UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-Q

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

For Quarter Ended: September 30, 2008

Commission File Number: 1-16609

ALLIANCE IMAGING, INC.(Exact name of registrant as specified in its charter)

DELAWARE(State or other jurisdiction of
incorporation or organization)

33-0239910(IRS Employer Identification Number)


100 Bayview Circle
Suite 400
Newport Beach, California 92660(Address of principal executive office)

(949) 242-5300(Registrant's telephone number, including area code)



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

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

Large accelerated filer o

Accelerated filer ý

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

Smaller reporting company o


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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 31, 2008:

Common
Stock, $.01 par value, 51,134,346 shares



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ALLIANCE IMAGING, INC.  FORM 10-Q  September 30, 2008        Index

PagePART IFINANCIAL INFORMATIONItem 1Financial Statements:Condensed Consolidated Balance Sheets
December 31, 2007 and September 30, 2008 (Unaudited)

2Condensed Consolidated Statements of Operations and Comprehensive Income
Quarter and nine months ended September 30, 2007 and 2008 (Unaudited)

3Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2007 and 2008 (Unaudited)

4Notes to Condensed Consolidated Financial Statements (Unaudited)

5Item 2Management's Discussion and Analysis of Financial Condition
and Results of Operations

26Item 3Quantitative and Qualitative Disclosures about Market Risk

38Item 4Controls and Procedures

40PART IIOTHER INFORMATIONItem 1Legal Proceedings

41Item 1ARisk Factors

41Item 2Unregistered Sales of Equity Securities and Use of Proceeds

41Item 3Defaults Upon Senior Securities

41Item 4Submission of Matters to a Vote of Security Holders

41Item 5Other Information

41Item 6Exhibits

41SIGNATURES

45


1

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PART IFINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

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

December 31,
2007

September 30,
2008ASSETSCurrent assets:Cash and cash equivalents

$
120,892

$
120,691Accounts receivable, net of allowance for doubtful accounts


58,439


64,747Deferred income taxes


16,091


16,091Prepaid expenses and other current assets


5,637


5,988Other receivables


7,304


6,457Total current assets


208,363


213,974Equipment, at cost


777,212


803,911Less accumulated depreciation


(434,364
)

(470,458
)Equipment, net


342,848


333,453Goodwill


175,804


182,701Other intangible assets, net


93,221


102,783Deferred financing costs, net


8,460


7,705Other assets


21,111


35,924Total assets

$
849,807

$
876,540LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
20,622

$
19,213Accrued compensation and related expenses


17,976


19,226Accrued interest payable


4,912


9,316Other accrued liabilities


33,512


43,659Current portion of long-term debt


3,627


5,066Total current liabilities


80,649


96,480Long-term debt, net of current portion


376,184


361,286Senior subordinated notes


290,985


288,953Minority interests and other liabilities


6,271


9,970Deferred income taxes


92,062


96,785Total liabilities


846,151


853,474Commitments and contingencies (Note 12)Stockholders' equity:Common stock


509


510Treasury stock


(61
)

(61
)Additional paid-in (deficit) capital


(1,470
)

3,289Accumulated comprehensive income (loss)


205


(10
)Retained earnings


4,473


19,338Total stockholders' equity


3,656


23,066Total liabilities and stockholders' equity

$
849,807

$
876,540


See accompanying notes.

2

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

Quarter Ended
September 30,

Nine Months Ended
September 30,2007

2008

2007

2008Revenues

$
110,162

$
128,125

$
331,324

$
370,027Costs and expenses:Cost of revenues, excluding depreciation and amortization


58,829


67,047


173,158


193,316Selling, general and administrative expenses


13,439


15,876


42,710


46,878Severance and related costs


282


127


522


453Depreciation expense


20,450


21,894


62,039


64,972Amortization expense


1,139


2,470


3,543


6,215Interest expense, net of interest income


9,953


10,706


30,415


33,771Loss on extinguishment of debt











61Other (income) expense, net


8


(140
)

(523
)

(473
)Total costs and expenses


104,100


117,980


311,864


345,193Income before income taxes, minority interest expense and earnings from unconsolidated investees


6,062


10,145


19,460


24,834Income tax expense


3,006


4,165


10,199


10,998Minority interest expense


323


884


1,315


2,520Earnings from unconsolidated investees


(1,214
)

(1,235
)

(6,450
)

(3,549
)Net income

$
3,947

$
6,331

$
14,396

$
14,865Comprehensive income, net of taxes:Net income

$
3,947

$
6,331

$
14,396

$
14,865Unrealized loss on hedging transactions, net of taxes


(312
)

(1,440
)

(843
)

(215
)Comprehensive income

$
3,635

$
4,891

$
13,553

$
14,650Earnings per common share:Basic

$
0.08

$
0.13

$
0.29

$
0.30Diluted

$
0.08

$
0.12

$
0.28

$
0.29Weighted average number of shares of common stock and common stock equivalents:Basic


50,273


50,367


50,158


50,332Diluted


51,815


52,073


51,843


51,945


See
accompanying notes.

3

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

Nine Months Ended
September 30,2007

2008Operating activities:Net income

$
14,396

$
14,865Adjustments to reconcile net income to net cash provided by operating activities:Provision for doubtful accounts


2,491


3,838Share-based payment


2,716


3,966Depreciation and amortization


65,582


71,187Amortization of deferred financing costs


1,267


1,728Accretion of discount on senior subordinated notes





1,509Adjustment of derivatives to fair value


1,501


(682
)Distributions greater than undistributed earnings from investees


155


844Deferred income taxes


7,606


5,080Excess tax benefit from share-based payment arrangements


(593
)

(218
)Gain on sale of assets


(523
)

(473
)Loss on extinguishment of debt





61Changes in operating assets and liabilities, net of acquisitions:Accounts receivable


(6,285
)

(6,744
)Prepaid expenses and other current assets


(1,625
)

62Other receivables


(517
)

777Other assets


(3,635
)

(8,389
)Accounts payable


(3,012
)

(7,152
)Accrued compensation and related expenses


1,071


935Accrued interest payable


2,947


4,403Income taxes payable


(637
)

Other accrued liabilities


(3,594
)

7,451Minority interests and other liabilities


1,044


3,699Net cash provided by operating activities


80,355


96,747Investing activities:Equipment purchases


(45,166
)

(41,192
)Decrease in deposits on equipment


9,681


1,192Purchases of marketable securities


(39,850
)

Proceeds from sale of marketable securities


11,275


Acquisitions, net of cash received





(34,582
)Increase in cash in escrow





(3,105
)Proceeds from sale of assets


2,819


2,713Net cash used in investing activities


(61,241
)

(74,974
)Financing activities:Principal payments on equipment debt


(2,138
)

(3,589
)Proceeds from equipment debt


138


396Principal payments on term loan facility


(600
)

(15,000
)Principal payments on revolving loan facility


(7,000
)

Proceeds from revolving loan facility


7,000


Principal payments on senior subordinated notes





(3,541
)Payments of debt issuance costs


(310
)

(973
)Payments of debt retirement costs





(61
)Proceeds from exercise of employee stock options


1,089


576Excess tax benefit from share-based payment arrangements


593


218Net cash used in financing activities


(1,228
)

(21,974
)Net increase (decrease) in cash and cash equivalents


17,886


(201
)Cash and cash equivalents, beginning of period


16,440


120,892Cash and cash equivalents, end of period

$
34,326

$
120,691Supplemental disclosure of cash flow information:Interest paid

$
25,877

$
28,873Income taxes paid, net of refunds


3,270


5,491Supplemental disclosure of non-cash investing and financing activities:Net book value of assets exchanged

$
1,405

$
293Capital lease obligations assumed for the purchase of equipment debt


3,518


2,438Comprehensive loss from hedging transactions, net of taxes


(843
)

(215
)Equipment debt assumed in connection with acquisitions





2,296Equipment purchases in accounts payable


269


5,442


See accompanying notes.

4

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ALLIANCE IMAGING, INC.        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        (Unaudited)        (Dollars in thousands, except per share
amounts)

1. Basis of Presentation, Principles of Consolidation, and Use of Estimates

Basis of PresentationThe accompanying unaudited condensed consolidated financial statements have been prepared by Alliance Imaging, Inc. (the "Company") in
accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating
results for the quarter and nine-month periods ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31,
2008. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial
statements for the year ended December 31, 2007.

Principles of ConsolidationThe accompanying unaudited condensed consolidated financial statements of the Company include the assets, liabilities, revenues and
expenses of all majority owned subsidiaries over which the Company exercises control. Intercompany transactions have been eliminated. The Company records minority interest expense related to its
consolidated subsidiaries which are not wholly owned. Investments in non-consolidated investees are accounted for under the equity method.

Use of EstimatesThe preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ
from those estimates.

2. Transactions

Effective October 1, 2007, the Company purchased the assets of Diagnostic Radiology Systems, Inc., a mobile provider of magnetic resonance imaging ("MRI") and positron
emission tomography/computed tomography ("PET/CT"), with operations in a certificate of need state. The purchase price consisted of $8,620 in cash and transaction costs. The acquisition was financed
using internally generated funds. As a result of this acquisition, the Company recorded goodwill of $2,148 and acquired intangible assets of $2,240, of which $1,520 was assigned to customer contracts,
which is amortized over eight years, $510 was assigned to the non-compete agreement, which is amortized over one year, and $210 was assigned to certificates of needs, which have indefinite
useful lives and are not subject to amortization. The intangible assets were recorded at fair value at the acquisition date. All recorded goodwill and intangible assets are capitalized for tax
purposes and amortized over 15 years. The preliminary values above were subject to adjustment for up to one year after the close of the transaction as a result of changes in the original
valuation of assets and liabilities acquired. During the nine months ended September 30, 2008, the Company increased goodwill by $7 as a result of changes in the original valuation of assets
and liabilities acquired. The year ended December 31, 2007 included three months of operations from this acquisition. The Company has not included pro forma

5

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ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

2. Transactions (Continued)

information
as this acquisition did not have a material impact on its consolidated financial position or results of operations.

Effective
November 2, 2007, Alliance Oncology, LLC ("AO"), an affiliate of the Company, purchased the assets of eight radiation oncology centers in Alabama, Arkansas,
Mississippi, and Missouri from Bethesda Resources, Inc., a wholly-owned subsidiary of Sonix, Inc. Many of these centers are sole community providers and are located on or near hospital
campuses. Several of these radiation oncology centers operate under certificates of need. The purchase price consisted of $36,500 in cash and $800 in assumed liabilities and transaction costs. The
acquisition was financed using internally generated funds and capital leases. As a result of this acquisition, the Company recorded goodwill of $4,246 and acquired intangible assets of $31,230, of
which $2,230 was assigned to the physician network, which is amortized over seven years and $29,000 was assigned to certificates of needs, which have indefinite useful lives and are not subject to
amortization. The intangible assets were recorded at fair value at the acquisition date. All recorded goodwill and intangible assets are capitalized for tax purposes and amortized over
15 years. The preliminary values above are subject to adjustment for up to one year after the close of the transaction as a result of changes in the original valuation of assets and liabilities
acquired. During the nine months ended September 30, 2008, the Company decreased goodwill by $72 as a result of changes in the original valuation of assets and liabilities acquired. The year
ended December 31, 2007 included approximately two months of operations from this acquisition. The Company has not included pro forma information as this acquisition did not have a material
impact on its consolidated financial position or results of operations.

Effective
November 5, 2007, the Company purchased all of the outstanding shares of the New England Health Enterprises Business Trust and all of the outstanding membership
interests of New England Imaging Management, LLC, a fixed-site provider of MRI and computed tomography ("CT"), collectively referred to as New England Health Enterprises, or NEHE.
NEHE operates seven fixed-site imaging centers and one mobile MRI system in Maine and Massachusetts. The total purchase price was $46,905, which consisted of $44,635 in cash, $2,270 in
cash which is being held in an escrow account, and $4,592 in assumed liabilities and transaction costs. The acquisition was financed using internally generated funds, borrowings under an Acquisition
Credit Facility and capital leases. The Company recorded total goodwill of $19,341, which includes $10,947 of goodwill related to deferred tax liabilities recorded for basis differences in intangible
assets as a result of the acquisition. None of the goodwill recorded is deductible for tax purposes. The Company acquired intangible assets of $29,000, of which $15,700 was assigned to the physician
network, which is amortized over 15 years, $3,800 was assigned to the non-compete agreement, which is amortized over five years, and $9,500 was assigned to certificates of need held
by NEHE, which have indefinite useful lives and are not subject to amortization. These assets were recorded at fair value at the acquisition date. The acquisition included $2,270 for a contingent
payment which is being held in an escrow account, pending the resolution of claims for indemnification and contingent consideration based on certain performance target requirements, which will be
resolved over the next one to three years. When the contingencies are resolved and consideration is distributable from the escrow account, the Company will record the fair value of the consideration
as additional purchase price to goodwill. The preliminary values above are subject to adjustment for up to one year after the close of the transaction as a result of changes in the original

6

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ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

2. Transactions (Continued)

valuation
of assets and liabilities acquired. During the nine months ended September 30, 2008, the Company decreased goodwill by $681 as a result of changes in the original valuation of assets
and liabilities acquired. The year ended December 31, 2007 included approximately two months of operations from this acquisition. The Company has not included pro forma information as this
acquisition did not have a material impact on its consolidated financial position or results of operations.

In
the first quarter of 2008, the Company purchased six CyberKnife® robotic radiosurgery facilities from Accuray, Inc. The radiosurgery systems are currently providing
radiosurgery services at hospitals located in California, Maryland, New Jersey and Tennessee. The purchase price totaled $10,287 in cash and $732 in transaction costs. The acquisition was financed
using proceeds from the Company's issuance of additional 71/4% Senior Subordinated Notes in December 2007. As a result of this acquisition, the Company recorded acquired intangible
assets of $1,459, which was assigned to customer contracts and will be amortized over seven years. The intangible assets were recorded at fair value at the acquisition date. All recorded intangible
assets are capitalized for tax purposes and amortized over 15 years. The preliminary values above are subject to adjustment for up to one year after the close of the transaction as a result of
changes in the original valuation of assets and liabilities acquired. The nine months ended September 30, 2008 included approximately six months of operations from this acquisition. The Company
has not included pro forma information as this acquisition did not have a material impact on its consolidated financial position or results of operations.

In
the third quarter of 2008, the Company purchased all of the outstanding membership interests of Medical Outsourcing Services, LLC ("MOS"), a mobile provider of PET/CT, based in
Naperville, Illinois. MOS currently operates in nine states, including, Illinois, Indiana, Iowa, Michigan, Missouri, New Jersey, Ohio, Pennsylvania, and Wisconsin. The total purchase price was
$24,335, which consisted of $17,271 in cash, $2,500 in cash which is being held in an escrow account, and $4,564 in assumed liabilities and transaction costs. The Company financed this acquisition
using internally generated funds and proceeds from the Company's issuance of 71/4% Senior Subordinated Notes in December 2007. As a result of this acquisition, the Company recorded
goodwill of $4,003 and acquired intangible assets of $11,750, of which $3,600 was assigned to the physician network, which is amortized over five years, $5,550 was assigned to customer relationships,
which is amortized over ten years and $2,600 was assigned to a non-compete agreement, which is amortized over three years. The intangible assets were recorded at fair value at the
acquisition date. All recorded goodwill and intangible assets are capitalized for tax purposes and amortized over 15 years. The acquisition included $2,500 for a contingent payment which is
being held in an escrow account, pending the resolution of claims for indemnification, which will be resolved over the next three years. When the contingencies are resolved and consideration is
distributable from the escrow account, the Company will record the fair value of the consideration as additional purchase price to goodwill. The preliminary values above are subject to adjustment for
up to one year after the close of the transaction as a result of changes in the original valuation of assets and liabilities acquired. The nine months ended September 30, 2008 included three
months of operations from this acquisition. The Company has not included pro forma information as this acquisition did not have a material impact on its consolidated financial position or results of
operations.

7

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ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

2. Transactions (Continued)

In
the third quarter of 2008, the Company purchased all of the outstanding membership interests of RAMIC Des Moines, LLC ("RAMIC"), a single modality center providing MRI services
in West Des Moines, Iowa. The total purchase price was $7,935, which consisted of $7,216 in cash, $605 in cash which is being held in an escrow account, and $114 in assumed liabilities and transaction
costs. The Company financed this acquisition using internally generated funds and proceeds from the Company's
issuance of 71/4% Senior Subordinated Notes in December 2007. As a result of this acquisition, the Company recorded goodwill of $3,049 and acquired intangible assets of $2,450, of which
$1,700 was assigned to the physician network, which is amortized over five years and $750 was assigned to certificates of need held by RAMIC, which have indefinite useful lives and are not subject to
amortization. The intangible assets were recorded at fair value at the acquisition date. All recorded goodwill and intangible assets are capitalized for tax purposes and amortized over
15 years. The acquisition included $605 for a contingent payment which is being held in an escrow account, pending the resolution of claims for indemnification, which will be resolved over the
next year. When the contingencies are resolved and consideration is distributable from the escrow account, the Company will record the fair value of the consideration as additional purchase price to
goodwill. The preliminary values above are subject to adjustment for up to one year after the close of the transaction as a result of changes in the original valuation of assets and liabilities
acquired. The nine months ended September 30, 2008 included approximately two months of operations from this acquisition. The Company has not included pro forma information as this acquisition
did not have a material impact on its consolidated financial position or results of operations.

3. Share-Based Payment

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

In
November 2005, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position FAS123R-3, Transition Election to Accounting for the Tax Effects of Share-Based
Payment Awards ("FSP"). The Company has elected to follow the alternative transition method as described in the FSP for computing its additional paid-in capital pool. In addition, the
Company treats the tax deductions from stock options as being realized when they reduce taxes payable in accordance with the principles and timing under the relevant tax law.

Stock Option Plans and Awards

In November 1999, the Company adopted an employee stock option plan (the "1999 Equity Plan") pursuant to which options and awards with
respect to a total of 6,325,000 shares of the Company's common stock became available for grant. On May 30, 2007 the Company adopted an amendment to

8

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ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

3. Share-Based Payment (Continued)

the
1999 Equity Plan which increased the number of shares available to be awarded to 8,025,000 shares. As of September 30, 2008, a total of 1,465,260 shares are available for grant under
the 1999 Equity Plan. Options are granted with exercise prices equal to fair value of the Company's common stock at the date of grant, except as noted below. All options have 10-year
terms. Options granted after January 1, 2008 are time options which vest 25% each year, over four years. For options granted prior to January 1, 2008, initial stock option grants were
comprised 50% of "time options" and 50% of "performance options." The time options have a five-year vesting schedule, vesting 20% per year. The performance options cliff vest after eight
years, however, in the event certain operating performance targets are met, up to 20% of the performance options may vest each year, accelerating the vesting period up to five years. Prior to
January 1, 2008, subsequent stock options granted under the 1999 Equity Plan to employees were always time options which vest 5% in the first year, 20% in the second year and 25% in years three
through five.

In
November 2000, the Company granted stock options to certain employees at exercise prices below the fair value of the Company's common stock, of which 35,000 options were outstanding
at September 30, 2008. The exercise prices of these options and the fair value of the Company's common stock on the grant date were $5.60 and $9.52 per share, respectively.

The
Company uses the Black-Scholes option pricing model to value the share-based payment associated with stock-based awards. The fair value of each option award is estimated on the date
of grant using the Black-Scholes option pricing model that uses the assumptions noted in the table below. In addition, forfeitures are estimated when recognizing share-based payment and the estimate
of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be
recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of share-based payment to be recognized in future periods. The Company records
share-based payment for stock options granted with exercise prices below the fair value of the Company's common stock at the date of grant and for certain stock options subject to amended performance
targets under the 1999 Equity Plan, as discussed below.

The
following weighted average assumptions were used in the estimated grant date fair value calculations for stock option awards:

Quarter
Ended
September 30,

Nine Months Ended
September 30,2007

2007

2008Risk free interest rate


4.68
%

4.72
%

3.44
%Expected dividend yield


0.00
%

0.00
%

0.00
%Expected stock price volatility


57.4
%

60.5
%

53.2
%Average expected life (in years)


6.43


6.55


6.25


There
were no stock options granted during the quarter ended September 30, 2008.

9

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ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

3. Share-Based Payment (Continued)

The
expected stock price volatility rates are based on a blend of the historical volatility of the Company's common stock and peer implied volatility. The risk free interest rates are
based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option or award. The average expected life represents the weighted average
period of time that options or awards granted are expected to be outstanding, as calculated using the simplified method described in the Securities and Exchange Commission's Staff Accounting Bulletin
No. 107.

The
following table summarizes the Company's stock option activity:

Number of
Shares

Weighted-
Average
Exercise Price

Weighted-
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
ValueOutstanding at December 31, 2007


3,805,920

$
6.36Granted


448,000


9.26Exercised


(123,795
)

4.73Canceled


(110,900
)

7.99Outstanding at September 30, 2008


4,019,225

$
6.69


6.50

$
15,186Vested and expected to vest in the future at September 30, 2008


3,445,980

$
6.66


6.32

$
12,438Exercisable at September 30, 2008


1,941,695

$
6.07


4.97

$
8,615


The
weighted average grant-date fair value of options granted during the quarter ended September 30, 2007 was $5.55 per share. The weighted average
grant-date fair value of
options granted during the nine months ended September 30, 2007 and 2008 was $4.58 per share and $5.07 per share, respectively. The total intrinsic value of options exercised during the
quarters ended September 30, 2007 and 2008 was $69 and $677, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2007 and 2008 was
$1,556 and $759, respectively. The total cash received from employees as a result of stock option exercises was $70 and $493 for the quarters ended September 30, 2007 and 2008, respectively.
The total cash received from employees as a result of stock option exercises was $1,089 and $576 for the nine months ended September 30, 2007 and 2008, respectively.

10

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ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

3. Share-Based Payment (Continued)

The
following table summarizes the Company's unvested stock option activity:

Shares

Weighted
Average
Grant Date
Fair ValueUnvested at December 31, 2007


2,182,855

$
3.88Granted


448,000


5.07Vested


(457,775
)

3.57Canceled


(95,550
)

4.56Unvested at September 30, 2008


2,077,530

$
4.17


At
September 30, 2008, the total unrecognized fair value share-based payment related to unvested stock options granted to both employees and non-employees was $4,530
which is expected to be recognized over a remaining weighted-average period of 2.59 years. The valuation model applied in this calculation utilizes highly subjective assumptions that could
potentially change over time, including the expected forfeiture rate and performance targets. Therefore the amount of unrecognized share-based payment noted above does not necessarily represent the
value that will ultimately be realized by the Company in the statements of operations. The total fair value of shares vested during the quarter and nine months ended September 30, 2007 was $46,
and $2,032, respectively. The total fair value of shares vested during the quarter and nine months ended September 30, 2008 was $47, and $1,633, respectively.

Restricted Stock Awards

The 1999 Equity Plan, as amended and restated, permits the award of restricted stock, restricted stock units, stock bonus awards and
performance-based awards. During 2007 and the first nine months of 2008, the Company granted 625,000 and 90,000 restricted stock awards ("awards") to certain employees of the Company. These awards
cliff vest after three years, provided that the employee remains continuously employed through the issuance date. For the quarter and nine months ended September 30, 2007 the Company recorded
share-based payment related to these grants of $254 and $752, respectively. For the quarter and nine months ended September 30, 2008 the Company recorded share-based payment related to these
grants of $473 and $1,395, respectively. The weighted average grant-date fair value of restricted stock awards granted during the nine months ended September 30, 2007 and 2008 was
$6.65 and $9.26 per share, respectively.

11

---



ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

3. Share-Based Payment (Continued)

The
following table summarizes the Company's unvested restricted stock activity:

Shares

Weighted
Average
Grant Date
Fair ValueUnvested at December 31, 2007


625,000

$
6.65Granted


90,000


9.26Vested


(3,300
)

9.26Canceled


(6,700
)

9.26Unvested at September 30, 2008


705,000

$
6.95


At
September 30, 2008, the total unrecognized fair value share-based payment related to restricted stock awards granted to employees was $2,291, which is expected to be recognized
over a remaining weighted-average period of 1.37 years. The valuation model applied in this calculation utilizes highly subjective assumptions that could potentially change over time, including
the expected forfeiture rate. Therefore the amount of unrecognized share-based payment noted above does not necessarily represent the value that will ultimately be realized by the Company in the
statements of operations.

Restricted Stock Units

On December 31, 2007, the Company granted restricted stock units to three non-employee directors of the Company who
are unaffiliated with Oaktree Capital Management, LLP ("Oaktree") or MTS Health Investors, LLC ("MTS") ("unaffiliated directors") equal to 8,421 shares of common stock each. This number
of shares represents the number of shares of our common stock having a value equal to $80, rounded down to the nearest whole share, and calculated using the average share price of our stock over the
fifteen-day period preceding December 31, 2007. Such restricted stock units will fully vest on December 31, 2008 based on the unaffiliated directors' continued service with
us through that date. The unaffiliated directors will each receive a restricted stock award on December 31, 2008 and each December 31 thereafter (the "Grant Date") of the number of
shares of common stock having a value equal to $80, rounded down to the nearest whole share, and calculated using the average share price of our stock over the fifteen-day period preceding
the Grant Date. Such restricted stock awards will fully vest one year after the Grant Date based on the continued service of the non-employee director through the vesting date.

12

---



ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

3. Share-Based Payment (Continued)

Stock Bonus Award

During 2006 and 2007, the Company granted stock bonus awards to certain employees of the Company. On the issuance date, the Company
issued a number of shares of the Company's common stock ("shares"), equal to the award divided by the fair market value of the shares at that time, provided that the employee remained continuously
employed through the issuance date. For the quarter and nine months ended September 30, 2007, the Company recorded share-based payment related to these grants of $83 and $417,
respectively. For the quarter and nine months ended September 30, 2008 the Company recorded share based payment related to these grants of $125 and $375, respectively.

At
September 30, 2008, the total unrecognized fair value share-based payment related to the stock bonus awards granted to employees is $417, which is expected to be
recognized over a remaining weighted-average period of 0.85 year. The valuation model applied in this calculation utilizes highly subjective assumptions that could potentially
change over time, including the expected forfeiture rate. Therefore the amount of unrecognized share-based payment noted above does not necessarily represent the value that will ultimately
be realized by the Company in the statements of operations.

4. Recent Accounting Pronouncements

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"), which permits entities to choose to measure many financial instruments and certain other items at
fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board's
long-term measurement objectives for accounting for financial instruments. SFAS 159 was effective and adopted by the Company on January 1, 2008. The provisions of
SFAS 159 are being applied prospectively. The adoption of SFAS 159 did not have a material impact on the Company's results of operations, cash flows or financial position.

Business CombinationsIn December 2007, the FASB issued SFAS No. 141(R) (Revised 2007), "Business Combinations" ("SFAS 141(R)").
SFAS 141(R) will significantly change the accounting for business combinations. Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141(R) will change the accounting treatment for certain specific items,
including:



13

---



ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

4. Recent Accounting Pronouncements (Continued)



SFAS 141(R)
also includes a substantial number of new disclosure requirements. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. Accordingly, since the Company is a calendar
year-end company it will continue to record and disclose business combinations following existing generally accepted accounting principles until January 1, 2009. The Company expects
SFAS 141(R) will have an impact on accounting for business combinations once adopted but the effect is generally dependent upon acquisitions at that time.

Noncontrolling Interests in Consolidated Financial StatementsIn December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial StatementsAn Amendment of Accounting Research Bulletin No. 51" ("SFAS 160"). SFAS 160 establishes new accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest as equity in the
consolidated financial statements and separate from the parent's equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of
the income statement. SFAS 160 clarifies that changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its
controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using
the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited.
The Company has not completed its evaluation of the potential impact of the adoption of SFAS 160 on consolidated results of operations, cash flows or financial position.

Derivative Instruments and Hedging ActivitiesIn March 2008, the FASB issued SFAS No. 161, "Disclosure about Derivative Instruments and Hedging
ActivitiesAn Amendment of FASB Statement No. 133" ("SFAS 161"), which enhances the current guidance on disclosure requirements for derivative instruments and hedging
activities. This statement requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. Specifically, SFAS 161 requires
disclosure about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flow. This statement requires qualitative
disclosure about the objectives and strategies for using derivatives in terms of the risks that the entity is intending to manage, quantitative disclosures about fair value amounts of gains and losses
on derivative instruments

14

---



ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

4. Recent Accounting Pronouncements (Continued)

in
a tabular format, and disclosures about credit-risk-related contingent features in derivative agreements to provide information on potential effect on an entity's liquidity
from using derivatives. The derivative instruments shall be distinguished between those used for risk management purposes and those used for other purposes. SFAS 161 is effective for fiscal
years, and interim periods within those fiscal years, beginning after November 15, 2008, with early application encouraged. As SFAS 161 provides only disclosure requirements, the
adoption of this standard will not have a material impact on the Company's results of operations, cash flows or financial position.

5. Fair Value of Financial Instruments

The Company used the following methods and assumptions in estimating fair value disclosure for financial instruments:

Cash and cash equivalentsThe carrying amounts reported in the balance sheet approximate fair value due to the short-term maturity or variable rates of
these instruments.

DebtThe fair value of our publicly traded notes was based on the prices of those notes at December 31, 2007 and September 30, 2008. The carrying
amount of variable-rate borrowings at September 30, 2008 approximates fair value due to the variable rates of those instruments.

Interest rate swapsFair value was determined based on the income approach and standard valuation techniques to convert future amounts to a single present amount
and approximates the net gains and losses that would have been realized if the contracts had been settled at each period-end.

The
estimated fair values of the Company's financial instruments are as follows:

December 31, 2007

September 30, 2008Carrying
Value

Fair
Value

Carrying
Value

Fair
ValueCash and cash equivalents

$
120,892

$
120,892

$
120,691

$
120,691Fixed-rate debt


290,985


280,036


288,953


279,375Variable-rate debt


366,600


366,600


351,600


351,600Interest rate swapsasset position


340


340


668


668


The
Company adopted SFAS No. 157, "Fair Value Measurements" ("SFAS 157") on January 1, 2008. There was no material impact to the results of operations, cash
flows or financial position for the quarter or nine months ended September 30, 2008. SFAS 157 applies to all assets and liabilities that are being measured and reported on a fair
value basis. SFAS 157 requires new disclosure that establishes a framework for measuring fair value in GAAP, and expands disclosure about fair value measurements. This statement enables the
reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair
values. The statement requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1Quoted market prices in active markets for identical assets or liabilities.

15

---



ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

5. Fair Value of Financial Instruments (Continued)

Level 2Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3Unobservable inputs that are not corroborated by market data.

The
following table summarizes the valuation of the Company's financial instruments by the above SFAS 157 pricing levels as of September 30, 2008:

Total

Quoted market
prices in active
markets
(Level 1)

Significant other
observable inputs
(Level 2)

Significant
unobservable inputs
(Level 3)Cash and cash equivalents

$
120,691

$
120,691

$


$
Fixed-rate debt


279,375





279,375


Variable-rate debt


351,600








351,600Derivative instrumentsasset position


668





668





The
Company's derivative instruments are pay-fixed, receive-variable interest rate swaps based on London Interbank Offered Rate ("LIBOR") swap rate. The Company
has elected to use the income approach to value the derivatives, using observable Level 2 market expectations at measurement date and standard valuation techniques to convert future amounts to
a single present amount assuming that participants are motivated, but not compelled to transact. Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities
in active markets (specifically futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap
rates, and credit risk at commonly quoted intervals). Mid-market pricing is used as a practical expedient for fair value measurements. SFAS 157 states that the fair value
measurement of an asset or liability must reflect the nonperformance risk of the entity and the counterparty. Therefore, the impact of the counterparty's credit worthiness when in an asset position
and the Company's creditworthiness when in a liability position has also been factored into the fair value measurement of the derivative instruments.

The
following table summarizes the changes in fair value of the Company's financial instruments that are classified as Level 3 as of September 30, 2008 and 2007,
respectively. There we no principal payments made in the three months ended September 30, 2008 or 2007, respectively.

Balance at
December 31,
2007

Payments

Balance at
September 30,
2008Variable-rate debt

$
366,600

$
(15,000
)
$
351,600


Balance at
December 31,
2006

Payments

Balance at
September 30,
2007Variable-rate debt

$
367,200

$
(600
)
$
366,600


16

---



ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

6. Goodwill and Intangible Assets

Changes in the carrying amount of goodwill are as follows:

Balance at December 31, 2007

$
175,804Goodwill acquired during the period


7,545Adjustments to goodwill during the period


(648
)Balance at September 30, 2008

$
182,701


Intangible
assets consisted of the following:

December 31, 2007

September 30, 2008Gross Carrying
Amount

Accumulated
Amortization

Intangible
Assets, net

Gross Carrying
Amount

Accumulated
Amortization

Intangible
Assets, netAmortizing intangible assets:Customer contracts

$
70,513

$
(27,232
)
$
43,281

$
82,832

$
(31,944
)
$
50,888Other


9,129


(3,598
)

5,531


11,837


(5,101
)

6,736Total amortizing intangible assets

$
79,642

$
(30,830
)
$
48,812

$
94,669

$
(37,045
)
$
57,624Intangible assets not subject to amortization








44,409








45,159Total other intangible assets







$
93,221







$
102,783


The Company reviews the recoverability of the carrying value of goodwill on an annual basis or more frequently when an event occurs or
circumstances change to indicate an impairment of these assets has possibly occurred. Goodwill is allocated to the Company's various reporting units which represent the Company's geographical regions.
The Company compares the fair value of the reporting unit to its carrying amount to determine if there is potential impairment.

The
Company uses a weighted average useful life of 15 years to amortize customer contracts. Other intangible assets subject to amortization are estimated to have a weighted
average useful life of three years. Amortization expense for intangible assets subject to amortization was $1,139 and $2,470 for the quarters ended September 30, 2007 and 2008, respectively,
and $3,543 and $6,215 for the nine months ended September 30, 2007 and 2008, respectively. The intangible assets not subject to amortization represent certificate of needs and regulatory
authority rights which have indefinite useful lives.

Estimated
annual amortization expense for each of the fiscal years ending December 31, is presented below:

2008

$
8,5872009


9,1702010


9,1012011


8,5202012


7,848


17

---



ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

7. Other Accrued Liabilities

Other accrued liabilities consisted of the following:

December 31,
2007

September 30,
2008Accrued systems rental and maintenance costs

$
1,957

$
2,349Accrued site rental fees


1,593


1,337Accrued property and sales taxes payable


13,486


14,428Accrued self-insurance expense


6,865


7,204Other accrued expenses


9,611


18,341Total

$
33,512

$
43,659


In
the third quarter of 2008, the Company and University of Pittsburgh Medical Center Specialty Programs, LLC ("UPMC") amended and restated the Limited Liability Company Agreement of AO.
Under the amended agreement, the Company has the right to purchase and UPMC has the right to sell the UPMC membership interest in AO to the Company for $6,524, plus any capital contributions made by
UPMC ("the put/call price"), until August 3, 2009. After August 3, 2009, for a period of one year, the put/call price will increase to $7,524, plus any capital contributions made by
UPMC. As of September 30, 2008, the Company has recorded an asset in other assets and a liability in other accrued liabilities of $6,524 related to this agreement.

8. Long-Term Debt and Senior Subordinated Credit Facility

Long-term debt consisted of the following:

December 31,
2007

September 30,
2008Term loan facility

$
366,600

$
351,600Senior subordinated notes


303,541


300,000Discount on senior subordinated notes of 8.5%


(12,556
)

(11,047
)Equipment debt


13,211


14,752Long-term debt, including current portion


670,796


655,305Less current portion


3,627


5,066Long-term debt

$
667,169

$
650,239


9. Derivatives

In the second quarter of 2004, the Company entered into interest rate swap agreements, with notional amounts of $56,813, $46,813 and $48,438 to manage the future cash interest payments
associated with a portion of the Company's variable rate bank debt. These agreements were three years in length. Two of these agreements matured in the second quarter of 2007 and the last agreement
matured in the fourth quarter of 2007. As of September 30, 2007, the fair value of the Company's interest rate swap agreements was an accumulated income of $224. Under these arrangements, the

18

---



ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

9. Derivatives (Continued)

Company
received three-month LIBOR and paid a fixed rate of 3.15%, 3.89% and 3.69%, respectively. The net effect of the hedges was to record interest expense at fixed rates of 5.65%, 6.39%
and 6.19%, respectively, as the debt incurred interest based on three-month LIBOR plus 2.50%. For the nine month period ended September 30, 2007, the Company received net settlement
amounts of $1,017. Changes in the fair value of the swap agreements were recorded in interest expense each period, as these transactions did not qualify for hedge accounting treatment. For the quarter
and nine months ended September 30, 2007 the Company recognized interest expense of $184 and $1,502, respectively, based on the change in the fair value of these instruments.

In
the first quarter of 2005, the Company entered into multiple interest rate collar agreements for its variable rate bank debt. The total underlying notional amount of the debt was
$178,000. Under these arrangements the Company purchased a cap on the interest rate of 4.00% and sold a floor of 2.25%. The Company paid a net purchase price of $1,462 for these collars. These
agreements were two and three years in length and matured at various dates between January 2007 and January 2008. As of September 30, 2007, the fair value of the Company's interest rate collar
agreements was an accumulated income of $873. For the quarter and nine month period ended September 30, 2007, the Company received net settlement amounts of $477 and $1,568, respectively. For
the nine month period ended September 30, 2008, the Company received net settlement amounts of $341. The Company designated these collars as cash flow hedges of variable future cash flows
associated with its long-term debt. For the quarter ended September 30, 2007, the Company recognized a comprehensive loss, net of tax, of $312, based on the change in fair value of
these instruments. For the nine months ended September 30, 2007 and 2008, the Company recognized a comprehensive loss, net of tax, of $843, and $205, respectively, based on the change in fair
value of these instruments.

In
the first quarter of 2008, the Company entered into two interest rate swap agreements in accordance with Company policy in order to avoid unplanned volatility in the income statement
due to changes in the LIBOR interest rate environment. The swap agreements, with a total notional amount of $185,438, were entered into to hedge future cash interest payments associated with a portion
of the Company's variable rate bank debt (the "2008 swaps"). These agreements are three years in length and mature in 2011. Under the terms of these agreements, the Company receives
three-month LIBOR and pays a fixed rate of 3.15%. The net effect of the hedges is to record interest expense at a fixed rate of 5.65%, as the debt incurs interest based on
three-month LIBOR plus 2.50%. For the quarter and nine month period ended September 30, 2008, the Company paid net settlement amounts of $119 and $73, respectively. The Company has
designated these swaps as cash flow hedges of future cash flows associated with its variable rate long-term debt. The Company will record effective changes in the fair value of the swaps
through comprehensive income (loss) during the period these instruments are designated as hedges. Comprehensive income (loss) is released to interest expense on a monthly basis as the underlying debt
payments are recognized in earnings. For the quarter and nine month periods ended September 30, 2008, the Company recognized comprehensive loss, net of tax, of $1,440 and $215, respectively,
based on the change in fair value of these instruments. For the quarter and nine month periods ended September 30, 2008, the Company recognized $1,362 and $1,374 in interest income related to
ineffectiveness on the 2008 swaps, based on the change in fair value of these instruments. For the quarter and nine months ended September 30, 2008, the ineffectiveness recognized

19

---



ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

9. Derivatives (Continued)

in
interest income was partially offset by the write down to zero for one of the 2008 swaps. This swap is with Lehman Commercial Paper, Inc. ("LCPI"), and had an asset position of $692 at
September 30, 2008.

On
September 15, 2008, Lehman Brothers Holding, Inc. ("LHI") filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. On
October 6, 2008, LCPI filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. One of the Company's 2008 swaps with a notional amount of $92,719, which
expires January 31, 2011, is with LCPI. As of September 12, 2008 hedge accounting was terminated and all further changes in the fair market value of the swap are being recorded in
interest expense. Comprehensive income (loss) related to effective unrealized gains or losses on the fair value of the swap through September 12, 2008 remain in accumulated comprehensive income
(loss) on the balance sheet and will be amortized into interest expense as the underlying interest payments are recognized in earnings. The swap was valued using the income approach with observable
Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single discounted present amount. The fair market value of the swap at
September 30, 2008 was an asset of $692 which was adjusted to zero as collectability was deemed uncertain due to the LHI bankruptcy filing. The Company included the write down of the asset in
interest expense for the quarter and nine months ended September 30, 2008. See Note 15 for additional details.

The
Company accounts for derivative instruments and hedging activities in accordance with the provisions of SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") and SFAS 138, "Accounting for Certain Derivative Instruments and Hedging Activities" ("SFAS 138"), an
amendment of SFAS 133. On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company does not enter into
derivative instruments that do not qualify as cash flow hedges as described in SFAS 133 and SFAS 138. The Company formally documents all relationships between hedging instruments and
hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. In this documentation, the Company specifically identifies the firm
commitment or forecasted transaction that has been designated as a hedged item and states how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally
measures effectiveness of its hedging relationships, both at the hedge inception and on an ongoing basis, in accordance with its risk management policy. The Company would discontinue hedge accounting
prospectively (i) if it is determined that the derivative is no longer effective in offsetting change in the cash flows of a hedged item, (ii) when the derivative expires or is sold,
terminated or exercised, (iii) because it is probable that the forecasted transaction will not occur, (iv) because a hedged firm commitment no longer meets the definition of a firm
commitment, or (v) if management determines that designation of the derivative as a hedge instrument is no longer appropriate. The Company's derivatives are recorded on the balance sheet at
their fair value. For derivatives accounted for as cash flow hedges any effective unrealized gains or losses on fair value are included in comprehensive income (loss), net of tax and any ineffective
gains or losses are recognized in income immediately.

20

---



ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

10. Income Taxes

For the quarter and nine months ended September 30, 2008, the Company recorded a provision for income taxes of $4,165 and $10,998, or 39.7% and 42.5% of the Company's pretax
income, respectively. For the quarter and nine months ended September 30, 2007, the Company recorded a provision for income taxes of $3,006 and $10,199, or 43.2% and 41.5% of the Company's
pretax income, respectively. The Company's effective tax rates were higher than the federal statutory rates primarily as a result of state income taxes and various permanent non-deductible
tax items, including share-based payment, unrecognized tax benefits and other permanent differences.

FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48") clarifies the accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes" ("FASB 109"). This Interpretation prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 was effective for fiscal years beginning after December 15, 2006. The impact of
the Company's reassessment of its tax positions in accordance with FIN 48 did not have a material effect on the results of operations, financial condition or liquidity.

As
of September 30, 2008, the Company has provided a liability of $2,016 for unrecognized tax benefits related to various federal and state income tax matters. This entire amount
would reduce the Company's effective income tax rate if recognized.

The
Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of September 30, 2008, the Company had approximately $302 in
accrued interest and penalties which is included as a component of the $2,016 unrecognized tax benefit noted above.

The
Company is subject to U.S. federal income tax as well as income tax of multiple state tax jurisdictions. The Company is currently open to audit under the statute of
limitations by the Internal Revenue Service for the years ending December 31, 2005 through 2007. The Company's state income tax returns are open to audit under the statute of limitations for
the years ending December 31, 2003 through 2007. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

21

---



ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

11. Earnings Per Common Share

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

Quarter Ended
September 30,

Nine Months Ended
September 30,2007

2008

2007

2008Numerator:Net income

$
3,947

$
6,331

$
14,396

$
14,865Denominator:Denominator for basic earnings per shareweighted-average shares


50,273


50,367


50,158


50,332Effect of dilutive securities: Employee stock options


1,542


1,706


1,685


1,613Denominator for diluted earnings per shareadjusted weighted-average shares


51,815


52,073


51,843


51,945Earnings per common share:Basic

$
0.08

$
0.13

$
0.29

$
0.30Diluted

$
0.08

$
0.12

$
0.28

$
0.29Stock 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


531


383


547


458Average exercise price per share that exceeds average market price of common stock

$
11.76

$
12.39

$
11.78

$
11.96


12. Commitments and Contingencies

The Company has applied the disclosure provisions of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others," to its agreements that contain guarantee or indemnification clauses. These disclosure provisions expand those required by FASB Statement No. 5, "Accounting for
Contingencies," by requiring a guarantor to disclose certain type of guarantees, even if the likelihood of requiring the guarantor's performance is remote. The following is a description of
arrangements in which the Company is the guarantor or indemnifies a party.

In
the normal course of business, the Company has made certain guarantees and indemnities, under which it may be required to make payments to a guaranteed or indemnified party, in
relation to certain transactions. The Company indemnifies other parties, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company
has agreed to hold the other party harmless against losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims arising from a
breach of representations or covenants. In addition, the Company has entered into indemnification agreements with its executive

22

---



ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

12. Commitments and Contingencies (Continued)

officers
and directors and the Company's bylaws contain similar indemnification obligations. Under these arrangements, we are obligated to indemnify, to the fullest extent permitted under applicable
law, our current or former officers and directors for various amounts incurred with respect to actions, suits or proceedings in which they were made, or threatened to be made, a party as a result of
acting as an officer or director.

It
is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and
circumstances involved in each particular agreement. Historically, payments made related to these indemnifications have been immaterial. At September 30, 2008, the Company has determined that
no liability is necessary related to these guarantees and indemnities.

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

13. Related-Party Transactions

The Company recorded management fees payable to Kohlberg Kravis Roberts & Co. ("KKR") of $193
for the nine months ended September 30, 2007. As of April 16, 2007, KKR no longer provided financial advisory services.

On
April 16, 2007, funds managed by Oaktree and MTS purchased approximately 24,501,505 shares of the Company's common stock from a fund managed by an affiliate of KKR. Upon
completion of the transaction, Oaktree and MTS owned in the aggregate approximately 49.7% of the outstanding shares of common stock of the Company. The Company does not pay management fees to Oaktree
and MTS for their financial advisory services to the Company.

Revenue
from management agreements with unconsolidated equity investees was $4,579 and $4,283 for the quarters ended September 30, 2007 and 2008, respectively, and $12,690 and
$13,406 for the nine months ended September 30, 2007 and 2008, respectively.

14. Investments in Unconsolidated Investees

The Company has direct ownership in five unconsolidated investees at September 30, 2008. The Company owns between 33.3% and 50% of these investees, and provides management
services under agreements with four of these investees, expiring at various dates through 2023. At September 30, 2008, the Company also has ownership in an unconsolidated investee of AO. AO
owns 50% of this investee and provides management services under an agreement which expires in 2025. All of these investees are accounted for under the equity method since the Company does not
exercise control over the operations of these investees.

23

---



ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

14. Investments in Unconsolidated Investees (Continued)

Set
forth below is certain unaudited financial data for Alliance-HNI, LLC and its subsidiaries, one of the Company's unconsolidated investees (amounts in thousands):

December 31,

September 30,2007

2008Balance Sheet Data:Current assets

$
6,955

$
6,478Noncurrent assets


14,720


16,533Current liabilites


4,693


5,018Noncurrent liabilites


4,627


6,295




Quarter Ended
September 30,

Nine Months Ended
September 30,2007

2008

2007

2008Combined Operating Results:Revenues

$
7,280

$
7,076

$
21,353

$
20,718Expenses


5,036


4,659


14,208


14,085Net income


2,244


2,417


7,145


6,633Earnings from unconsolidated investee


1,122


1,180


3,573


3,288


Set
forth below is certain unaudited financial data for the aggregate of the Company's unconsolidated investees, including Alliance-HNI, LLC and its subsidiaries
(amounts in thousands):

December 31,

September 30,2007

2008Combined Balance Sheet Data:Current assets

$
10,904

$
9,459Noncurrent assets


23,147


22,633Current liabilites


7,760


7,656Noncurrent liabilites


9,624


9,299




Quarter Ended September 30,

Nine Months Ended September 30,2007

2008

2007

2008Combined Operating Results:Revenues

$
9,180

$
9,297

$
27,389

$
28,117Expenses


6,752


6,653


19,900


20,920Net income


2,428


2,644


7,489


7,197Earnings from unconsolidated investees


1,214


1,235


6,450


3,549


24

---



ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands, except per share amounts)

15. Subsequent Events

As discussed in Note 9, on October 6, 2008, LCPI filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. The counterparty to one of
the Company's 2008 swaps, with a notional amount of $92,719, is LCPI. The fair market value of this swap at September 30, 2008 was an asset of $692 which was written down to zero as
collectability was deemed uncertain due to the LHI bankruptcy filing. The Company included the write down of the asset in interest expense for the quarter and nine months ended September 30,
2008. The fair market value of the swap as of October 6, 2008 was a liability of $784. The Company will continue to record interest expense in the statement of operations in future periods
based on the change in the fair value of this swap.

25

---





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

Overview

We are a leading national provider of outpatient diagnostic imaging services, based upon annual revenue and number of diagnostic
imaging systems deployed, and are a provider of radiation oncology services. Our principal sources of revenue are derived from magnetic resonance imaging ("MRI") and positron emission
tomography/computed tomography ("PET/CT"). We provide imaging and therapeutic services primarily to hospitals and other healthcare providers on a shared-service and full-time service
basis. We also provide services through a growing number of fixed-site imaging centers, primarily to hospitals or health systems. Our services normally include the use of our imaging
systems, technologists to operate the systems, equipment maintenance and upgrades and management of day-to-day shared-service and fixed-site diagnostic imaging
operations. We also provide non scan-based services, which includes only the use of our imaging systems under a short-term contract. We have also leveraged our leadership in
MRI and PET/CT to expand into radiation oncology. Our radiation oncology business is operated through our affiliate, Alliance Oncology, LLC, and includes a wide range of services for cancer
patients covering initial consultation, preparation for treatment, simulation of treatment, actual radiation oncology delivery, therapy management and follow-up care. Our services include
the use of our linear accelerators, therapists to operate such systems, administrative staff, equipment maintenance and
upgrades, and management of day-to-day operations. We also provide stereotactic radiation oncology services through our wholly-owned subsidiary, Alliance
Radiosurgery, LLC. For the nine months ended September 30, 2008, MRI and PET/CT services generated 55% and 33% of our revenue, respectively. The remaining revenue was comprised of
radiation oncology revenue and other modality diagnostic imaging services revenue, primarily computed tomography ("CT") and management contract revenue. We had 488 diagnostic imaging and radiation
oncology systems, including 303 MRI systems and 88 PET or PET/CT systems and served over 1,000 clients in 46 states at September 30, 2008. We operated 92 fixed-site imaging centers
(four in unconsolidated joint ventures), which constitutes systems installed in hospitals or other medical buildings on or near hospital campuses, including modular buildings, systems installed inside
medical groups' offices, and free-standing fixed-site imaging centers, which includes systems installed in a medical office building, ambulatory surgical center, or other
retail space at September 30, 2008. Of the 92 fixed-site imaging centers, 75 were MRI fixed-site imaging centers, six were PET or PET/CT fixed-site imaging
centers, seven were other modality fixed-site imaging centers, and four were in unconsolidated joint ventures. We also operated 18 radiation oncology centers and stereotactic radiosurgery
facilities (including two radiation oncology centers in unconsolidated joint ventures) at September 30, 2008.

Approximately
79% of our revenues for the nine months ended September 30, 2008 were generated by providing services to hospitals and other healthcare providers, which we refer to
as wholesale revenues. Our wholesale revenues are typically generated from contracts that require our clients to pay us based on the number of scans we perform on patients on our clients' behalf,
although some pay us a flat fee for a period of time regardless of the number of scans we perform. Wholesale payments are due to us independent of our clients' receipt of retail reimbursement from
third-party payors. We typically deliver our services for a set number of days per week through exclusive, long-term contracts with hospitals and other healthcare providers. The initial
terms of these contracts average approximately three years in length for mobile services and approximately five to 10 years in length for fixed-site arrangements. These contracts
often contain automatic renewal provisions and certain contracts have cancellation clauses if the hospital or other healthcare provider purchases their own system. We price our contracts based on the
type of system used, the scan volume, and the number of ancillary services provided. Pricing is also affected by competitive pressures.

Approximately
21% of our revenues for the nine months ended September 30, 2008 were generated by providing services directly to patients from our sites located at or near
hospitals or other

26

---



healthcare
provider facilities, which we refer to as retail revenue. Our revenue from these sites is generated from direct billings to patients or their third-party payors, including Medicare, which
are recorded net of contractual discounts and other arrangements for providing services at discounted prices. We typically charge a higher price per scan under retail billing than we do under
wholesale billing.

Fixed-site
imaging centers and radiation oncology centers can be structured as either wholesale or retail arrangements. Revenues from these centers are included in both our
wholesale or retail revenues, respectively.

On
February 8, 2006, the Deficit Reduction Act of 2005 ("DRA") was signed into law. The DRA imposes caps on Medicare payment rates for certain imaging services, including MRI and
PET, furnished in physician's offices and other non-hospital based settings. Under the cap, payments for specified imaging services cannot exceed the hospital outpatient payment rates for
those services. This change applied to services furnished on or after January 1, 2007. The limitation is applicable to the technical components of the services only, which is the payment we
receive for the services for which we bill directly under the Medicare Physician Fee Schedule. The reimbursement for the technical component under the Physician Fee Schedule generally allows for
higher reimbursement than under the hospital outpatient prospective payment system, or HOPPS. The implementation of this reimbursement reduction contained in the DRA had a significant effect on our
financial condition and results of operations in 2007 and 2008.

On
November 1, 2006, the Centers for Medicare and Medicaid Services, or CMS, issued a final determination of Medicare Part B HOPPS reimbursement rates for PET and PET/CT
imaging procedures, effective January 1, 2007. For 2007, the national rate for nonmyocardial PET scans was reduced from the rate of $1,150 per scan in 2006 to $855 per scan. The 2007 national
rate for myocardial PET scans was reduced from the rate of $800 per single-study myocardial PET and $2,485 per multiple-study myocardial PET in 2006, to $731 per scan (whether it be a single or
multiple-study PET). In addition, for 2007, the national rate for nonmyocardial PET/CT scans was reduced from the rate of $1,250 per scan in 2006 to $950 per scan.

On
November 1, 2007, CMS released its final determination of Medicare Part B HOPPS reimbursement rates for PET and PET/CT imaging procedures, effective January 1,
2008. For 2008, the national payment rate for nonmyocardial PET and PET/CT scans is $1,057 per scan and the national payment rate for myocardial PET scans is $1,400 per scan. In its final 2008 HOPPS
reimbursement rates, CMS also bundled the PET and PET/CT payment for radiopharmaceuticals with the payment for the PET and PET/CT scan. In addition, CMS reduced the 2008 national Medicare HOPPS rate
for MRI scans by approximately 3%. On October 30, 2008, CMS released its 2009 national Medicare HOPPS payment rates, effective January 1, 2009. For nonmyocardial PET and PET/CT, the 2009
payment rate is $1,037 per scan. For myocardial PET procedures, the 2009 payment rate is $1,157 per scan.

For
full year 2006, we estimate that approximately 5.6% of our revenue was billed directly to the Medicare program. If the DRA had been in effect for full year 2006, we estimate the
reduction in Medicare revenue due to the DRA reimbursement rate decrease would have reduced revenue by approximately $9.7 million and the PET and PET/CT Medicare HOPPS reduction would have
reduced revenue by approximately $2.8 million. Combined, the DRA and PET and PET/CT Medicare HOPPS rate reductions would have negatively impacted our 2006 revenue and did impact our 2007
revenue by a total of approximately $12.5 million and $14 million, respectively. For 2008, however, the DRA and the net Medicare rate reductions in HOPPS have not had a material negative
effect on revenue and earnings. Also to date, in 2008, the Company has not faced an increase in pressure in wholesale pricing for PET and PET/CT as a result of the reductions in Medicare reimbursement
rates from the implementation of the DRA and revised PET and PET/CT reimbursements under HOPPS. At this

27

---



time,
however, we cannot predict the impact the rate reductions will have on our future revenues or business.

In
addition, with respect to our retail revenue, the Medicare, Medicaid and SCHIP Extension Act of 2007, which was signed into law on December 29, 2007, eliminated a scheduled
10.1% reduction for 2008 payment rates under the 2008 Medicare Physician Fee Schedule payment rule, and increased the rates by 0.5%. This increase to the annual Medicare Physician Fee Schedule payment
update is effective only for Medicare claims with dates of service between January 1, 2008 and June 30, 2008. Beginning July 1, 2008, under a new law, the Medicare Improvement for
Patients and Providers Act of 2008 (H.R. 6331), which was enacted on July 15, 2008, not only is the 10.1% reduction continued for the rest of 2008, a 1.1% increase to the July 1, 2008 is
scheduled for 2009. Also with respect to H.R. 6331, the new legislation requires all suppliers that provide the technical component of diagnostic MRI, CT, PET and nuclear medicine to be accredited by
a CMS-designated accreditation organization by January 1, 2012. Though CMS has not yet designated the accreditation organizations, all our facilities are accredited by The Joint
Commission.

Furthermore,
on October 30, 2008, CMS released its final Medicare Physician Fee Schedule Rule for calendar year 2009, which includes some additional performance standards for
suppliers of mobile diagnostic services. The final rule requires suppliers of mobile diagnostic services under certain circumstances to enroll in Medicare and bill directly for these services,
regardless of where they are performed. An exception was made for services provided to hospital patients under arrangement with that hospital. In those circumstances, the mobile diagnostic facility
would be required to enroll in Medicare, but the hospital would bill for the services. At this time, we do not expect that this requirement under CMS's final rule will significantly impact our
business.

In
2007 and 2008, the growth rate of MRI industry wide scan volumes has slowed in part due to weak hospital volumes as reported by several investor-owned hospital companies, a growing
number of medical groups adding imaging capacity within their practice setting, the increasing trend of third-party payors intensifying their utilization management efforts to control MRI scan volume
growth rate and additional patient-related cost-sharing programs. We expect that this trend will continue throughout 2008.

We
have experienced and continue to experience an increase in the competitive climate in the MRI industry, resulting in an increase in activity by original equipment manufacturers, or
OEMs, selling systems directly to certain of our clients. Typically, OEMs target our higher scan volume clients. This increase in activity by OEMs has resulted in overcapacity of systems
in the marketplace, especially related to medical groups adding imaging capacity within their practice setting. This has caused an increase in the number of our higher scan volume clients deciding not
to renew their contracts. We replace these higher volume clients typically with lower volume clients. In the first nine months of 2008, our MRI revenues increased compared to 2007 levels due to an
acquisition completed in the fourth quarter of 2007, which was partially offset by the modest decrease in scan volume. We believe that MRI revenues will modestly decline in future years.

In
the United States, recent market and economic conditions have been unprecedented and challenging with tighter credit conditions and slower growth through the third quarter of 2008.
For the nine months ended September 30, 2008, continued concerns about the systemic impact of inflation, energy costs, geopolitical issues, the availability and cost of credit, the United
States mortgage market and a declining real estate market in the United States have contributed to increased market volatility and diminished expectations for the United States economy. In the third
quarter of 2008, added concerns fueled by the federal government conservatorship of the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association, the declared bankruptcy of
Lehman Brothers Holdings Inc., the United States government provided loan to American International Group Inc. and other federal government interventions in the United States credit
markets lead to

28

---



increased
market uncertainty and instability in both United States and international capital and credit markets. These conditions, combined with volatile oil prices, declining business and consumer
confidence and increased unemployment have in recent weeks subsequent to the end of the quarter contributed to volatility of unprecedented levels.

As
a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads.
Concern about the stability of the markets generally and the strength of counterparties specifically has lead many lenders and institutional investors to reduce, and in some cases, cease to provide
funding to borrowers. Continued turbulence in the United States and international markets and economies may adversely affect our liquidity and financial condition, and the liquidity and financial
condition of our customers. If these market conditions continue, they may limit our ability, and the ability of our customers, to timely replace maturing liabilities, and access the capital markets to
meet liquidity needs, resulting in adverse effects on our financial condition and results of operations.

The
principal components of our cost of revenues are compensation 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 result of higher scan volumes per system significantly improves our margins while lower scan volumes result in
lower margins.

The
principal components of selling, general and administrative expenses are sales and marketing costs, corporate overhead costs, provision for doubtful accounts, and share-based
payment.

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

Seasonality

We experience seasonality in the revenues and margins generated for our services. In 2007 and 2008, the first and second quarters had
more scanning days than the third and fourth quarters. Third and fourth quarter revenues are affected by holiday and client and patient vacation schedules, resulting in fewer scans during the period.
The first quarter of 2008 benefited from one extra calendar day due to leap year. The second half of 2008 has 3.6 less scanning days than the first half of 2008. The variability in margins is higher
than the variability in revenues due to the fixed nature of our costs.

29

---



Results of Operations

The following table shows our consolidated statements of operations as a percentage of revenues for each of the quarters and nine
months ended September 30:

Quarter Ended
September 30,

Nine Months Ended
September 30,2007

2008

2007

2008Revenues


100.0
%

100.0
%

100.0
%

100.0
%Costs and expenses:Cost of revenues, excluding depreciation and amortization


53.4


52.3


52.3


52.2Selling, general and administrative expenses


12.2


12.4


12.9


12.7Severance and related costs


0.3


0.1


0.1


0.1Depreciation expense


18.6


17.1


18.7


17.5Amortization expense


1.0


1.9


1.1


1.7Interest expense, net of interest income


9.0


8.4


9.2


9.1Loss on extinguishment of debt











0.1Other (income) and expense, net





(0.1
)

(0.2
)

(0.1
)Total costs and expenses


94.5


92.1


94.1


93.3Income before income taxes, minority interest expense and earnings from unconsolidated investees


5.5


7.9


5.9


6.7Income tax expense


2.7


3.3


3.1


3.0Minority interest expense


0.3


0.7


0.4


0.7Earnings from unconsolidated investees


(1.1
)

(1.0
)

(1.9
)

(1.0
)Net income


3.6
%

4.9
%

4.3
%

4.0
%


The
table below provides MRI statistical information for each of the quarters and nine months ended September 30:

Quarter Ended
September 30,

Nine Months Ended
September 30,2007

2008

2007

2008MRI statisticsAverage number of total systems


302.8


305.4


307.5


305.8Average number of scan-based systems


250.4


255.7


253.8


253.9Scans per system per day (scan-based systems)


9.42


9.23


9.29


9.21Total number of scan-based MRI scans


160,098


157,737


486,877


479,680Price per scan

$
363.05

$
379.44

$
362.00

$
380.20


The
table below provides PET and PET/CT statistical information for each of the quarters and nine months ended September 30:

Quarter Ended
September 30,

Nine Months
Ended
September 30,2007

2008

2007

2008PET and PET/CT statisticsAverage number of systems


74.7


92.0


72.3


82.7Scans per system per day


6.33


6.17


6.32


6.18Total number of PET and PET/CT scans


28,888


37,756


85,751


102,004Price per scan

$
1,186

$
1,196

$
1,202

$
1,187


30

---



Following
are the components of revenue (in millions):

Quarter Ended
September 30,

Nine Months Ended
September 30,2007

2008

2007

2008Total MRI revenue

$
65.7

$
67.6

$
198.2

$
204.6PET/CT revenue


34.5


45.4


103.9


121.8Radiation oncology, other modalities and other revenue


10.0


15.1


29.2


43.6Total

$
110.2

$
128.1

$
331.3

$
370.0




Quarter Ended
September 30,

Nine Months
Ended
September 30,2007

2008

2007

2008Total fixed-site imaging center revenue (in millions)

$
19.2

$
26.1

$
55.9

$
75.3


Quarter Ended September 30, 2008 Compared to Quarter Ended September 30, 2007

Revenue increased $17.9 million, or 16.3%, to $128.1 million in the third quarter of 2008 compared to
$110.2 million in the third quarter of 2007 primarily due to an increase in PET/CT revenues, radiation oncology, other modalities and other revenue, and MRI revenues. PET/CT revenue in the
third quarter of 2008 increased $10.9 million, or 31.4%, compared to the third quarter of 2007. Total PET/CT scan volumes increased 30.7% to 37,756 scans in the third quarter of 2008 from
28,888 scans in the third quarter of 2007, primarily as a result of growth in our core PET business and the acquisition of Medical Outsourcing Services, LLC ("MOS") in the third quarter of
2008. The average number of PET and PET/CT systems in service increased to 92.0 systems in the third quarter of 2008 from 74.7 systems in the third quarter of 2007. The average price per PET/CT scan
increased 0.8% to $1,196 per scan in the third quarter of 2008 compared to $1,186 per scan in the third quarter of 2007. Scans per system per day decreased 2.5% to 6.17 scans per system per day in the
third quarter of 2008 from 6.33 scans per system per day in the third quarter of 2007. Radiation oncology, other modalities and other revenue increased $5.1 million, or 53.2%, to
$15.1 million in the third quarter of 2008 compared to $10.0 million in the third quarter of 2007 primarily due to an increase in radiation oncology revenue generated by the purchase of
eight radiation oncology centers from Bethesda Resources, Inc. ("Bethesda Transaction"). MRI revenue increased $1.9 million in the third quarter of 2008, or 2.8%. Scan-based MRI
revenue increased $1.8 million in the third quarter of 2008, or 3.0%, compared to the third quarter of 2007, to $59.9 million in the third quarter of 2008 from $58.1 million in
the third quarter of 2007. This increase is primarily a result of an increase in the average price per MRI scan of $379.44 per scan in the third quarter of 2008 compared to $363.05 per scan in the
third quarter of 2007 primarily due to retail revenue associated with the acquisition of New England Health Enterprises ("NEHE"). Scan-based systems in service increased to 255.7 systems
in the third quarter of 2008 from 250.4 systems in the third quarter of 2007. Non-scan based MRI revenue increased $0.1 million in the third quarter of 2008 over the same period in
2007. These increases were partially offset by a 1.5% decrease in our scan-based MRI scan volume. Scan-based MRI scan volume decreased to 157,737 scans in the third quarter of
2008 from 160,098 scans in the third quarter of 2007, primarily due to a decrease in client demand. Average scans per system per day also decreased by 2.0% to 9.23 in the third quarter of 2008 from
9.42 in the third quarter of 2007. Included in the revenue totals above is fixed-site imaging center revenues, which increased $6.9 million, or 35.9%, to $26.1 million in the
third quarter of 2008 from $19.2 million in the third quarter of 2007.

We
had 303 MRI systems at September 30, 2008, compared to 310 MRI systems at September 30, 2007. We had 88 PET and PET/CT systems at September 30, 2008, compared to
76 PET and PET/CT

31

---



systems
at September 30, 2007. We operated 92 fixed-site imaging centers (including four in unconsolidated joint ventures) at September 30, 2008, compared to 77
fixed-site imaging centers (including three in unconsolidated joint ventures) at September 30, 2007. We operated 18 radiation oncology centers and stereotactic radiosurgery
facilities (including two radiation oncology centers in unconsolidated joint ventures) at September 30, 2008.

Cost
of revenues, excluding depreciation and amortization, increased $8.2 million, or 14.0%, to $67.0 million in the third quarter of 2008 compared to $58.8 million
in the third quarter of 2007. Compensation and related employee expenses increased $2.6 million, or 9.4%, primarily as a result of an increase in average headcount related to acquisitions
completed in the fourth quarter of 2007 and the third quarter of 2008. Medical supplies increased $1.6 million, or 36.0%, primarily as a result of an increase in the number of PET and PET/CT
scans, which use a radiopharmaceutical as a component of the PET and PET/CT scan. Maintenance and related costs increased $1.2 million, or 9.6%, due to an increase in service costs related to
the addition of radiation oncology systems and an increase in the number of PET/CT systems in operation. Fuel expenses increased $0.9 million, or 61.6%, primarily due to an increase in the
average price per gallon of diesel fuel costs. Site fees increased $0.6 million, or 67.3%, primarily as a result of an increase in the average number of retail fixed-site imaging
centers in operation. Equipment rental costs increased $0.5 million, or 42.5%, due to an increase in the number of rental PET/CT systems in use related to the MOS acquisition. License, taxes
and other fees increased $0.4 million, or 31.3%, primarily due to an increase in property taxes related to an increase in PET/CT and radiation oncology systems in use. All other cost of
revenues, excluding depreciation and amortization, increased $0.4 million, or 3.8%. Cost of revenues, as a percentage of revenue, decreased to 52.3% in the third quarter of 2008 from 53.4% in
the third quarter of 2007 as a result of the factors described above, offset by a decrease in total fixed costs as a percentage of revenue, due to an increase in revenue.

Selling,
general and administrative expenses increased $2.5 million, or 18.1%, to $15.9 million in the third quarter of 2008 compared to $13.4 million in the third
quarter of 2007. The provision for doubtful accounts increased $1.4 million in the third quarter of 2008 due to the collection of higher than normal amounts of aged accounts receivable in the
third quarter of 2007, as well as an incremental increase in the provision for doubtful accounts related to acquisitions completed in the fourth quarter of 2007 and third quarter of 2008, which
generated incremental retail revenue. The provision for doubtful accounts, as a percentage of revenue, was 1.2% in the third quarter of 2008 compared to 0.1% of revenue in the third quarter of 2007.
Compensation and related employee expenses increased $0.2 million, or 2.1%, primarily as a result of an increase in average headcount related to acquisitions completed in the fourth quarter of
2007 and third quarter of 2008. Share-based payment increased $0.1 million, or 2.1%, in the third quarter of 2008 from the third quarter of 2007 due to new equity awards granted in the first
quarter of 2008. All other selling, general and administrative expenses increased $0.8 million, or 37.0%. Selling, general and administrative expenses as a percentage of revenue were 12.4% and
12.2% in the third quarter of 2008 and 2007, respectively.

We
recorded severance and related costs of $0.1 million in the third quarter of 2008 and $0.3 million in the third quarter of 2007.

Depreciation
expense increased $1.4 million, or 7.1%, to $21.9 million in the third quarter of 2008 compared to $20.5 million in the third quarter of 2007 as a
result of fixed assets acquired in connection with our acquisitions in the fourth quarter of 2007 and third quarter of 2008.

Amortization
expense increased by $1.4 million, or 116.9%, to $2.5 million in the third quarter of 2008 compared to $1.1 million in the third quarter of 2007,
primarily due to the incremental amortization expense for intangible assets acquired in conjunction with our acquisitions in the fourth quarter of 2007 and third quarter of 2008.

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Interest expense, net increased $0.7 million, or 7.6%, to $10.7 million in the third quarter of 2008 compared to $10.0 million in the third quarter of 2007. Interest
expense increased due to incremental interest expense associated with the $150.0 million 71/4% Senior Subordinated Note offering completed in the fourth quarter of 2007,
partially offset by lower interest rates and a $0.7 million non-cash fair value adjustment related to our interest rate swap agreement with Lehman Commercial Paper, Inc. ("LCPI").

Income
tax expense was $4.2 million and $3.0 million in the third quarter of 2008 and 2007, respectively, resulting in effective tax rates of 39.7% and 43.2% in the third
quarter of 2008 and 2007, respectively. Our effective tax rates were higher than the federal statutory rates principally as a result of state income taxes and various permanent
non-deductible tax items, including share-based payments, unrecognized tax benefits and other permanent differences.

Minority
interest expense increased $0.6 million, or 174.0%, to $0.9 million in the third quarter of 2008 compared to $0.3 million in the third quarter of 2007.

Earnings
from unconsolidated investees was $1.2 million in both the third quarters of 2008 and 2007.

Our
net income was $6.3 million, or $0.12 per share on a diluted basis, in the third quarter of 2008 and $3.9 million, or $0.08 per share on a diluted basis in 2007.

Nine Months Ended September 30, 2008 Compared to September 30, 2007

Revenue increased $38.7 million, or 11.7%, to $370.0 million in the first nine months of 2008 compared to
$331.3 million in the first nine months of 2007 due to an increase in PET/CT revenues, radiation oncology, other modalities and other revenue, and MRI revenues. PET/CT revenue in the first nine
months of 2008 increased $17.9 million, or 17.2%, compared to the first nine months of 2007. Total PET and PET/CT scan volumes increased 19.0% to 102,004 scans in the first nine months of 2008
from 85,751 scans in the first nine months of 2007, primarily as a result of growth in our core PET business and the acquisition of MOS in the third quarter of 2008. The average number of PET and
PET/CT systems in service increased to 82.7 systems in the first nine months of 2008 from 72.3 systems in the first nine months of 2007. These PET and PET/CT increases were partially offset by a 1.2%
decline in the average price per PET and PET/CT scan, to $1,187 per scan in the first nine months of 2008 compared to $1,202 per scan in the first nine months of 2007. Scans per system per day also
decreased 2.2%, to 6.18 scans per system per day in the first nine months of 2008 from 6.32 scans per system per day in the first nine months of 2007. Radiation oncology, other modalities and other
revenue increased $14.4 million, or 49.5%, to $43.6 million in the first nine months of 2008 compared to $29.2 million in the first nine months of 2007 primarily due to an
increase in radiation oncology revenue generated from the Bethesda Transaction. MRI revenue increased $6.4 million in the first nine months of 2008, or 3.2%. Scan-based MRI revenue
increased $6.2 million in the first nine months of 2008, or 3.5%, compared to the first nine months of 2007, to $182.4 million in the first nine months of 2008 from $176.2 million
in the first nine months of 2007. This increase is primarily a result of an increase in the average price per MRI scan of $380.20 per scan in the first nine months of 2008 compared to $362.00 per scan
in the first nine months of 2007 primarily due to retail revenue associated with the NEHE acquisition. Scan-based systems in service increased to 253.9 systems in the first nine months of
2008 from 253.8 systems in the first nine months of 2007. Non-scan based MRI revenue increased $0.2 million in the first nine months of 2008 over the same period in 2007. These
increases were partially offset by a 1.5% decrease in our scan-based MRI scan volume. Scan-based MRI scan volume decreased to 479,680 scans in the first nine months of 2008
from 486,877 scans in the first nine months of 2007, primarily due to a decrease in client demand. Average scans per system per day also decreased by 0.9% to 9.21 in the first nine months of 2008 from
9.29 in the first nine months of 2007. Included in the revenue totals above is fixed-site imaging center revenues, which increased

33

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$19.4 million,
or 34.7%, to $75.3 million in the first nine months of 2008 from $55.9 million in the first nine months of 2007.

We
had 303 MRI systems at September 30, 2008, compared to 310 MRI systems at September 30, 2007. We had 88 PET and PET/CT systems at September 30, 2008, compared to
76 PET and PET/CT systems at September 30, 2007. We operated 92 fixed-site imaging centers (including four in unconsolidated joint ventures) at September 30, 2008, compared
to 77 fixed-site imaging centers (including three in unconsolidated joint ventures) at September 30, 2007. We operated 18 radiation oncology centers and stereotactic radiosurgery
facilities (including two radiation oncology centers in unconsolidated joint ventures) at September 30, 2008.

Cost
of revenues, excluding depreciation and amortization, increased $20.1 million, or 11.6%, to $193.3 million in the first nine months of 2008 compared to
$173.2 million in the first nine months of 2007. Compensation and related employee expenses increased $7.9 million, or 9.4%, primarily as a result of an increase in average headcount
related to acquisitions completed in the fourth quarter of 2007 and third quarter of 2008. Medical supplies increased $2.8 million, or 20.0%, primarily as a result of an increase in the number
of PET and PET/CT scans, which use a radiopharmaceutical as a component of the PET and PET/CT scan. Maintenance and related costs increased $2.6 million, or 7.1%, due to an increase in service
costs related to the addition of radiation oncology systems and an increase in the number of PET/CT systems in operation. Fuel expenses increased $2.0 million, or 47.5%, primarily due to an
increase in the average price per gallon of diesel fuel costs. Site fees increased $1.3 million, or 44.8%, primarily as a result of an increase in the average number of retail
fixed-site imaging centers in operation. Outside medical services increased $1.2 million, or 20.7%, primarily as a result of an increase in radiologist service costs associated with
the NEHE acquisition. Management contract expenses increased $0.5 million, or 4.7%, as a result of an increase in expenses incurred on behalf of unconsolidated investees. License, taxes and
other fees increased $0.5 million, or 16.8%, primarily due to an increase in property taxes related to an increase in PET/CT and radiation oncology systems in use. Marketing costs increased
$0.2 million, or 59.2%, as a result of increased marketing campaigns. Equipment rental costs increased $0.2 million, or 4.5%, primarily due to an increase in the number of rental PET/CT
systems in use related to the MOS acquisition. All other cost of revenues, excluding depreciation and amortization, increased $0.9 million, or 10.3%. Cost of revenues, as a percentage of
revenue, decreased to 52.2% in the first nine months of 2008 from 52.3% in the first nine months of 2007 as a result of the factors described above, offset by a decrease in total fixed costs as a
percentage of revenue, due to an increase in revenue.

Selling,
general and administrative expenses increased $4.2 million, or 9.8%, to $46.9 million in the first nine months of 2008 compared to $42.7 million in the
first nine months of 2007. Share-based payment increased $1.3 million, or 46.0%, in the first nine months of 2008 from the first nine months of 2007 due to new equity awards granted in the
first quarter of 2008. Compensation and related employee expenses increased $0.7 million, or 3.0%, primarily as a result of an increase in average headcount related to acquisitions completed in
the fourth quarter of 2007 and 2008. The provision for doubtful accounts increased $0.5 million, or 14.8%, due to the collection of higher than normal amounts of aged accounts receivable in the
third quarter of 2007, as well as an increase in the provision for doubtful accounts related to increased retail revenue generated from acquisitions completed in the fourth quarter of 2007 and third
quarter of 2008. The provision for doubtful accounts, as a percentage of revenue, was 1.0% in both the first nine months of 2008 and 2007. All other selling, general and administrative expenses
increased $1.7 million, or 14.5%. Selling, general and administrative expenses as a percentage of revenue were 12.7% and 12.9% in the first nine months of 2008 and 2007, respectively.

We
recorded severance and related costs of $0.5 million in both the first nine months of 2008 and 2007.

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Depreciation
expense increased $3.0 million, or 4.7%, to $65.0 million in the first nine months of 2008 compared to $62.0 million in the first nine months of 2007 as
a result of fixed assets acquired in connection with our acquisitions in the fourth quarter of 2007 and third quarter of 2008.

Amortization
expense increased by $2.7 million, or 75.4%, to $6.2 million in the first nine months of 2008 compared to $3.5 million in the first nine months of 2007,
primarily due to the incremental amortization expense for intangible assets acquired in conjunction with our acquisitions in the fourth quarter of 2007 and 2008.

Interest
expense, net, increased $3.4 million, or 11.0%, to $33.8 million in the first nine months of 2008 compared to $30.4 million in the first nine months of
2007. This increase was primarily related to incremental interest expense associated with the $150.0 million 71/4% Senior Subordinated Note offering completed in the fourth
quarter of 2007, partially offset by lower interest rates and a $0.7 million non-cash fair value adjustment related to our interest rate swap agreement with LCPI.

Income
tax expense was $11.0 million and $10.2 million in the first nine months of 2008 and 2007, respectively, resulting in effective tax rates of 42.5% and 41.5% in the
first nine months of 2008 and 2007, respectively. Our effective tax rates were higher than the federal statutory rates principally as a result of state income taxes and various permanent
non-deductible tax items, including share-based payments, unrecognized tax benefits and other permanent differences.

Minority
interest expense increased $1.2 million, or 91.6%, to $2.5 million in the first nine months of 2008 compared to $1.3 million in the first nine months of
2007.

Earnings
from unconsolidated investees decreased by $3.0 million, or 45.0%, to $3.5 million in the first nine months of 2008 compared to $6.5 million in the first
nine months of 2007, primarily due to a $2.5 million gain on sale from a sale/leaseback transaction in one of the Company's unconsolidated investees as well as a $0.5 million gain on the
sale of real estate.

Our
net income was $14.9 million, or $0.29 per share on a diluted basis, in the first nine months of 2008 compared to $14.4 million, or $0.28 per share on a diluted basis,
in the first nine months of 2007.

Liquidity and Capital Resources

Our primary source of liquidity is cash provided by operating activities. We generated $96.7 million and $80.4 million of
cash flow from operating activities in the first nine months of 2008 and 2007, respectively. Our ability to generate cash flow is affected by numerous factors, including demand for MRI, PET, other
diagnostic imaging and radiation oncology services. Our ability to generate cash flow from operating activities is also dependent upon the collections of our accounts receivable. The provision for
doubtful accounts increased by $1.3 million in the first nine months of 2008 compared to the first nine months of 2007. Our number of days of revenue outstanding for our accounts receivable was
47 days and 50 days as of September 30, 2008 and 2007, respectively, which we believe is among the more favorable in the healthcare service industry.

Approximately
$15.0 million of our $70.0 million revolving line of credit is held by LCPI, a subsidiary of Lehman Brothers, which has filed for bankruptcy protection under
Chapter 11 of the United States Bankruptcy Code. We do not expect that LCPI would fund this commitment if requested to do so. We intend to replace LCPI as a lender under our revolving line of
credit to the extent we are able to do so given the current condition of the global financial markets. To the extent we are not able to replace LCPI as a lender under the revolving line of credit, we
do not expect that their inability to fund their commitment would have a material adverse impact on our liquidity. As of September 30, 2008, excluding the commitment of LCPI, we had
$50.1 million of available borrowings under our revolving line of credit.

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We
used cash of $75.0 million and $61.2 million for investing activities in the nine months ended September 30, 2008 and 2007, respectively. Investing activities in
the first nine months of 2008 includes $34.6 million used for acquisitions. We expect to continue to use cash for acquisitions in the future. Other than acquisitions, our primary use of capital
resources is to fund capital expenditures. We incur capital expenditures for the purposes of:



Capital
expenditures totaled $41.2 million and $45.2 million in the nine months ended September 30, 2008 and 2007, respectively. During the first nine months of
2008, we purchased 13 MRI systems and eight PET/CT systems. We traded-in or sold a total of 34 total systems for the nine months ended September 30, 2008. Our decision to purchase a
new system is typically predicated on obtaining new or extending existing client contracts, which serve as the basis of demand for the new system. We expect to purchase additional systems in 2008 and
finance substantially all of these purchases with our available cash, cash from operating activities, our revolving line of credit, and equipment leases. Based upon the client demand described above,
which dictates the type of equipment purchased, we expect capital expenditures to total approximately $55 to $65 million in 2008.

At
September 30, 2008, we had cash and cash equivalents of $120.7 million. This available cash and cash equivalents are held in accounts managed by third party financial
institutions and consist of invested cash and cash in our operating accounts. The invested cash is invested in interest bearing funds managed by third party financial institutions. These funds invest
in high-quality money market instruments, primarily direct obligations of the government of the United States. To date, we have experienced no loss or lack of access to our invested cash or cash
equivalents; however, we can provide no assurances that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets.

At
September 30, 2008, the Company had $119.0 million in our accounts that are with third party financial institutions which exceed the Federal Deposit Insurance
Corporation ("FDIC") insurance limits. While we monitor daily the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the
underlying financial institutions fail or could be subject to other adverse conditions in the financial markets. To date, we have experienced no loss or lack of access to cash in our operating
accounts.

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

Recent Accounting Pronouncements

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No. 115" ("SFAS 159"), which permits entities to choose to measure many financial instruments and certain other
items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board's
long-term measurement objectives for accounting for financial instruments. SFAS 159 was effective and adopted by us on January 1, 2008. The provisions of SFAS 159 are
being applied

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prospectively.
The adoption of SFAS 159 did not have a material impact on our results of operations, cash flows or financial position.

In
December 2007, the FASB issued SFAS No. 141(R) (Revised 2007), "Business Combinations" ("SFAS 141(R)"). SFAS 141(R) will significantly change the accounting for
business combinations. Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date
fair value with limited exceptions. SFAS 141(R) will change the accounting treatment for certain specific items, including:



SFAS 141(R)
also includes a substantial number of new disclosure requirements. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. Accordingly, since we are a calendar year-end
company we will continue to record and disclose business combinations following existing generally accepted accounting principles until January 1, 2009. We expect SFAS 141(R) will have
an impact on accounting for business combinations once adopted but the effect is generally dependent upon acquisitions at that time.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial StatementsAn Amendment of Accounting Research Bulletin
No. 51" ("SFAS 160"). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.
Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent's equity. The
amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent's
ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a
parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the
deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We have not completed our evaluation of the potential impact of
the adoption of SFAS 160 on our consolidated results of operations, cash flows or financial position.

In
March 2008, the FASB issued SFAS No. 161, "Disclosure about Derivative Instruments and Hedging ActivitiesAn Amendment of FASB Statement No. 133"
("SFAS 161"), which enhances the current guidance on disclosure requirements for derivative instruments and hedging activities. This statement requires that objectives for using derivative
instruments be disclosed in terms of underlying risk and accounting designation. Specifically, SFAS 161 requires disclosure about (a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedged items are

37

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accounted
for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and
cash flow. This statement requires qualitative disclosure about the objectives and strategies for using derivatives in terms of the risks that the entity is intending to manage, quantitative
disclosures about fair value amounts of gains and losses on derivative instruments in a tabular format, and disclosures about credit-risk-related contingent features in
derivative agreements to provide information on potential effect on an entity's liquidity from using derivatives. The derivative instruments shall be distinguished between those used for risk
management purposes and those used for other purposes. SFAS 161 is effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008, with
early application encouraged. As SFAS 161 provides only disclosure requirements, the adoption of this standard will not have a material impact on our results of operations, cash flows or
financial position.

Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995

Certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, particularly in
the section entitled "Liquidity and Capital Resources", and elsewhere in this quarterly report on Form 10-Q, are "forward-looking statements," within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Statements which address activities, events or developments that we expect or anticipate will or may occur in the future, including
such things as results of operations and financial condition, capital expenditures, the consummation of acquisitions and financing transactions and the effect of such transactions on our business and
our plans and objectives for future operations and expansion are examples of forward-looking statements. In some cases you can identify these statements by forward-looking words like "may", "should",
"expect", "anticipate", "believe", "estimate" "predict", "continue" or similar words. These forward-looking statements are subject to risks and uncertainties which could cause actual outcomes and
results to differ materially from our expectations, forecasts and assumptions. These risks and uncertainties include factors affecting our leverage, including fluctuations in interest rates, the risk
that the counter-parties to our interest rate swap agreements fail to satisfy their obligations under these agreements, our ability to incur financing, the effect of operating and financial
restrictions in our debt instruments, the accuracy of our estimates regarding our capital requirements, the effect of intense levels of competition in our industry, changes in the rates or methods of
third party reimbursements for diagnostic imaging services, changes in the healthcare regulatory environment, our ability to keep pace with technological developments within our industry, our ability
to integrate acquisitions, and other risks and uncertainties, including those enumerated and described under "Risk Factors" in our Form 10-K, as filed with the
Securities and Exchange Commission, for the fiscal year ended December 31, 2007. The foregoing should not be construed as an exhaustive list of all factors which could cause actual results to
differ materially from those expressed in forward-looking statements made by us.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We provide our services exclusively in the United States and receive payment for our services exclusively in United States dollars. As
a result, our financial results are unlikely to be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets.

Our
interest expense is sensitive to changes in the general level of interest rates in the United States, particularly because the majority of our indebtedness has interest rates which
are variable. The recorded carrying amount of our long-term debt under our existing credit agreement approximates fair value as these borrowings have variable rates that reflect currently
available terms and conditions for similar debt. To decrease the risk associated with interest rate increases, we entered into multiple

38

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interest
rate swap and collar agreements for a portion of our variable rate debt. These swaps and collars are designated as cash flow hedges of variable future cash flows associated with our
long-term debt.

During
2004 we entered into swap agreements which had notional amounts of $56.8 million, $46.8 million and $48.4 million. Under the terms of these agreements, we
received three-month LIBOR and paid a fixed rate of 3.15%, 3.89%, and 3.69%, respectively. The net effect of the hedges was to record interest expense at fixed rates of 5.65%, 6.39% and 6.19%
respectively, as the debt incurred interest based on three-month LIBOR plus 2.50%. For the nine months ended September 30, 2007, we received net settlement amounts $1.0 million. The swap
agreements matured during the second and fourth quarters of 2007.

During
2005 we entered into multiple interest rate collar agreements which had a notional amount of $178.0 million. Under the terms of these agreements, we purchased a cap on the
interest rate of 4.00% and sold a floor of 2.25%. For the nine months ended September 30, 2008, we received net settlement amounts of $0.3 million. For the quarter and nine months ended
September 30, 2007, we received net
settlement amounts of $0.5 million and $1.6 million, respectively, on these collar agreements. The collar agreements matured at various dates between January 2007 and January 2008.

During
the first quarter of 2008 we entered into two interest rate swap agreements with notional amounts of $92.7 million each, to hedge future cash interest payments associated
with a portion of the Company's variable rate bank debt (the "2008 swaps"). Under the terms of these agreements, we receive three-month LIBOR and pay a fixed rate of 3.15%. The net effect of the
hedges is to record interest expense at a fixed rate of 5.65%, as the debt incurs interest based on three-month LIBOR plus 2.50%. For the quarter and nine month period ended September 30, 2008,
the Company paid net settlement amounts of $119 and $73, respectively. The 2008 swaps are three years in length and mature in 2011.

The
collar agreements and the 2008 swaps have been designated as cash flow hedges of variable future cash flows associated with our long term debt. In accordance with SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," the collars and the 2008 swaps are, and will be, recorded at fair value. On a quarterly basis, the fair value of the collars and will be
determined based on quoted market prices and, assuming perfect effectiveness, the difference between the fair value and the book value of the collars will be recognized in comprehensive income, a
component of shareholders' equity. On a quarterly basis the fair value of the 2008 swaps will be determined based on the income approach using observable Level 2 inputs. The fair market value
of the 2008 swaps will be recorded on the balance sheet as assets or liabilities with all effective changes deferred in comprehensive income. Any ineffectiveness of the collars and 2008 swaps is
required to be recognized in earnings.

The
2008 swaps expose us to credit risk in the event that the counterparties to the agreements do not or cannot meet their obligations. The notional amount is used to measure interest to
be paid or received and does not represent the amount of exposure to credit loss. The loss would be limited to the amount that would have been received, if any, over the remaining life of the 2008
swaps. On a quarterly basis, the counterparties are evaluated for non-performance risk. On September 15, 2008, Lehman Brothers Holding, Inc. ("LHI") filed for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Code, and as a result, hedge accounting was terminated on one of the swaps, with a notional amount of $92.7 million. All
further changes in the fair market value of this swap will be recorded in interest expense. On October 6, 2008, LCPI filed for bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code. The fair market value of the swap at September 30, 2008 was an asset of $692 which was written down to zero as collectability was deemed uncertain due to the LHI bankruptcy
filing. The write down of this amount is included in interest expense for the quarter and nine months ended September 30, 2008. We do not expect LCPI to fulfill their obligations

39

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under
the swap agreement and, as such, we are seeking to replace LCPI as a counterparty to such agreement. However, there can be no assurances that we will be able to replace our swap agreement with a
comparable alternative contract on commercially reasonable terms or at all. Additionally, the credit crisis could have an impact on our other interest rate swap agreement if that counterparty files
for bankruptcy or is otherwise unable to perform its obligations. See Notes 9 and 15 to the Condensed
Consolidated Financial Statement for additional details. The collars outstanding at December 31, 2007 matured during January 2008, and all counterparty obligations were met.

Our
interest income is sensitive to changes in the general level of interest rates in the United States, particularly because the majority of our investments are in cash equivalents. The
Company maintains its cash equivalents in financial instruments with original maturities of 90 days or less. Cash and cash equivalents are invested in interest bearing funds managed by third
party financial institutions. These funds invest in high-quality money market instruments, primarily direct obligations of the government of the United States. At September 30, 2008, we had
cash and cash equivalents of $120.7 million, of which $119.0 million was held in accounts that are with third party financial institutions which exceed the Federal Deposit Insurance
Corporation ("FDIC") insurance limits. The Company also held investments in marketable securities during 2007, which consisted primarily of investment grade auction rate securities and debt
securities, all classified as available-for-sale with original maturities greater than 90 days. The recorded carrying amounts of cash and cash equivalents and marketable
securities approximate fair value due to their short-term maturities.

ITEM 4.    CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, we have investments in certain
unconsolidated entities. As we do not control or manage these entities, our disclosure controls and procedures with respect to such entities are more limited than those we maintain with respect to our
consolidated subsidiaries. These unconsolidated entities are not considered material to our consolidated financial position or results of operations.

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

There
has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially
affect, our internal controls over financial reporting.

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PART IIOTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

From time to time, we are involved in routine litigation incidental to the conduct of our business. We believe that none of the
litigation currently pending against us will have a material adverse effect on our business.

ITEM 1A.    RISK FACTORS

The Company has included in Part I, Item 1A of its Annual Report on Form 10-K for the year ended
December 31, 2007, a description of certain risks and uncertainties that could affect the Company's business, future performance or financial condition (the "Risk Factors"). The Risk Factors
are hereby incorporated in Part II, Item 1A of this Form 10-Q. Investors should consider the Risk Factors prior to making an investment decision with respect to the
Company's stock.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5.    OTHER INFORMATION

Not applicable.

ITEM 6.    EXHIBITS

| |     |  |                                                                                                                                                                                                                                                             
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1 |  | Amended and Restated Certificate of Incorporation of Alliance.(3)                                                                                                                                                                                           
| | 3.2 |  | Amended and Restated By-laws of Alliance.(3)                                                                                                                                                                                                                
| | 3.3 |  | Amendment to Amended and Restated By-laws of Alliance.(18)                                                                                                                                                                                                  
| | 4.1 |  | Credit Agreement dated as of November 2, 1999, as amended.(1)                                                                                                                                                                                               
| | 4.2 |  | Specimen certificate for shares of common stock, $.01 par value, of Alliance.(3)                                                                                                                                                                            
| | 4.3 |  | Second Amendment dated as of June 10, 2002 to Credit Agreement.(4)                                                                                                                                                                                          
| | 4.4 |  | 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)
| | 4.5 |  | Third Amendment dated as of December 29, 2004 to Credit Agreement.(6)                                                                                                                                                                                       
| | 4.6 |  | Fourth Amendment dated as of December 19, 2005 to Credit Agreement.(8)                                                                                                                                                                                      
| | 4.7 |  | Fifth Amendment dated as of April 16, 2007 to Credit Agreement.(16)                                                                                                                                                                                         
| | 4.8 |  | Indenture, including the form of Note, dated as of December 4, 2007, between Alliance Imaging, Inc., as issuer, and
The Bank of New York Trust Company, N.A., as trustee.(17)                                                                               

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| |       |  |                                                                                                                                            
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1  |  | The 1999 Equity Plan for Employees of Alliance and Subsidiaries, as amended and restated.(18)                                              
| | 10.2  |  | Two forms of option agreement under the 1999 Equity Plan for Employees of Alliance and Subsidiaries, as amended and
restated.(1)           
| | 10.3  |  | Alliance Directors' Deferred Compensation Plan, as amended and restated.(18)                                                               
| | 10.4  |  | Employment Agreement dated as of January 1, 2003 between Alliance and Paul S. Viviano.(5)                                                  
| | 10.5  |  | Agreement Not to Compete dated as of January 1, 2003 between Alliance and Paul S. Viviano.(5)                                              
| | 10.6  |  | Stock Subscription Agreement dated as of January 2, 2003 between Alliance and Paul S. Viviano.(5)                                          
| | 10.7  |  | Stock Subscription Agreement dated as of February 3, 2003 between Alliance and Paul S. Viviano.(5)                                         
| | 10.8  |  | Form of Stockholder's Agreement.(1)                                                                                                        
| | 10.9  |  | Registration Rights Agreement dated as of November 2, 1999.(1)                                                                             
| | 10.10 |  | Management Agreement, dated as of November 2, 1999, between Alliance and Kohlberg Kravis Roberts & Co.,
 LLP.(1)                           
| | 10.11 |  | Amendment No. 1 to Management Agreement, effective as of January 1, 2000, between Alliance and Kohlberg Kravis
Roberts & Co., LLP.(1)      
| | 10.12 |  | Form of Indemnification Agreement.(2)                                                                                                      
| | 10.13 |  | Amended and Restated Employment Agreement dated as of May 9, 2005 between Alliance and Paul S. 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 December 1, 2005 between Alliance and Howard K. Aihara.(9)                                                
| | 10.16 |  | Agreement Not to Compete dated as of December 1, 2005 between Alliance and Howard K. Aihara.(9)                                            
| | 10.17 |  | 2006 Executive Incentive Plan(10)                                                                                                         
| | 10.18 |  | Summary of compensation award to Nicholas A. Poan(11)                                                                                      
| | 10.19 |  | Form of Restricted Stock Award Agreement under the 1999 Equity Plan for Employees of Alliance and Subsidiaries, as amended and
Restated(14)
| | 10.20 |  | Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement (Directors)(18)                                 
| | 10.21 |  | Form of Stock Bonus Award Agreement under the 1999 Equity Plan for Employees of Alliance and Subsidiaries, as amended and
Restated(14)     
| | 10.22 |  | Summary of compensation award to Michael F. Frisch(12)                                                                                     
| | 10.23 |  | Summary of compensation award to Eli Glovinsky(14)                                                                                         
| | 10.24 |  | Schedule of Executive Officer Compensation(19)                                                                                             
| | 10.25 |  | Schedule of Non-Employee Director Compensation(19)                                                                                         

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| |       |  |                                                                                                                                                                                                                                                                                       
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.26 |  | 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(13)
| | 10.27 |  | 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.(15)                                                                                                        
| | 10.28 |  | Form of Executive Severance Agreement(15)                                                                                                                                                                                                                                             
| | 10.29 |  | Assignment, dated as of April 16, 2007, to Registration Rights Agreement, dated as of November 2, 1999.(16)                                                                                                                                                                           
| | 10.30 |  | Amendment No. 2 to Management Agreement, dated as of April 16, 2007, between Alliance and Kohlberg, Kravis
Roberts & Co., LLP.(16)                                                                                                                                                    
| | 10.31 |  | Amendment of Employment Agreement, dated as of April 16, 2007, between Paul S. Viviano and Alliance Imaging,
 Inc.(16)                                                                                                                                                                
| | 10.32 |  | Amendment of Employment Agreement, dated as of April 16, 2007, between Howard K. Aihara and Alliance Imaging,
 Inc.(16)                                                                                                                                                               
| | 10.33 |  | Registration Rights Agreement, dated as of December 4, 2007, by and between Alliance Imaging, Inc. and Deutsche Bank
Securities Inc. and Piper Jaffray & Co.(17)                                                                                                                      
| | 10.34 |  | New form of option agreement under the 1999 Equity Plan for Employees of Alliance and subsidiaries, as amended and
restated.(19)                                                                                                                                                      
| | 31    |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.(20)                                                                                                                                                  
| | 32    |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.(20)                                                                                                                                                  

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SIGNATURES

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

|                 |  |                        |  |                                                                                                                                          
|---------------- |  | ---------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|                 |  | ALLIANCE IMAGING, INC.
|November 7, 2008 |  | By:                    |  | /s/PAUL S. VIVIANO Paul S. Viviano Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)                       
|November 7, 2008 |  | By:                    |  | /s/HOWARD K. AIHARA Howard K. Aihara Executive Vice President and Chief Financial Officer
(Principal Financial Officer)                  
|November 7, 2008 |  | By:                    |  | /s/NICHOLAS A. POAN Nicholas A. Poan Senior Vice President, Corporate Finance and Chief Accounting Officer
(Principal Accounting Officer)

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