 |   |
| Non-cash share-based  compensation                                                 |       | 1,308                                         |       | 1,845 |   |
| Depreciation and  amortization                                                     |       | 44,393                                        |       | 43,993 |   |
| Amortization of deferred  financing costs                                          |       | 794                                           |       | 795 |   |
| Adjustment of swaps to  fair value                                                 |       | (494                                          | )          | 1,318 |   |
| Distributions less than  equity in undistributed income of investees               |       | (188                                          | )          | (469 | ) |
| Deferred income taxes                                                              |       | 6,552                                         |       | 5,361 |   |
| Excess tax benefit from  share-based payment arrangements                          |       | —                                        |       | (567 | ) |
| Loss (gain) on sale of  assets                                                     |       | 472                                           |       | (531 | ) |
| Changes in operating assets and liabilities:                                       |       |                                          |       |   |   |
| Accounts receivable                                                                |       | (6,903                                        | )          | (7,861 | ) |
| Prepaid expenses and  other current assets                                         |       | (1,312                                        | )          | (1,856 | ) |
| Other receivables                                                                  |       | (2,091                                        | )          | 264 |   |
| Other assets                                                                       |       | (848                                          | )          | (945 | ) |
| Accounts payable                                                                   |       | (8,915                                        | )          | (3,470 | ) |
| Accrued compensation and  related expenses                                         |       | 1,866                                         |       | (3,901 | ) |
| Accrued interest payable                                                           |       | 128                                           |       | 99 |   |
| Income taxes payable                                                               |       | (11                                           | )          | (637 | ) |
| Other accrued liabilities                                                          |       | 1,934                                         |       | (3,389 | ) |
| Minority interests and  other liabilities                                          |       | (259                                          | )          | 989 |   |
| Net cash provided  by operating activities                                         |       | 48,418                                        |       | 43,821 |   |
| **Investing activities:**                                                          | ** ** | ** **                                    |       | ** ** |   |
| Equipment  purchases                                                               |       | (43,035                                       | )          | (34,935 | ) |
| Decrease in  deposits on equipment                                                 |       | 10,388                                        |       | 9,814 |   |
| Proceeds from sale  of assets                                                      |       | 2,322                                         |       | 1,978 |   |
| Net cash used in  investing activities                                             |       | (30,325                                       | )          | (23,143 | ) |
| **Financing activities:**                                                          | ** ** | ** **                                    |       | ** ** |   |
| Principal payments  on equipment debt                                              |       | (1,934                                        | )          | (1,550 | ) |
| Proceeds from  equipment debt                                                      |       | —                                        |       | 138 |   |
| Principal payments  on term loan facility                                          |       | (2,675                                        | )          | (600 | ) |
| Principal payments  on revolving loan facility                                     |       | (28,825                                       | )          | (7,000 | ) |
| Proceeds from  revolving loan facility                                             |       | 13,500                                        |       | 7,000 |   |
| Payments of debt  issuance costs                                                   |       | (186                                          | )          | (185 | ) |
| Proceeds from  exercise of employee stock options                                  |       | 1,029                                         |       | 1,019 |   |
| Excess tax benefit  from share-based payment arrangements                          |       | —                                        |       | 567 |   |
| Net cash used in  financing activities                                             |       | (19,091                                       | )          | (611 | ) |
| Net (decrease)  increase in cash and cash equivalents                              |       | (998                                          | )          | 20,067 |   |
| Cash and cash  equivalents, beginning of period                                    |       | 13,421                                        |       | 16,440 |   |
| Cash and cash  equivalents, end of period                                          |       | $                                             | 12,423     |   | $ | 36,507 |   |
| **Supplemental disclosure of cash flow  information:**                             | ** ** | ** **                                    |       | ** ** |   |
| Interest paid                                                                      |       | $                                             | 19,676     |   | $ | 18,794 |   |
| Income taxes paid,  net of refunds                                                 |       | 767                                           |       | 2,113 |   |
| **Supplemental disclosure of non-cash investing  and financing activities:**       | ** ** | ** **                                    |       | ** ** |   |
| Net book value of  assets exchanged                                                |       | $                                             | 5,439      |   | $ | 1,016 |   |
| Capital lease  obligations assumed for the purchase of equipment debt              |       | 1,839                                         |       | 3,518 |   |
| Equipment debt  transferred to unconsolidated investee                             |       | (2,772                                        | )          | — |   |
| Comprehensive  income (loss) from hedging transactions, net of taxes               |       | 825                                           |       | (531 | ) |

 

*See accompanying notes.*

5

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**ALLIANCE IMAGING,INC.**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**June 30, 2007**

**(Unaudited)**

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

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

**Basis ofPresentation—**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 quarter andsix-month periods ended June 30, 2007 are not necessarily indicative ofthe results that may be expected for the year ending December 31, 2007. 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 31,2006.

**Principles ofConsolidation—**Theaccompanying unaudited condensed consolidated financial statements of theCompany include the assets, liabilities, revenues and expenses of all majorityowned subsidiaries over which the Company exercises control. Intercompanytransactions have been eliminated. The Company records minority interestexpense related to its consolidated subsidiaries which are not wholly owned.Investments in non-consolidated investees are accounted for under the equitymethod. At June 30, 2006 and 2007, the Company had $2,065 and $713,respectively, in accounts payable related to deposits on equipment.

**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.   Share-BasedCompensation**

The Company adopted Statement of Financial AccountingStandards No. 123(R) (revised December 2004), “Share-BasedPayment” (“SFAS 123(R)”), in the fiscal year beginning January 1, 2006,using the modified prospective application transition method. UnderSFAS 123(R), the Company now records in its consolidated statements ofoperations (i) compensation cost for options granted, modified,repurchased or cancelled on or after January 1, 2006 under the provisionsof SFAS 123(R) and (ii) compensation cost for the unvestedportion of options granted prior to January 1, 2006 over their remainingvesting periods using the amounts previously measured under SFAS 123 forpro forma disclosure purposes.

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

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***Stock Option Plans and Awards***

On November 2, 1999, in connection with a seriesof transactions contemplated by an Agreement and Plan of Merger between ViewerAcquisition Corp and the Company in November 1999, the Company adopted anemployee stock option plan (the “1999 Equity Plan”) pursuant to which optionsand awards with respect to a total of 6,325,000 shares of the Company’s commonstock became available for grant. On May 30, 2007 the Company adopted anamendment to the 1999 Equity Plan which increased the number of sharesavailable to be awarded to 8,025,000 shares. As of June 30, 2007, a totalof 1,957,785 shares are available for grant under the 1999 Equity Plan. Optionsare granted with exercise prices equal to fair value of the Company’s commonstock at the date of grant, except as noted below. All options have 10-yearterms. A portion of the options vest in equal increments over five years and aportion vest after eight years (subject to acceleration if certain financialperformance targets are achieved). The Company settles stock option exerciseswith newly issued shares of common stock.

The Company is using the Black-Scholes optionpricing model to value the compensation expense associated with stock-basedawards. The fair value of each option award is estimated on the date of grantusing the Black-Scholes option pricing model that uses the assumptionsnoted in the table below. In addition, forfeitures are estimated whenrecognizing compensation expense, and the estimate of forfeitures will be adjustedover the requisite service period to the extent that actual forfeitures differ,or are expected to differ, from such estimates. Changes in estimatedforfeitures will be recognized through a cumulative catch-up adjustment in theperiod of change and will also impact the amount of compensation expense to berecognized in future periods. The Company records non-cash share-basedcompensation for stock options granted with exercise prices below the fairvalue of the Company’s common stock at the date of grant and for certain stockoptions subject to amended performance targets under the 1999 Equity Plan, asdiscussed below.

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

| ** **                        | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **   2006   **  | ** ** | **   2007   ** | ** ** |
| Risk free  interest rate          |       |                                          | 4.55       | % |   |   | 4.74 | % |   |
| Expected dividend  yield          |       |                                          | 0.00       | % |   |   | 0.00 | % |   |
| Expected stock  price volatility  |       |                                          | 56.7       | % |   |   | 60.4 | % |   |
| Average expected life  (in years) |       |                                          | 6.69       |   |   |   | 6.61 |   |   |

 

There were no stock options granted during the secondquarters ended June 30, 2006 or 2007.

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

In November 2000, the Company granted stockoptions to certain employees at exercise prices below the fair value ofthe Company’s common stock, of which 35,000 options were outstanding at June 30,2007. The exercise prices of these options and the fair value of the Company’scommon stock on the grant date were $5.60 and $9.52 per share, respectively.

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

7

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agreements. On June 20,2001, the Company’s compensation committee authorized the Company to amend theoption agreements under its 1999 Equity Plan to reduce the performance targetsfor 1,899,600 performance options out of the 2,284,222 performance optionsoutstanding. On May 18, 2004, the Company’s compensation committeeauthorized the Company to make a second amendment to the option agreementsunder its 1999 Equity Plan to further reduce the performance targets for all ofthe 1,914,500 performance options outstanding. As a result of theamendment, if the Company achieves the reduced performance targets but does notachieve the original performance targets, and an option holder terminatesemployment prior to the eighth anniversary of the option grant date, theCompany would be required to record a non-cash stock-based compensationcharge equal to the amount by which the actual value of the shares subject tothe performance option on the date of the amendment exceeded the option’sexercise price.

Thefollowing table summarizes the Company’s stock option activity:

| ** **                                                            | ** ** | ** **         | ** ** | ** **              | ** ** | **Weighted-**   | ** ** | ** **    | ** ** |
|-----------------------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|-----------------|------------|---------------|------------|
| ** **                                                            | ** ** | ** **         | ** ** | ** **              | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                                                            | ** ** | ** **         | ** ** | **Weighted-**           | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                                                            | ** ** | **Number of** | ** ** | **Average**             | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                                                            | ** ** | **Shares**         | ** ** | **Exercise Price** | ** ** | **Term**        | ** ** | **Value**     | ** ** |
| Outstanding at  December 31, 2006                                |       | 4,094,325          |       |                    | $          | 5.93            |       |          |       |   |   |   |   |   |   |   |
| Granted                                                               |       | 655,500            |       |                    | 7.28       |            |       |          |       |   |   |   |   |   |   |
| Exercised                                                             |       | (321,180           | )          |                    | 3.17       |            |       |          |       |   |   |   |   |   |   |
| Canceled                                                              |       | (483,035           | )          |                    | 5.92       |            |       |          |       |   |   |   |   |   |   |
| Outstanding at  June 30, 2007                                    |       | 3,945,610          |       |                    | $          | 6.38            |       |          |       | 7.45 |   |   |   | $ | 13,124 |   |   |
| Vested and  expected to vest in the future at June 30, 2007 |       | 3,202,040          |       |                    | $          | 6.31            |       |          |       | 7.13 |   |   |   | $ | 10,947 |   |   |
| Exercisable at  June 30, 2007                                    |       | 1,413,128          |       |                    | $          | 5.95            |       |          |       | 5.75 |   |   |   | $ | 5,296 |   |   |

 

The weighted average grant-date fair value of optionsgranted during the six months ended June 30, 2006 and 2007 was $2.58 pershare and $4.57 per share, respectively. The total intrinsic value of optionsexercised during the quarters ended June 30, 2006 and 2007 was $298 and$820, respectively. The total intrinsic value of options exercised during thesix months ended June 30, 2006 and 2007 was $389 and $1,488, respectively.The total cash received from employees as a result of stock option exerciseswas $759 and $463 for the quarters ended June 30, 2006 and 2007,respectively. The total cash received from employees as a result of stockoption exercises was $1,029 and $1,019 for the six months ended June 30,2006 and 2007, respectively.

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

| ** **                          | ** ** | ** ** | ** ** | **Weighted**        | ** ** |
|-------------------------------------|------------|------------|------------|---------------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Average**         | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **                          | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Unvested at  December 31, 2006 |       | 2,830,441  |       |                | $          | 3.54 |   |   |
| Granted                             |       | 655,500    |       |                | 4.57       |   |   |
| Vested                              |       | (547,309   | )          |                | 3.63       |   |   |
| Canceled                            |       | (406,150   | )          |                | 3.26       |   |   |
| Unvested at  June 30, 2007     |       | 2,532,482  |       |                | $          | 3.79 |   |   |

 

At June 30, 2007, thetotal unrecognized fair value compensation cost related to unvested stock optionsgranted to both employees and non-employees was $5,383, which is expected to berecognized over a remaining weighted-average period of 3.39 years. Thevaluation model applied in this calculation utilizes highly subjectiveassumptions that could potentially change over time, including the expectedforfeiture 

8

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rate andperformance targets. Therefore the amount of unrecognized compensation expensenoted above does not necessarily represent the value that will ultimately berealized by the Company in the statements of operations. The total fair valueof shares vested during the quarter and six months ended June 30, 2006 was$167, and $1,024, respectively. The total fair value of shares vested duringthe quarter and six months ended June 30, 2007 was $45, and $1,986,respectively.

***Restricted Stock Awards***

The 1999 Equity Plan, as amended and restated, permitsthe award of restricted stock, restricted stock units, stock bonus awards andperformance-based awards. During 2007, the Company granted 625,000 restrictedstock awards (“award”) to certain employees of the Company, with an effectivegrant date of January 1, 2007. These awards cliff vest after three years,provided that the employee remains continuously employed through the issuancedate. For the quarter and six months ended June 30, 2007 the Companyrecorded non-cash share-based compensation expense related to these grants of$252 and $498, respectively.

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

| ** **                          | ** ** | ** ** | ** ** | **Weighted**        | ** ** |
|-------------------------------------|------------|------------|------------|---------------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Average**         | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **                          | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Unvested at  December 31, 2006 |       | —     |       |                |       |   |   |
| Granted                             |       | 625,000    |       |                | $          | 6.65 |   |   |
| Vested                              |       | —     |       |                |       |   |   |
| Canceled                            |       | —     |       |                |       |   |   |
| Unvested at  June 30, 2007     |       | 625,000    |       |                | $          | 6.65 |   |   |

 

At June 30, 2007, thetotal unrecognized fair value compensation cost related to restricted stockawards granted to employees was $2,533, which is expected to be recognized overa remaining weighted-average period of 2.51 years. The valuation model appliedin this calculation utilizes highly subjective assumptions that couldpotentially change over time, including the expected forfeiture rate. Thereforethe amount of unrecognized compensation expense noted above does notnecessarily represent the value that will ultimately be realized by the Companyin the statements of operations.

***Stock Bonus Award***   

During 2006 and 2007, the Company granted stock bonusawards (“award”) to certain employees of the Company. On the issuance date, theCompany shall issue a number of shares of the Company’s common stock (“shares”),equal to the bonus award divided by the fair market value of the shares at thattime, provided that the employee remains continuously employed through theissuance date. For the quarter and six months ended June 30, 2006, theCompany recorded non-cash share based compensation expense related to thesegrants of $125 and $250, respectively. For the quarter and six months ended June 30,2007 the Company recorded non-cash share based compensation expense related tothese grants of $167 and $333, respectively.

At June 30, 2007, thetotal unrecognized fair value compensation cost related to the stock bonusawards granted to employees was $917, which is expected to be recognized over aremaining weighted-average period of 1.69 years. The valuation model applied inthis calculation utilizes highly subjective assumptions that could potentiallychange over time, including the expected forfeiture rate. Therefore the amountof unrecognized compensation expense noted above does not necessarily representthe value that will ultimately be realized by the Company in the statements ofoperations.

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**3.   RecentAccounting Pronouncements**

**Uncertainty in Income Taxes****—In July 2006,the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes,” (“FIN 48”), an interpretation of FASB Statement No. 109, “Accountingfor Income Taxes,” (“FASB 109”). FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB 109. This Interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.FIN 48 also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure, and transition. FIN 48 waseffective for fiscal years beginning after December 15, 2006. Thecumulative effect, if any, of applying FIN 48 is to be reported as anadjustment to the opening balance of retained earnings in the year of adoption.The impact of the Company’s reassessment of its tax positions in accordancewith FIN 48 did not have a material effect on the results of operations,financial condition or liquidity. See further discussion of FIN 48 at Note 8.**

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

**Fair Value Option for Financial Assets and Liabilities**—In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities,including an amendment of FASB Statement No. 115” (“SFAS 159”), whichpermits entities to choose to measure many financial instruments and certainother items at fair value. The objective is to improve financial reporting byproviding entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. This Statement is expectedto expand the use of fair value measurement, which is consistent with the Board’slong-term measurement objectives for accounting for financial instruments. SFAS159 is effective for fiscal years beginning after November 15, 2007 andinterim periods within those fiscal years. The Company is currently evaluatingthe provisions of SFAS 159 and the impact on our consolidated financialposition and results of operations. The Company will adopt SFAS 159 for thefiscal year beginning January 1, 2008.

**4.   Goodwilland Intangible Assets**

Changesin the carrying amount of goodwill are as follows:

| Balance at  December 31, 2006       |   | $      | 150,069 |   |
|------------------------------------------|--------|--------|---------|--------|
| Additions to  goodwill during the period |   | — |    |
| Balance at June 30,  2007           |   | $      | 150,069 |   |

 

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Intangibleassets consisted of the following:

| ** **                                     | ** ** | **December 31, 2006** | ** ** | **June 30, 2007** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **Gross Carrying**         | ** ** | **Accumulated**             | ** ** | **Intangible** | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** | **Intangible** | ** ** |
| ** **                                     | ** ** | **Amount**                      | ** ** | **Amortization**            | ** ** | **Assets, net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Assets, net** | ** ** |
| Amortizing intangible  assets:                 |       |                            |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Customer contracts                             |       |                            | $          | 51,063                      |       |   |   | $ | (22,909 | ) |   |   | $ | 28,154 |   |   |   | $ | 51,063 |   |   |   | $ | (24,946 | ) |   |   | $ | 26,117 |   |   |
| Other                                          |       |                            | 7,175      |                        |       |   | (2,726 | ) |   |   | 4,449 |   |   |   | 6,910 |   |   |   | (3,092 | ) |   |   | 3,818 |   |   |
| Total amortizing intangible assets             |       |                            | $          | 58,238                      |       |   |   | $ | (25,635 | ) |   |   | $ | 32,603 |   |   |   | $ | 57,973 |   |   |   | $ | (28,038 | ) |   |   | $ | 29,935 |   |   |
| Intangible assets  not subject to amortization |       |                            |       |                        |       |   |   |   |   |   | $ | 3,179 |   |   |   |   |   |   |   |   |   |   |   | $ | 3,449 |   |   |
| Total other intangible  assets                 |       |                            |       |                        |       |   |   |   |   |   | $ | 35,782 |   |   |   |   |   |   |   |   |   |   |   | $ | 33,384 |   |   |

 

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

Amortization expense for intangible assets subject toamortization was $1,229 and $1,194 for the quarters ended June 30, 2006and 2007, respectively, and $2,473 and $2,404 for the six months ended June 30,2006 and 2007, 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 31,is presented below:

| 2007 |   | $     | 4,680  |   |
|------|--------|-------|--------|--------|
| 2008 |   | 4,467 |   |
| 2009 |   | 4,146 |   |
| 2010 |   | 4,077 |   |
| 2011 |   | 3,935 |   |

 

**5.   Other Accrued Liabilities**

Otheraccrued liabilities consisted of the following:

| ** **                                    | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                    | ** ** | **2006**              | ** ** | **2007**          | ** ** |
| Accrued systems  rental and maintenance costs |       |                  | $          | 2,596             |       |   | $ | 1,504 |   |
| Accrued site  rental fees                     |       |                  | 1,507      |              |       | 1,322 |   |
| Accrued property  and sales taxes payable     |       |                  | 12,055     |              |       | 12,948 |   |
| Accrued  self-insurance expense               |       |                  | 6,915      |              |       | 7,262 |   |
| Other accrued  expenses                       |       |                  | 9,258      |              |       | 5,890 |   |
| Total                                         |       |                  | $          | 32,331            |       |   | $ | 28,926 |   |

 

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**6.   Long-Term Debt and Senior Subordinated CreditFacility**

Long-termdebt consisted of the following:

| ** **                                 | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **2006**              | ** ** | **2007**          | ** ** |
| Term loan  facility                        |       |                  | $          | 367,200           |       |   | $ | 366,600 |   |
| Senior  subordinated notes                 |       |                  | 153,541    |              |       | 153,541 |   |
| Equipment debt                             |       |                  | 8,684      |              |       | 10,790 |   |
| Long-term debt,  including current portion |       |                  | 529,425    |              |       | 530,931 |   |
| Less current  portion                      |       |                  | 2,858      |              |       | 3,042 |   |
| Long-term debt                             |       |                  | $          | 526,567           |       |   | $ | 527,889 |   |

 

**7.**   Derivatives

In 2004, the Company entered into interest rate swapagreements, with notional amounts of $56,813, $46,813 and $48,438 to manage thefuture cash interest payments associated with a portion of the Company’svariable rate bank debt. These agreements are three years in length. Two ofthese agreements matured in the second quarter of 2007. One of these agreementswill mature in the fourth quarter of 2007. As of June 30, 2006 and 2007,the fair value of the Company’s interest rate swap agreements was $3,318 and$408, respectively. Under these arrangements, the Company receives three-monthLondon Interbank Offered Rate (“LIBOR”) and pays a fixed rate of 3.15%, 3.89%and 3.69%, respectively. The net effect is to record interest expense at fixedrates of 5.65%, 6.39% and 6.19%, respectively, as the debt incurs interestbased on three-month LIBOR plus 2.50%. For the quarter and six months ended June 30,2006 the Company received net settlement amounts of $465 and $771, respectively.For the quarter and six months ended June 30, 2007, the Company receivednet settlement amounts of $314 and $1,017, respectively. Changes in the fairvalue of the swap agreements are recorded in interest expense each period, asthese transactions do not qualify for hedge accounting treatment. For thequarter and six months ended June 30, 2006 the Company recognized areduction to interest expense of $52 and $494, respectively, based on thechange in the fair value of these instruments. For the quarter and six months endedJune 30, 2007 the Company recognized interest expense of $647 and $1,318,respectively, based on the change in the fair value of these instruments. TheCompany will continue to record subsequent changes in the fair value of the swapsthrough interest expense.

In the first quarter of 2005, the Company entered intomultiple interest rate collar agreements for its variable rate bank debt. Thetotal underlying notional amount of the debt was $178,000. Under thesearrangements the Company has purchased a cap on the interest rate of 4.00% andhas sold a floor of 2.25%. The Company paid a net purchase price of $1,462for these collars. These agreements are two and three years in length andmature at various dates between January 2007 and January 2008. As of June 30,2006 and 2007, the fair value of the Company’s interest rate collar agreementswas $3,901 and $1,393, respectively. For the quarter and six month period endedJune 30, 2006, the Company received a net settlement amount of $287 and$355, respectively. For the quarter and six month period ended June 30,2007, the Company received a net settlement amount of $468 and $1,096,respectively. The Company has designated these collars as cash flow hedges ofvariable future cash flows associated with its long-term debt. For the quartersended June 30, 2006 and 2007, the Company recognized $273 and ($262), netof tax, respectively, in comprehensive income (loss), based on the change infair value of these instruments. For the six months ended June 30, 2006and 2007, the Company recognized $825, and ($531), net of tax, respectively,based on the change in fair value of these instruments. The Company will recordsubsequent changes in the fair value of the collars through comprehensiveincome (loss) during the period these instruments are designated as hedges.

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The Company accounts for derivative instruments and hedging activitiesin accordance with the provisions of SFAS 133, “Accounting for DerivativeInstruments and Hedging Activities” (“SFAS 133”) and SFAS 138, “Accountingfor Certain Derivative Instruments and Hedging Activities” (“SFAS 138”),an amendment of SFAS 133. On the date the Company enters into a derivativecontract, management may designate the derivative as a hedge of the identifiedexposure. The Company formally documents all relationships between hedginginstruments and hedged items, as well as the risk-management objective andstrategy for undertaking various hedge transactions. In this documentation, theCompany specifically identifies the firm commitment or forecasted transactionthat has been designated as a hedged item and states how the hedging instrumentis expected to hedge the risks related to the hedged item. The Company formallymeasures effectiveness of its hedging relationships, both at the hedgeinception and on an ongoing basis, in accordance with its risk managementpolicy. The Company would discontinue hedge accounting prospectively (i) ifit is determined that the derivative is no longer effective in offsettingchange in the cash flows of a hedged item, (ii) when the derivativeexpires or is sold, terminated or exercised, (iii) because it is probablethat the forecasted transaction will not occur, (iv) because a hedged firmcommitment no longer meets the definition of a firm commitment, or (v) ifmanagement determines that designation of the derivative as a hedge instrumentis no longer appropriate. The Company’s derivatives are recorded on the balancesheet at their fair value. For derivatives accounted for as cash flow hedgesany unrealized gains or losses on fair value are included in comprehensiveincome, net of tax, assuming perfect effectiveness. Any ineffectiveness isrecognized in earnings.

**8.   Income Taxes**

For the quarter and six months ended June 30,2007, the Company recorded a provision for income taxes of $3,241 and $7,193,or 40.4% and 40.8% of the Company’s pretax income, respectively. For thequarter and six months ended June 30, 2006, the Company recorded aprovision for income taxes of $3,556 and $7,207, or 41.2% and 40.9% of theCompany’s pretax income, respectively. The Company’s effective tax rates werehigher than the federal statutory rates primarily as a result of state incometaxes.

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

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

The Company recognizes accrued interest and penaltiesrelated to unrecognized tax benefits in income tax expense. As of January 1,2007, the Company had approximately $176 in accrued interest and penaltieswhich is included as a component of the $1,495 unrecognized tax benefit notedabove. The liability for the payment of interest and penalties did notmaterially change as of June 30, 2007.

Alliance Imaging, Inc.and its subsidiaries are subject to U.S. federal income tax as well as incometax of multiple state tax jurisdictions. The Company is currently open to audit under the statuteof limitations by the Internal Revenue Service for the years ending December 31,2003 through 2006. The Company and its subsidiaries state income tax returnsare open to audit under the statute of limitations for the years 

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ending December 31, 2002 through 2006. TheCompany does not anticipate a significant change to the total amount of unrecognizedtax benefits within the next 12 months.

**9.   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,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2006**                              | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
| Numerator:                                                                                          |       |                                  |       |                                          |       |   |   |   |   |
| Net income                                                                                          |       | $                                     | 5,066      |                                          | $          | 4,778 |   | $ | 10,399 |   | $ | 10,449 |   |
| Denominator:                                                                                        |       |                                  |       |                                          |       |   |   |   |   |
| Denominator for basic earnings per  share—weighted-average shares                              |       | 49,758                                |       | 50,462                                        |       | 49,684 |   | 50,210 |   |
| Effect of  dilutive securities:                                                                     |       |                                  |       |                                          |       |   |   |   |   |
| Employee stock options                                                                              |       | 474                                   |       | 1,147                                         |       | 423 |   | 1,143 |   |
| Denominator for diluted earnings per share—adjusted  weighted-average shares                   |       | 50,232                                |       | 51,609                                        |       | 50,107 |   | 51,353 |   |
| Earnings per  common share:                                                                         |       |                                  |       |                                          |       |   |   |   |   |
| Basic                                                                                               |       | $                                     | 0.10       |                                          | $          | 0.09 |   | $ | 0.21 |   | $ | 0.21 |   |
| Diluted                                                                                             |       | $                                     | 0.10       |                                          | $          | 0.09 |   | $ | 0.21 |   | $ | 0.20 |   |
| Stock options  excluded from the computation of diluted per share amounts:                          |       |                                  |       |                                          |       |   |   |   |   |
| Weighted-average  shares for which the exercise price exceeds average market price of common  stock |       | 1,141                                 |       | 530                                           |       | 1,182 |   | 587 |   |
| Average exercise price  per share that exceeds average market price of common stock                 |       | $                                     | 11.32      |                                          | $          | 11.79 |   | $ | 11.31 |   | $ | 11.59 |   |

 

**10.   Commitments and Contingencies**

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

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

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proceedings in which theywere made, or threatened to be made, a party as a result of acting as anofficer or director.

It is not possible to determine the maximum potentialamount under these indemnification agreements due to the limited history ofprior indemnification claims and the unique facts and circumstances involved ineach particular agreement. Historically, payments made related to theseindemnifications have been immaterial. At June 30, 2007 the Company hasdetermined that no liability is necessary related to these guarantees andindemnities.

The Company guarantees a portion of a loan on behalfof an unconsolidated investee under an agreement executed prior to 2002. Themaximum potential future payment under this financial guarantee is $51 at June 30,2007. The Company has not recorded an obligation for this guarantee.

On May 5, 2005, Alliance Imaging, Inc. wasserved with a complaint filed in Alameda County Superior Court alleging wageand hour claims on behalf of a putative class of approximately 400 former andcurrent California employees of the Company. On August 19, 2005, theplaintiffs filed an amended complaint, which the Company answered on September 23,2005. In this suit, captioned Linda S. Jones, et al. v. Alliance Imaging, Inc.,et al., the plaintiffs allege violations of California’s wage, meal period, andbreak time laws and regulations. Plaintiffs sought recovery of unspecifiedeconomic damages, statutory penalties, attorneys’ fees, and costs of suit. Onor about March 10, 2006, plaintiffs filed a second amended complaintadding a cause of action for conversion and a plea for punitive damages. TheCompany filed a demurrer seeking to strike the new claim and plea. On July 19,2006, the Company and the Plaintiffs entered into a tentative settlement of theClass Action Complaint pursuant to which the Company agreed to pay $2,500in exchange for dismissal with prejudice of all claims brought on behalf of theputative class under the Class Action Complaint. On September 8,2006, the settlement was preliminarily approved by the court and a conditionalclass was certified for purposes of seeking class approval of the settlement.On October 2, 2006, notice was mailed to the conditional class membersoutlining the terms of the settlement and providing all class members with anopportunity to opt out of the settlement prior to the final approval hearingscheduled for November 27, 2006. Two putative class members opted out ofthe class, and there were no objections submitted. The final approval hearingwas held on November 27, 2006 as scheduled, and the Court granted finalapproval of the settlement. The settlement amount was distributed by the classsettlement administrator on February 16, 2007. On July 24, 2007, theCourt ordered the case dismissed with prejudice pursuant to the Class SettlementAgreement.

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

**11.   Related-Party Transactions**

The Company recorded management fees payable toKohlberg Kravis Roberts & Co (“KKR”) of $163 and $325 for the quarter and six months ended June 30,2006. The Company recorded management fees payable to KKR of $30 and$193 for the quarter and six months ended June 30,2007. As of April 16, 2007 KKR no longer provides financialadvisory services.

On April 16, 2007, funds managed by OaktreeCapital Management, LLC (“Oaktree”) and MTS Health Investors, LLC (“MTS”)purchased approximately 24,501,505 shares of the Company’s common stock from afund managed by an affiliate of KKR. Upon completion of the transaction,Oaktree and MTS owned in the aggregate approximately 49.7% of the outstandingshares of common stock of the Company. The Company does not pay management feesto Oaktree and MTS for their financial advisory services.

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Revenue from managementagreements with unconsolidated equity investees was $4,173 and $4,156 for thequarters ended June 30, 2006 and 2007, respectively, and $8,529 and $8,111for the six months ended June 30, 2006 and 2007, respectively.

**12.   Investments in Unconsolidated Investees**

The Company has direct ownership in fourunconsolidated investees at June 30, 2007. The Company owns between 33.3percent and 50 percent of these investees, expiring at various dates through2023. At June 30, 2007 the Company also has ownership in an unconsolidatedinvestee of Alliance Oncology (“AO”), a consolidated joint venture of theCompany. AO owns 50% of this investee and provides management services under anagreement which expires in 2025. All of these investees are accounted for underthe equity method since the Company does not exercise control over theoperations of these investees.

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

| ** **                    | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|-------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                    | ** ** | **2006**              | ** ** | **2007**          | ** ** |
| Combined Balance Sheet  Data: |       |                  |       |              |       |   |   |
| Current assets                |       |                  | $          | 10,033            |       |   | $ | 11,501 |   |
| Noncurrent assets             |       |                  | 26,182     |              |       | 23,254 |   |
| Current  liabilites           |       |                  | 7,741      |              |       | 7,340 |   |
| Noncurrent liabilites         |       |                  | 11,822     |              |       | 9,730 |   |
|                               |            |                       |            |                   |            |  |  |  |  |

 

| ** **                                      | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                              | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
| Combined  Operating Results:                    |       |                                  |       |                                          |       |   |   |   |   |
| Revenues                                        |       | $                                     | 10,469     |                                          | $          | 9,052 |   | $ | 20,750 |   | $ | 18,209 |   |
| Expenses                                        |       | 7,864                                 |       | 6,970                                         |       | 15,862 |   | 13,148 |   |
| Net income                                      |       | 2,605                                 |       | 2,082                                         |       | 4,888 |   | 5,061 |   |
| Equity in earnings of  unconsolidated investees |       | 1,977                                 |       | 1,752                                         |       | 3,017 |   | 5,236 |   |
|                                                 |            |                                       |            |                                               |            |  |  |  |  |  |  |  |  |

 

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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). We provide imaging and therapeutic servicesprimarily to hospitals and other healthcare providers on a shared and full-timeservice basis. We also provide services through a growing number of fixed-sitesprimarily to hospitals or health systems. Our services normally include the useof our imaging systems, technologists to operate the systems, equipmentmaintenance and upgrades and management of day-to-day shared-service andfixed-site diagnostic imaging operations. We also provide non scan-basedservices, which includes only the use of our imaging systems under a short-termcontract. For the six months ended June 30, 2007, MRI services and PET andPET/CT services generated 60% and 31% of our revenue, respectively. Theremaining revenue was comprised of other modality diagnostic imaging servicesrevenue, primarily computed tomography (CT), and management contract revenue.We had 484 diagnostic imaging systems, including 318 MRI systems and 75 PET orPET/CT systems and served over 1,000 clients in 43 states at June 30,2007. Of these 484 diagnostic imaging systems, 74 were located in fixed-sites,which constitutes systems installed in hospitals or other buildings on hospitalcampuses, including modular buildings, systems installed inside medical groups’offices or medical buildings, and free-standing fixed-sites, which includessystems installed in a medical office building, ambulatory surgical center, orother retail space. Of these 74 fixed-sites, 63 were MRI fixed-sites, fourwere PET or PET/CT fixed-sites and seven were other modality fixed-sites.

Approximately 90% of ourrevenues for the six months ended June 30, 2007 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 on patients on our clients’ behalf, although some pay us a flat fee fora period of time regardless of the number of scans we perform. These paymentsare due to us independent of our clients’ receipt of reimbursement fromthird-party payors. We typically deliver our services for a set number of daysper week through exclusive, long-term contracts with hospitals and otherhealthcare providers. The initial terms of these contracts averageapproximately three years in length for mobile services and approximately fiveto 10 years in length for fixed-site arrangements. These contracts oftencontain automatic renewal provisions and certain contracts have cancellationclauses if the hospital or other healthcare provider purchases their ownsystem. We price our contracts based on the type of system used, the scanvolume, and the number of ancillary services provided. Pricing is also affectedby competitive pressures.

Approximately 10% of ourrevenues for the six months ended June 30, 2007 were generated byproviding services directly to patients from our sites located at or nearhospitals or other healthcare provider facilities, which we refer to as retailrevenue. Our revenue from these sites is generated from direct billings topatients or their third-party payors, including Medicare, which are recordednet of contractual discounts and other arrangements for providing services atdiscounted prices. We typically charge a higher price per scan under retailbilling than we do under wholesale billing.

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

On February 8, 2006, the Deficit Reduction Act of2005 (“DRA”) was signed into law by President George W. Bush. The DRA imposescaps on Medicare payment rates for certain imaging services, including MRI andPET, furnished in physician’s offices and other non-hospital based settings.Under the 

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cap, payments forspecified imaging services cannot exceed the hospital outpatient payment ratesfor those services. This change applies to services furnished on or after January 1,2007. The limitation is applicable to the technical components of the servicesonly, which is the payment we receive for the services for which we billdirectly under the Medicare Physician Fee Schedule. The technical reimbursementunder the Physician Fee Schedule generally allows for higher reimbursement thanunder the hospital outpatient prospective payment system, or HOPPS. Theimplementation of this reimbursement reduction contained in the DRA has had andwill continue to have a significant effect on our financial condition andresults of operations in 2007.

On November 1, 2006, the Centers for Medicare andMedicaid Services, or CMS, issued a final determination of Medicare Part BHOPPS reimbursement rates for PET and PET/CT imaging procedures, effective January 1,2007. For 2007, the national rate for PET scans was reduced from the rate of$1,150 per scan in 2006 to $855 per scan. In addition, for 2007, the nationalrate for PET/CT scans was reduced from the rate of $1,250 per scan in 2006 to$950 per scan.

For full year 2006, we estimate that approximately5.6% of our revenue was billed directly to the Medicare program. If the DRA hadbeen in effect for full year 2006, we estimate the reduction in Medicarerevenue due to the DRA reimbursement rate decrease would have reduced revenueby approximately $9.7 million. Additionally, the PET and PET/CT Medicare HOPPSreduction would have reduced revenue by approximately $2.8 million. Combined,the DRA and PET and PET/CT Medicare HOPPS rate reductions would have negativelyimpacted our 2006 revenue and will negatively impact our full year 2007 revenueby a total of approximately $12.5 million and $14 million,respectively. We expect that the entire 2007 revenue decrease will have adirect, negative affect on earnings.

As a result of the 2007 reductions in Medicarereimbursement rates resulting from the implementation of the DRA and revisedPET and PET/CT reimbursements under HOPPS, the Company may face increased PETand PET/CT wholesale pricing pressure.

In addition, the DRA also codifies the reduction inreimbursement for multiple images on contiguous body parts. The DRA mandatespayment at 100% of the technical component of the higher-priced imagingprocedure and 50% for the technical component of each additional imagingprocedure for multiple images of contiguous body parts within a family of codesperformed in the same session. Initially, CMS announced that it would phase inthis reimbursement reduction over a two-year period, resulting in a 25% reductionfor each additional imaging procedure on contiguous body parts in 2006 and anadditional 25% reduction in 2007. On November 1, 2006, however, CMSannounced that it would not implement the additional 25% reduction in 2007. Theimplementation of this reimbursement reduction did not have a material impacton our consolidated financial position or results of operations for the yearended December 31, 2006 or the first six months of 2007. We continue tobelieve that the implementation of this reimbursement reduction will not have amaterial impact on our consolidated financial position or results of operationsin the future.

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 share-based compensation.

We record minority interest expense and earnings fromunconsolidated investees related to our consolidated and unconsolidatedsubsidiaries, respectively. These subsidiaries primarily provide shared-serviceand fixed-site diagnostic imaging and therapeutic services.

In 2006 and 2007, the growth rate of MRI industry widescan volumes has slowed in part due to weak hospital volumes as reported byseveral investor-owned hospital companies, a growing number of medical 

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groups adding imagingcapacity within their practice setting, the increasing trend of third-partypayors intensifying their utilization management efforts to control MRI scanvolume growth rate and additional patient-related cost-sharing programs. Weexpect that this trend will continue throughout 2007.

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

**Seasonality**

We experience seasonalityin revenues and margins generated for our services. In 2006 and 2007, the firstand second quarters had more scanning days then the third and fourth quarters.Third and fourth quarter revenues are affected by holiday and client andpatient vacation schedules resulting in fewer scans during the period. Thevariability in margins is higher than the variability in revenues due to thefixed nature of our costs.

**Results ofOperations**

The following table shows our consolidated statementsof income as a percentage of revenues for each of the quarters and six monthsended June 30:

| ** **                                                                                         | ** ** | **Quarter Ended  June 30,**                                | ** ** | **Six Months Ended  June 30,**                        | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **     2006     ** | ** ** | **     2007     ** | ** ** | **     2006     ** | ** ** | **     2007     ** | ** ** |
| Revenues                                                                                           |       |                                                                 | 100.0      | %                                                                    |       |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| Costs and expenses:                                                                                |       |                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenues,  excluding depreciation and  amortization                                        |       |                                                                 | 54.2       |                                                                 |       |   | 52.0 |   |   |   | 53.1 |   |   |   | 51.7 |   |   |
| Selling, general  and administrative expenses                                                      |       |                                                                 | 11.8       |                                                                 |       |   | 13.0 |   |   |   | 11.9 |   |   |   | 13.2 |   |   |
| Severance and  related costs                                                                       |       |                                                                 | 0.1        |                                                                 |       |   | 0.2 |   |   |   | 0.2 |   |   |   | 0.1 |   |   |
| Depreciation  expense                                                                              |       |                                                                 | 18.1       |                                                                 |       |   | 18.6 |   |   |   | 18.1 |   |   |   | 18.8 |   |   |
| Amortization  expense                                                                              |       |                                                                 | 1.1        |                                                                 |       |   | 1.1 |   |   |   | 1.1 |   |   |   | 1.1 |   |   |
| Interest expense,  net of interest income                                                          |       |                                                                 | 8.7        |                                                                 |       |   | 9.3 |   |   |   | 8.6 |   |   |   | 9.2 |   |   |
| Other (income)  and expense, net                                                                   |       |                                                                 | (0.2       | )                                                                    |       |   | (0.2 | ) |   |   | 0.2 |   |   |   | (0.2 | ) |   |
| Total costs and expenses                                                                           |       |                                                                 | 93.8       |                                                                 |       |   | 94.0 |   |   |   | 93.2 |   |   |   | 93.9 |   |   |
| Income before  income taxes, minority interest expense and earnings from unconsolidated  investees |       |                                                                 | 6.2        |                                                                 |       |   | 6.0 |   |   |   | 6.8 |   |   |   | 6.1 |   |   |
| Income tax  expense                                                                                |       |                                                                 | 3.1        |                                                                 |       |   | 2.9 |   |   |   | 3.1 |   |   |   | 3.3 |   |   |
| Minority interest  expense                                                                         |       |                                                                 | 0.4        |                                                                 |       |   | 0.4 |   |   |   | 0.5 |   |   |   | 0.5 |   |   |
| Earnings from  unconsolidated investees                                                            |       |                                                                 | (1.7       | )                                                                    |       |   | (1.6 | ) |   |   | (1.3 | ) |   |   | (2.4 | ) |   |
| Net income                                                                                         |       |                                                                 | 4.4        | %                                                                    |       |   | 4.3 | % |   |   | 4.5 | % |   |   | 4.7 | % |   |

 

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The table below providesMRI statistical information for each of the quarters and six months ended June 30:

| ** **                                     | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                              | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
| MRI statistics                                 |       |                                  |       |                                          |       |   |   |   |   |
| Average number of total systems                |       | 323.0                                 |       | 309.1                                         |       | 325.6 |   | 309.8 |   |
| Average number of scan-based systems           |       | 274.1                                 |       | 254.5                                         |       | 276.9 |   | 255.5 |   |
| Scans per system per day (scan-based  systems) |       | 9.38                                  |       | 9.35                                          |       | 9.37 |   | 9.23 |   |
| Total number scan-based MRI scans              |       | 179,869                               |       | 163,979                                       |       | 362,291 |   | 326,779 |   |
| Price per scan                                 |       | $                                     | 361.54     |                                          | $          | 362.28 |   | $ | 360.06 |   | $ | 361.49 |   |
|                                                |            |                                       |            |                                               |            |  |  |  |  |  |  |  |  |

 

Thetable below provides PET and PET/CT statistical information for each of thequarters and six months ended June 30:

| ** **                           | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2006**                              | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
| PET and PET/CT  statistics           |       |                                  |       |                                          |       |   |   |   |   |
| Average number of systems            |       | 69.1                                  |       | 72.3                                          |       | 68.1 |   | 71.1 |   |
| Scans per system per day             |       | 5.89                                  |       | 6.35                                          |       | 5.86 |   | 6.32 |   |
| Total number of PET and PET/CT scans |       | 24,734                                |       | 29,150                                        |       | 49,198 |   | 56,863 |   |
| Price per scan                       |       | $                                     | 1,314      |                                          | $          | 1,200 |   | $ | 1,313 |   | $ | 1,210 |   |
|                                      |            |                                       |            |                                               |            |  |  |  |  |  |  |  |  |

 

Followingare the components of revenue (in millions):

| ** **                          | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **2006**                              | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
| Total MRI revenue                   |       | $                                     | 71.6       |                                          | $          | 66.9 |   | $ | 143.5 |   | $ | 132.5 |   |
| PET and PET/CT  revenue             |       | 32.9                                  |       | 35.2                                          |       | 65.2 |   | 69.4 |   |
| Other modalities  and other revenue |       | 10.8                                  |       | 9.7                                           |       | 21.9 |   | 19.3 |   |
| Total                               |       | $                                     | 115.3      |                                          | $          | 111.8 |   | $ | 230.6 |   | $ | 221.2 |   |

 

| ** **                              | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | **2006**                              | ** ** | **2007**                                      | ** ** | **  2006  ** | ** ** | **  2007  ** | ** ** |
| Total fixed-site  revenue (in millions) |       | $                                     | 18.9       |                                          | $          | 18.6 |   |   | $ | 36.7 |   |   |   | $ | 36.7 |   |   |
|                                         |            |                                       |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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***Quarter Ended June 30, 2007 Compared to QuarterEnded June 30, 2006***

Revenue for the second quarter of 2007 was negativelyimpacted by the Medicare reimbursement reductions related to the DRA and HOPPSreimbursement rate reduction for PET and PET/CT imaging procedures which cameinto effect for services furnished on or after January 1, 2007. The fullyear 2007 revenue impact of the DRA and PET and PET/CT HOPPS reimbursement ratereductions is expected to total approximately $14 million. Revenue was alsonegatively impacted by approximately $1.6 million in the second quarter of 2007over the second quarter of 2006 due to our decision to close 11 unprofitablefixed-sites during 2006.

Revenue decreased $3.5 million, or 3.1%, to $111.8million in the second quarter of 2007 compared to $115.3 million in the secondquarter of 2006 primarily due to decrease in total MRI revenue and decrease inother modalities and other revenue, offset by an increase in PET and PET/CTrevenues. Total MRI revenue decreased $4.7 million in the second quarter of2007, or 6.5%, compared to the second quarter of 2006. Scan-based MRI revenuedecreased $5.6 million in the second quarter of 2007, or 8.6%, to $59.4 millionin the second quarter of 2007 from $65.0 million in the second quarter of 2006.This decrease is primarily a result of an 8.8% decrease in our scan-based MRIscan volume. Scan-based MRI scan volume decreased to 163,979 scans in thesecond quarter of 2007 from 179,869 scans in the second quarter of 2006,primarily due to a decrease in the average number of scan-based systems inservice due to lower client demand. Scan-based systems in service decreased to254.5 systems in the second quarter of 2007 from 274.1 systems in the secondquarter of 2006 to adjust to a decline in MRI scan volumes and to increase theefficiency of our mobile MRI systems. Average scans per system per day alsodecreased by 0.3% to 9.35 in the second quarter of 2007 from 9.38 in the secondquarter of 2006. These decreases were partially offset by a 0.2% increase inthe average price per MRI scan to $362.28 per scan in second quarter of 2007compared to $361.54 per scan in second quarter of 2006 and an increase innon-scan based MRI revenue of $1.0 million in the second quarter of 2007 overthe same period in 2006. Other modalities and other revenue decreased $1.1million, or 11.2%, to $9.7 million in the second quarter of 2007 compared to$10.8 million in the second quarter of 2006 primarily due to a decrease inother fixed-site modality revenue primarily related to the Company’s decisionto close 11 unprofitable fixed-sites in 2006, a decrease in management contractrevenue for our management agreements and a decrease in reimbursement ofexpenses from unconsolidated investees. PET and PET/CT revenue in the secondquarter of 2007 increased $2.3 million, or 7.0%, compared to the second quarterof 2006. Total PET and PET/CT scan volumes increased 17.9% to 29,150 scans inthe second quarter of 2007 from 24,734 scans in the second quarter of 2006,primarily as a result of growth in our core PET business. The average number ofPET and PET/CT systems in service increased to 72.3 systems in the secondquarter of 2007 from 69.1 systems in the second quarter of 2006. Scans persystem per day increased 7.8%, to 6.35 scans per system per day in the secondquarter of 2007 from 5.89 scans per system per day in the second quarter of2006. These PET and PET/CT increases were partially offset by an 8.7% declinein the average price per PET and PET/CT scan, to $1,200 per scan in the secondquarter of 2007 compared to $1,314 per scan in the second quarter of 2006. Thedecline in PET and PET/CT average price per scan is primarily due to the impactof the DRA and HOPPS reimbursement rate reductions which became effective January 1,2007.

We had 318 MRI systems at June 30, 2007 comparedto 335 MRI systems at June 30, 2006. We had 75 PET and PET/CT systemsat June 30, 2007 compared to 74 PET and PET/CT systems at June 30,2006. We operated 74 fixed-sites at June 30, 2007, compared to 72fixed-sites at June 30, 2006.

Cost of revenues, excluding depreciation andamortization, decreased $4.4 million, or 7.1%, to $58.2 million inthe second quarter of 2007 compared to $62.6 million in the second quarterof 2006. During the second quarter of 2006 we recorded a class action settlementof $2.5 million. Medical supplies decreased $0.8 million, or 14.8%, primarilyas a result of a decrease in film costs due to lower MRI scan volume. Medicalsupplies also decreased due to a decrease in radiopharmaceutical, or FDG, costs,which are used as a component of a PET and PET/CT scan, as a result of sourcingdiscounts, partially offset by an 

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increase in FDG costs dueto an increase in the number of PET and PET/CT scans. Outside medical servicesdecreased $0.5 million, or 20.6%, primarily as a result of a decrease inradiologist service costs associated with a decrease in costs incurred atfixed-sites related to our decision to close 11 unprofitable fixed-sites in2006 and lower MRI scan volume. Equipment rental expense decreased $0.3million, or 18.5%, primarily due to a lower number of rental systems in use tosupport current clients as a result of improved system utilization. Fuelexpenses and tractor and transportation expenses decreased $0.4 million, or 16.6%primarily due to improved mobile route efficiency. These decreases werepartially offset by a $0.7 million increase in maintenance and related costs,or 6.4%, primarily due to an increase in the per unit cost for servicecontracts. All other cost of revenues, excluding depreciation and amortization,decreased $0.6 million, or 2.1%. Cost of revenues, as a percentage of revenue,decreased to 52.0% in the second quarter of 2007 from 54.2% in the secondquarter of 2006 as a result of the factors described above.

Selling, general and administrative expenses increased$0.9 million, or 6.8%, to $14.5 million in the second quarter of 2007 comparedto $13.6 million in the second quarter of 2006. Non-cash share-basedcompensation increased $0.3 million in the second quarter of 2007 from thesecond quarter of 2006 due to new equity awards granted during the firstquarter of 2007. Bad debt expense increased $0.7 million, or 80.6%, to $1.5million in the second quarter of 2007 compared to $0.8 million in the secondquarter of 2006. All other selling, general and administrative expensesdecreased $0.1 million, or 0.8%. Selling, general and administrative expensesas a percentage of revenue were 13.0% and 11.8% in the second quarter of 2007and 2006, respectively.

Severance and related costs were $0.2 million in thesecond quarter of 2007 compared to $0.1 million in the second quarter of 2006.

Depreciation expense decreased $0.1 million, or 0.6%,to $20.8 million in the second quarter of 2007 compared to $20.9 million in thesecond quarter of 2006.

Amortization expense was $1.2 million in both thesecond quarter of 2007 and the second quarter of 2006.

Interest expense, net, increased $0.4 million, or3.7%, to $10.4 million in the second quarter of 2007 compared to $10.0 millionin the second quarter of 2006. Variability in the fair value of our interestrate swaps executed in 2004 accounted for $0.7 million of this increase ininterest expense. This increase in interest expense was also the result ofhigher average interest rates in the second quarter of 2007 on our variablerate term loans. The increase in interest rates on our variable rate term loanswas partially offset by existing interest rate swap and collar agreements.These increases were further offset by a decrease in interest expense due to loweraverage debt balances during 2007 as a result of the repayment of debt in thesecond half of 2006.

Income tax expense was $3.2 million and$3.6 million in the second quarter of 2007 and 2006, respectively,resulting in effective tax rates of 40.4% and 41.2% in the second quarter of2007 and 2006, respectively. Our effective tax rates were higher than thefederal statutory rates principally as a result of state income taxes.

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

Earnings from unconsolidated investees decreased by$0.2 million, or 11.4%, to $1.8 million in the second quarter of 2007 comparedto $2.0 million in the second quarter of 2006.

Our net income was$4.8 million, or $0.09 per share on a diluted basis, in the second quarterof 2007 and $5.1 million, or $0.10 per share on a diluted basis in 2006.

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***Six Months Ended June 30, 2007 Compared to June 30,2006***

Revenue for the first six months of 2007 wasnegatively impacted by the Medicare reimbursement reductions related to the DRAand HOPPS reimbursement rate reduction for PET and PET/CT imaging procedureswhich came into effect for services furnished on or after January 1, 2007.The full year 2007 revenue impact of the DRA and PET and PET/CT HOPPSreimbursement rate reductions is expected to total approximately $14 million.Revenue was also negatively impacted by approximately $3.5 million in the firstsix months of 2007 over the first six months of 2006 due to our decision toclose 11 unprofitable fixed-sites during 2006.

Revenue decreased $9.4 million, or 4.1%, to $221.2million in the first six months of 2007 compared to $230.6 million in the firstsix months of 2006 primarily due to a decrease in MRI revenue and othermodalities and other revenue, offset by an increase in PET and PET/CT revenues.MRI revenue decreased $11.0 million in the first six months of 2007, or 7.7%,compared to the first six months of 2006. Scan-based MRI revenue decreased$12.3 million in the first six months of 2007, or 9.4%, compared to the firstsix months of 2006, from $130.4 million in the first six months of 2006 to$118.1 million in the first six months of 2007. Scan-based MRI scan volumedecreased to 326,779 scans in the first six months of 2007 from 362,291 scansin the first six months of 2006, primarily due to a decrease in the averagenumber of scan-based systems in service due to lower client demand. Scan-basedsystems in service decreased to 255.5 systems in the first six months of 2007from 276.9 systems in the first six months of 2006 to adjust to a decline in MRIscan volumes and to increase the efficiency of our mobile MRI systems. Averagescans per system per day also decreased by 1.5% to 9.23 in the first six monthsof 2007 from 9.37 in the first six months of 2006. These decreases werepartially offset by a 0.4% increase in the average price per MRI scan to $361.49per scan in the first six months of 2007 compared to $360.06 per scan in thefirst six months of 2006 and an increase in non-scan based revenue of $1.3million in the six months of 2007 over the same period in 2006. Othermodalities and other revenue decreased $2.6 million, or 11.7%, to $19.3 millionin the first six months of 2007 compared to $21.9 million in the first sixmonths of 2006 primarily due to a decrease in other fixed-site modality revenueprimarily related to the closure of 11 unprofitable fixed sites during 2006, adecrease in management contract revenue for our management agreements and adecrease in reimbursement of expenses from unconsolidated investees. PET andPET/CT revenue in the first six months of 2007 increased $4.2 million, or 6.3%,compared to the first six months of 2006. Total PET and PET/CT scan volumesincreased 15.6% to 56,863 scans in the first six months of 2007 from 49,198scans in the first six months of 2006, primarily as a result of growth in ourcore PET business. The average number of PET and PET/CT systems in serviceincreased to 71.1 systems in the first six months of 2007 from 68.1 systems inthe first six months of 2006. Scans per system per day also increased 7.8%, to6.32 scans per system per day in the first six months of 2007 from 5.86 scansper system per day in the first six months of 2006. These PET and PET/CTincreases were partially offset by a 7.8% decline in the average price per PETand PET/CT scan, to $1,210 per scan in the first six months of 2007 compared to$1,313 per scan in the first six months of 2006. The decline in PET and PET/CTaverage price per scan is primarily due to the impact of the DRA and HOPPSreimbursement rate reductions which became effective January 1, 2007.

We had 318 MRI systems at June 30, 2007 comparedto 335 MRI systems at June 30, 2006. We had 75 PET and PET/CT systemsat June 30, 2007 compared to 74 PET and PET/CT systems at June 30,2006. We operated 74 fixed-sites at June 30, 2007, compared to 72fixed-sites at June 30, 2006.

Cost of revenues, excluding depreciation andamortization, decreased $8.2 million, or 6.6%, to $114.3 million inthe first six months of 2007 compared to $122.5 million in the first sixmonths of 2006. During the first six months of 2006, we recorded a class actionsettlement of $2.5 million. Medical supplies decreased $1.3 million, or 11.5%,primarily as a result of a decrease in film costs related to lower MRI scanvolume. Medical supplies also decreased due to a decrease in FDG costs, whichare used as a component of a PET and PET/CT scan as a result of sourcingdiscounts, partially offset by an increase in FDG costs due to an increase inthe number of PET and PET/CT scans. Compensation and related employee 

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expenses decreased $1.2million, or 2.2%, primarily as a result of labor efficiencies and a loweraverage headcount of MRI technologists as a result of a decrease in the averagenumber of MRI systems in use. Outside medical services decreased $1.1 million,or 23.7%, primarily as a result of a decrease in radiologist service costsassociated with a decrease in costs incurred at fixed-sites related to ourdecision to close 11 unprofitable fixed-sites in 2006 and lower MRI scanvolume, and a decrease in temporary staffing needs. Equipment rental expensedecreased $0.9 million, or 30.0%, primarily due to a lower number of rentalsystems in use to support current clients as a result of improved system utilization.Fuel expenses decreased $0.5 million, or 14.1%, primarily due to improved mobileroute efficiency. Management contract expenses decreased $0.4 million, or 5.6%,primarily as a result of a decrease in expenses incurred on behalf ofunconsolidated investees. Tractor and transportation expenses decreased $0.3million, or 19.5%, primarily due to decrease in the number of tractors onoperating leases. Site fee expense decreased $0.3 million, or 13.6%, primarilydue to a decrease in the number of retail fixed-sites in operation. Thesedecreases were partially offset by a $1.6 million increase in maintenance andrelated costs, or 7.3%, primarily due to an increase in the per unit cost forservice contracts. All other cost of revenues, excluding depreciation andamortization, decreased $1.3 million, or 15.8%. Cost of revenues, as apercentage of revenue, decreased to 51.7% in the first six months of 2007 from53.1% in the first six months of 2006 as a result of the factors describedabove.

Selling, general and administrative expenses increased$1.9 million, or 7.0%, to $29.3 million in the first six months of 2007 compared to $27.4 million in the first six months of 2006. Professionalservices increased $0.9 million, or 28.7%, due to an increase in legal costsand consulting services. Non-cash share-basedcompensation increased $0.5 million in the first six months of 2007 from thefirst six months of 2006 due to new equity awards granted during the firstquarter of 2007. All other selling, general and administrative expensesincreased $0.5 million, or 2.2%. Selling, general and administrative expensesas a percentage of revenue were 13.2% and 11.9% in the first six months of 2007and 2006, respectively.

We recorded severance and related costs of $0.2million in the first six months of 2007 and $0.6 million in the first sixmonths of 2006.

Depreciation expense decreased$0.3 million, or 0.8%, to $41.6 million in the first six months of 2007compared to $41.9 million in the first six months of 2006.

Amortization expense was $2.4 million in the first sixmonths of 2007 and $2.5 million in the first six months of 2006.

Interest expense, net, increased$0.7 million, or 3.4%, to $20.5 million in the first six months of 2007compared to $19.8 million in the first six months of 2006. Variability in the fair value of our interest rate swapsexecuted in 2004 accounted for $1.8 million of the increase in interestexpense. The increase in interest expense was also the result of higher averageinterest rates in the first six months of 2007 on our variable rate term loans.The increase in interest rates on our variable rate term loans was partiallyoffset by existing interest rate swap and collar agreements. These increaseswere further offset by a decrease in interest expense due to lower average debtbalances during 2007 as a result of the repayment of debt in the second half of2006.

Income tax expense was$7.2 million in the first six months of 2007 and 2006, resulting ineffective tax rates of 40.8% and 40.9% in the first six months of 2007 and2006, respectively. Our effective tax rates were higher than statutory ratesfor the first six months of 2007 and 2006 primarily as a result of state incometaxes.

Minority interest expense was $1.0 million inboth the first six months of 2007 and 2006.

Earnings from unconsolidated investees increased by$2.2 million, or 73.6%, to $5.2 million in the first six months of 2007compared to $3.0 million in the first six months of 2006, primarily due to a $2.0 million 

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gainon sale from a sale/leaseback transaction in one of the Company’sunconsolidated investees as well as an increase in earnings ofunconsolidated investees.

Our net income was $10.4million, or $0.20 per share on a diluted basis, in the first six months of 2007compared to $10.4 million, or $0.21 per share on a diluted basis, in thefirst six months of 2006.

**Liquidity andCapital Resources**

Our primary source of liquidity is cash provided byoperating activities. We generated $43.8 million and $48.4 million of cash flowfrom operating activities in the first six months of 2007 and 2006,respectively. Our ability to generate cash flow is affected by numerousfactors, including demand for MRI, PET and other diagnostic imaging services.Our ability to generate cash flow from operating activities is also dependentupon the collections of our accounts receivable. The provision for doubtfulaccounts increased by $0.7 million in the first six months of 2007 compared tothe first six months of 2006. Our number of days of revenue outstanding for ouraccounts receivable was 51 days as of June 30, 2007, which we believe isamong the more favorable in the healthcare service industry. In addition, as ofJune 30, 2007, we had $64.1 million of available borrowings under ourrevolving line of credit.

Our primary use ofcapital resources is to fund capital expenditures. We used cash of $23.1million and $30.3 million for investing activities in the first six monthsended June 30, 2007 and 2006, respectively. We incur capital expendituresfor the purposes of:

·       purchasingnew systems;

·       replacingless advanced systems with new systems;

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

Capital expenditures totaled $34.9 million and $43.0 millionin the first six months ended June 30, 2007 and 2006, respectively. Duringthe first six months of 2007, we purchased 10 MRI systems, eight PET/CT systemsand three CT systems. We traded-in or sold a total of 33 MRI, PET, or CTsystems for the six months ended June 30, 2007. In the second quarter of2007 we opened one radiation therapy center and financed the equipment througha capital lease. Our decision to purchase or lease a new system is typicallypredicated on obtaining new or extending existing client contracts, which serveas the basis of demand for the new system. We expect to purchase additionalsystems in 2007 and finance substantially all of these purchases with ouravailable cash, cash from operating activities, our revolving line of credit,and equipment leases. Based upon the client demand described above, whichdictates the type of equipment purchased, we expect capital expenditures tototal approximately $75 to $85 million in 2007.

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

**Recent AccountingPronouncements**

In July 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes,” (“FIN 48”), an interpretation of FASB Statement No. 109, “Accountingfor Income Taxes,” (“FASB 109”). FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB 109. This Interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.FIN 48 also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure, and transition. FIN 48 is

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effective for fiscal years beginning after December 15, 2006. Thecumulative effect, if any, of applying FIN 48 is to be reported as anadjustment to the opening balance of retained earnings in the year of adoption.The impact of our reassessment of tax positions in accordance with FIN 48 didnot have a material effect on our results of operations, financial condition orliquidity.

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

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

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

Certain statementscontained in Management’s Discussion and Analysis of Financial Condition 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 rates or methods of thirdparty reimbursements for diagnostic imaging services, changes in the healthcareregulatory environment, our ability to keep pace with technologicaldevelopments within our industry, and other risks and uncertainties, includingthose enumerated and described under “Risk Factors” in our Form 10-K/A,as filed with the Securities and Exchange Commission, for the fiscal year endedDecember 31, 2006. The foregoing should not be construed as an 

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exhaustivelist of all factors which could cause actual results to differ materially fromthose expressed in forward-looking statements made by us.

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

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

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

During 2004 we entered into swap agreements which havenotional amounts of $56.8 million, $46.8 million and $48.4 million at June 30,2007. Under the terms of these agreements, we receive three-month LIBOR and paya fixed rate of 3.15%, 3.89%, and 3.69%, respectively. The net effect is torecord interest expense at fixed rates of 5.65%, 6.39% and 6.19% respectively,as the debt incurs interest based on three-month LIBOR plus 2.50%. For thequarter and six months ended June 30, 2007, we received a net settlement amount of $0.3 million and $1.0 million,respectively. For the quarter ended and six months ended June 30, 2006 wereceived a net settlement amount of $0.5 million and $0.8 million,respectively. Two of the swap agreements matured during the secondquarter of 2007 and one of the swap agreements will mature during the fourthquarter of 2007.

During 2005 we entered into multiple interest ratecollar agreements which have a notional amount of $178.0 million. Under the termsof these agreements, we have purchased a cap on the interest rate of 4.00% andhave sold a floor of 2.25%. For the quarter and six months ended June 30,2007, we received a net settlement amount of $0.5 million and $1.1 million,respectively, on these collar agreements. For the quarter and six months ended June 30,2006, we received a net settlement amount of $0.3 million and $0.4 million,respectively, on these collar agreements. The collar agreements mature atvarious dates between January 2007 and January 2008.

The collar agreements have been designated as cashflow hedges of variable future cash flows associated with our long term debt.In accordance with SFAS 133, “Accounting for Derivative Instruments and HedgingActivities,” the collars are recorded at fair value. On a quarterly basis, thefair value of the collars will be determined based on quoted market prices and,assuming perfect effectiveness, the difference between the fair value and thebook value of the collars will be recognized in comprehensive income, acomponent of shareholders’ equity. Any ineffectiveness of the collars isrequired to be recognized in earnings.

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

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

**ITEM 4.**                CONTROLSAND PROCEDURES

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

As required by SEC Rule 13a-15(b), wecarried out an evaluation, under the supervision and with the participation ofour 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 have been no changes in the Company’s internalcontrol over financial reporting occurring during the fiscal quarter covered bythis report which have materially affected or are reasonably likely tomaterially affect the Company’s internal control over financial reporting.

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**PART II—OTHERINFORMATION**

**ITEM 1.**                LEGALPROCEEDINGS

On May 5, 2005, Alliance Imaging, Inc. wasserved with a complaint filed in Alameda County Superior Court alleging wageand hour claims on behalf of a putative class of approximately 400 former andcurrent California employees of the Company. On August 19, 2005, theplaintiffs filed an amended complaint, which the Company answered on September 23,2005. In this suit, captioned Linda S. Jones, et al. v. Alliance Imaging, Inc.,et al., the plaintiffs allege violations of California’s wage, meal period, andbreak time laws and regulations. Plaintiffs sought recovery of unspecifiedeconomic damages, statutory penalties, attorneys’ fees, and costs of suit. Onor about March 10, 2006, plaintiffs filed a second amended complaintadding a cause of action for conversion and a plea for punitive damages. TheCompany filed a demurrer seeking to strike the new claim and plea. On July 19,2006, the Company and the Plaintiffs entered into a tentative settlement of theClass Action Complaint pursuant to which the Company agreed to pay $2,500in exchange for dismissal with prejudice of all claims brought on behalf of theputative class under the Class Action Complaint. On September 8,2006, the settlement was preliminarily approved by the court and a conditionalclass was certified for purposes of seeking class approval of the settlement.On October 2, 2006, notice was mailed to the conditional class membersoutlining the terms of the settlement and providing all class members with anopportunity to opt out of the settlement prior to the final approval hearingscheduled for November 27, 2006. Two putative class members opted out ofthe class, and there were no objections submitted. The final approval hearingwas held on November 27, 2006 as scheduled, and the Court granted finalapproval of the settlement. The settlement amount was distributed by the classsettlement administrator on February 16, 2007. On July 24, 2007, theCourt ordered the case dismissed with prejudice pursuant to the Class SettlementAgreement.

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

**ITEM 1A.**        RISKFACTORS

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

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

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

Thesetwo risk factors are amended and superseded by the risk factors set forthbelow. The other risk factors disclosed in our Form 10-K/A shallremain in full force and affect.

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

We depend upon our management team to a substantialextent. In particular, we depend upon Mr. Viviano, our Chief ExecutiveOfficer and the Chairman of our Board of Directors for his skills, experienceand knowledge of our company and industry contacts. Effective April 16,2007, Mr. Viviano entered into an amendment to his employment agreementwhich extends its term to April 16, 2010, subject to automatic extensionson a quarterly basis after the initial term has been completed. Mr. Vivianocan prevent a quarterly extension by giving notice of a desire to modify orterminate the agreement at least thirty days prior to the quarterly extensiondate. In addition, we do not have key employee insurance policies covering anyof our management team. The loss of Mr. Viviano or other members of our 

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management team could havea material adverse effect on our business, results of operations or financialcondition.

As we grow, we will increasinglyrequire field managers and sales persons with experience in our industry tooperate our diagnostic equipment. It is impossible to predict the availabilityof qualified field managers and sales persons or the compensation levels thatwill be required to hire them. The loss of the services of any member of oursenior management or our inability to hire qualified field managers and salespersons at economically reasonable compensation levels could adversely affectour ability to operate and grow our business.

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

On April 16, 2007, OCM Principal OpportunitiesFund IV, L.P., MTS Health Investors II, L.P., and affiliated funds, which werefer to as the Oaktree Parties, acquired approximately 49.7% of ouroutstanding shares of common stock from a fund controlled by an affiliate ofKohlberg Kravis Roberts & Co., L.P. Following the acquisition, theOaktree Parties beneficially own approximately 49.7% of our outstanding sharesof common stock. In connection with the acquisition, the Oaktree Partiesobtained the right to designate three of the seven members of our board ofdirectors, two of the four members of our Compensation Committee (including thechairperson), two of the four members of our Nominating and CorporateGovernance Committee, and one of the three members of our Finance Committee.

As a result of thearrangements described above, the Oaktree Parties have the ability to exertsignificant influence on our management and operations, as well as mattersrequiring stockholder approval, including approving mergers, consolidations orsales of all or substantially all of our assets. This concentration ofownership may also delay or prevent a change of control of our company orreduce the price investors might be willing to pay for our common stock. Theinterests of the Oaktree Parties may conflict with the interests of otherholders of our common stock.

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

Not applicable.

**ITEM 3.**                DEFAULTSUPON SENIOR SECURITIES

Not applicable.

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

(a)          The Annual Meeting ofStockholders of Alliance Imaging, Inc. was held on May 30, 2007.

(b)         The following nomineeswere elected as Class III Directors for a three-year term expiring at the2010 Annual Meeting: Edward L. Samek and Stephen A. Kaplan. The Class IIDirectors, Anthony B. Helfet and Michael P. Harmon, whose terms expire at the2009 Annual Meeting, and the Class I Directors, Neil F. Dimick, Paul S.Viviano and Curtis S. Lane, whose terms expire at the 2008 Annual Meeting,continue to serve on our Board of Directors.

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(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 registered  public accounting firm for the fiscal year ending December 31, 2007 |       | 42,852,627          |       | 846,142     |       | 2,412       |     | — |   |
| Approval of the  amended and restated 1999 Equity Plan                                                                                                        |       | 34,848,778          |       | 4,885,395   |       | 546,589     |     | 3,420,419 |   |

 

**Election of Directors**

| **Director**      | ** ** | ** ** | ** ** | **Votes Received** | ** ** | **Votes Withheld** | ** ** |
|-------------------|------------|------------|------------|-------------------------|------------|-------------------------|------------|
| Edward L. Samek   |       |       | 41,883,387 |                    |       |                    | 1,817,794  |   |   |
| Stephen A. Kaplan |       |       | 41,949,557 |                    |       |                    | 1,751,624  |   |   |

 

**ITEM5.**                OTHER INFORMATION

Not applicable.

**ITEM6.**                EXHIBITS

(a)   Exhibits
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | Amended and Restated Certificate of Incorporation of  Alliance.(3)                                                                                                                                                                                                                             |
| 3.2              |       | Amended and Restated By-laws of Alliance.(7)                                                                                                                                                                                                                                                   |
| 4.1              |       | Indenture dated as of April 10, 2001 by and  between the Registrant and the Bank of New York with respect to $260  million aggregate principal amount of 103¤8%  Senior Subordinated Notes due 2011.(1)                                                                         |
| 4.2              |       | Credit Agreement dated as of November 2, 1999,  as amended.(1)                                                                                                                                                                                                                            |
| 4.3              |       | Specimen certificate for shares of common stock,  $.01 par value, of Alliance.(3)                                                                                                                                                                                                              |
| 4.4              |       | Second Amendment dated as of June 10, 2002 to  Credit Agreement.(8)                                                                                                                                                                                                                       |
| 4.5              |       | Indenture dated as of December 29, 2004 by and  between the Registrant and the Bank of New York with respect to  $150 million aggregate principal amount of 71¤4%  Senior Subordinated Notes due 2012 and 71¤4%  Series B Senior Subordinated Notes due 2012.(6) |
| 4.6              |       | Supplemental Indenture dated as of December 14,  2004 by and between Registrant and the Bank of New York with respect to 103¤8%  Senior Subordinated Notes due 2011.(6)                                                                                                              |
| 4.7              |       | Third Amendment dated as of December 29, 2004  to Credit Agreement.(6)                                                                                                                                                                                                                    |
| 4.8              |       | Fourth Amendment dated as of December 19, 2005  to Credit Agreement.(8)                                                                                                                                                                                                                   |
| 4.9              |       | Fifth Amendment dated as of April 16, 2007 to  Credit Agreement.(17)                                                                                                                                                                                                                      |
| 10.1             |       | The 1999 Equity Plan for Employees of Alliance and  Subsidiaries, as amended.(11)                                                                                                                                                                                                              |
| 10.2             |       | Two forms of option agreement under the 1999 Equity  Plan for Employees of Alliance and Subsidiaries, as amended.(1)                                                                                                                                                                           |
| 10.3             |       | Alliance Directors’ Deferred Compensation Plan, as  amended.(2)                                                                                                                                                                                                                           |
| 10.4             |       | Employment Agreement dated as of January 1,  2003 between Alliance and Paul S. Viviano.(5)                                                                                                                                                                                           |

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| 10.5  |   | Agreement Not to Compete dated as of January 1,  2003 between Alliance and Paul S. Viviano.(5)                                                                                                                                                                                                      |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.6  |   | Stock Subscription Agreement dated as of  January 2, 2003 between Alliance and Paul S. Viviano.(5)                                                                                                                                                                                                  |
| 10.7  |   | Stock Subscription Agreement dated as of  February 3, 2003 between Alliance and Paul S. Viviano.(5)                                                                                                                                                                                                 |
| 10.8  |   | Form of Stockholder’s Agreement.(1)                                                                                                                                                                                                                                                                 |
| 10.9  |   | Registration Rights Agreement dated as of  November 2, 1999.(1)                                                                                                                                                                                                                                          |
| 10.10 |   | Management Agreement, dated as of November 2,  1999, between Alliance and Kohlberg Kravis Roberts & Co., LLP.(1)                                                                                                                                                                           |
| 10.11 |   | Amendment No. 1 to Management Agreement,  effective as of January 1, 2000, between Alliance and Kohlberg Kravis  Roberts & Co., LLP.(1)                                                                                                                                                    |
| 10.12 |   | Form of Indemnification Agreement.(2)                                                                                                                                                                                                                                                                    |
| 10.13 |   | Amended and Restated Employment Agreement dated as  of May 9, 2005 between Alliance and Paul S. Viviano.(7)                                                                                                                                                                                              |
| 10.14 |   | Agreement Not to Compete dated as of May 9,  2005 between Alliance and Paul S. Viviano.(7)                                                                                                                                                                                                               |
| 10.15 |   | Employment Agreement dated as of May 9, 2005  between Alliance and Andrew P. Hayek.(7)                                                                                                                                                                                                                   |
| 10.16 |   | Agreement Not to Compete dated as of May 9,  2005 between Alliance and Andrew P. Hayek.(7)                                                                                                                                                                                                          |
| 10.17 |   | Employment Agreement dated as of December 1,  2005 between Alliance and Howard K. Aihara.(9)                                                                                                                                                                                                        |
| 10.18 |   | Agreement Not to Compete dated as of  December 1, 2005 between Alliance and Howard K. Aihara.(9)                                                                                                                                                                                                    |
| 10.19 |   | 2006 Executive Incentive Plan†(10)                                                                                                                                                                                                                                                                       |
| 10.20 |   | Summary of compensation award to Nicholas A.  Poan(12)                                                                                                                                                                                                                                                        |
| 10.21 |   | Forms of Restricted Stock Award Agreement under the  1999 Equity Plan for Employees of Alliance and Subsidiaries, as amended and  Restated(15)                                                                                                                                                                |
| 10.22 |   | Form of Stock Bonus Award Agreement under the  1999 Equity Plan for Employees of Alliance and Subsidiaries, as amended and  Restated(15)                                                                                                                                                                 |
| 10.23 |   | Summary of compensation award to Michael F. Frisch(13)                                                                                                                                                                                                                                                        |
| 10.24 |   | Summary of compensation award to Eli Glovinsky(15)                                                                                                                                                                                                                                                            |
| 10.25 |   | Schedule of Executive Officer Compensation(15)                                                                                                                                                                                                                                                                |
| 10.26 |   | Schedule of Non-Employee Director Compensation(15)                                                                                                                                                                                                                                                            |
| 10.27 |   | Underwriting Agreement, dated November 20,  2006, by and among Alliance Imaging, Inc., the selling stockholder named  therein and Citigroup Global Markets Inc. and Merrill Lynch, Pierce,  Fenner & Smith Incorporated, as representatives of the several  underwriters named therein(14) |
| 10.28 |   | Governance and Standstill Agreement, dated as of  March 16, 2007, among Alliance Imaging, Inc., OCM Principal  Opportunities Fund IV, LP., and MTS Health Investors II, L.P.(16)                                                                                                          |
| 10.29 |   | Form of Executive Severance Agreement(16)                                                                                                                                                                                                                                                                |
| 10.30 |   | Assignment, dated as of April 16, 2007, to  Registration Rights Agreement, dated as of November 2, 1999.(17)                                                                                                                                                                                        |
| 10.31 |   | Amendment No. 2 to Management Agreement, dated  as of April 16, 2007, between Alliance and Kohlberg, Kravis  Roberts & Co., LLP.(17)                                                                                                                                                       |
| 10.32 |   | Amendment of Employment Agreement, dated as of  April 16, 2007, between Paul S. Viviano and Alliance Imaging, Inc.(17)                                                                                                                                                                              |

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| 10.33 |   | Amendment of Employment Agreement, dated as of  April 16, 2007, between Howard K. Aihara and Alliance  Imaging, Inc.(17)                                                        |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.34 |   | Underwriting Agreement, dated May 10, 2007, by  and among Alliance Imaging, Inc., the selling stockholder named therein and  Citigroup Global Markets Inc., the underwriter named therein.(18) |
| 21.1  |   | List of subsidiaries.(15)                                                                                                                                                                           |
| 31    |   | Certifications of Chief Executive Officer and Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.(19)                                                         |
| 32    |   | Certifications of Chief Executive Officer and Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.(19)                                                         |

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

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

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

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

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

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

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

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

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

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

(11)   Incorporated by reference toAppendix A to the Company’s Proxy Statement on Schedule 14A relating to its 2007Annual Meeting (File No. 001-16609).

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

(13)   Incorporated by reference toItem 5.02(c) of the Company’s Current Report on Form 8-K, datedNovember 13, 2006 (File No. 001-16609)

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

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(15)   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 31,2006 (File No. 001-16609).

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

(17)   Incorporated by reference toItem 9.01(d), “Exhibits”, of the Company’s Current Report on Form 8-K,dated April 20, 2007 (File No. 001-16609)

(18)   Incorporated by reference toItem 9.01(d), “Exhibits”, of the Company’s Current Report on Form 8-K,dated May 15, 2007 (File No. 001-16609)

(19)   Filed herewith

†                    Portions ofthis Exhibit have been redacted due to a request for confidentialtreatment.

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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,  2007 | By:    | /s/ PAUL S. VIVIANO                                     |
| * *             |   | Paul S. Viviano                                         |
| * *             |   | *Chairman of the Board and Chief Executive Officer*     |
| * *             |   | *(Principal Executive Officer)*                         |
| August 9,  2007 | By:    | /s/ HOWARD K. AIHARA                                    |
| * *             |   | Howard K. Aihara                                        |
| * *             |   | *Executive Vice President and Chief Financial  Officer* |
| * *             |   | *(Principal Financial Officer)*                         |
| August 9,  2007 | By:    | /s/ NICHOLAS A. POAN                                    |
| * *             |   | Nicholas A. Poan                                        |
| * *             |   | *Senior Vice President, Finance, and Corporate*         |
| * *             |   | *Controller and Chief Accounting Officer*               |
| * *             |   | *(Principal Accounting Officer)*                        |

 

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