**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

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**FORM 10-Q**

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

**For QuarterEnded:  September 30, 2006**

**Commission FileNumber:  1-16609**

**ALLIANCE  IMAGING, INC.**

(Exact name ofregistrant as specified in its charter)

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

 

**1900South State College BoulevardSuite 600Anaheim, California 92806**(Addressof principal executive office)

**(714) 688-7100**(Registrant’stelephone number, including area code)

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

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

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

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

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of October 31, 2006:

Common Stock, $.01 par value, 49,843,683 shares

 

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**ALLIANCE  IMAGING, INC.FORM 10-QSeptember 30, 2006Index**

|                                                                                                                                                      | ** ** | **Page** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| PART I—FINANCIAL  INFORMATION                                                                                                              |       |     |       |   |   |
| Item  1—Financial Statements:                                                                                                                   |       |     |       |   |   |
| Condensed Consolidated Balance SheetsDecember 31, 2005 and September 30, 2006  (Unaudited)                                                 |       |     | 3          |   |   |
| Condensed Consolidated Statements of Operations and  Comprehensive IncomeQuarter and nine months ended September 30, 2005  and 2006 (Unaudited) |       |     | 4          |   |   |
| Condensed Consolidated Statements of Cash FlowsNine months ended September 30, 2005 and 2006 (Unaudited)                                        |       |     | 5          |   |   |
| Notes to Condensed Consolidated Financial Statements  (Unaudited)                                                                                    |       |     | 6          |   |   |
| Item 2—Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                              |       |     | 19         |   |   |
| Item 3—Quantitative and Qualitative Disclosures about  Market Risk                                                                              |       |     | 29         |   |   |
| Item 4—Controls and Procedures                                                                                                                  |       |     | 30         |   |   |
| PART II—OTHER  INFORMATION                                                                                                                 |       |     |       |   |   |
| Item  1—Legal Proceedings                                                                                                                       |       |     | 31         |   |   |
| Item 1A—Risk Factors                                                                                                                            |       |     | 31         |   |   |
| Item 2—Unregistered Sales of Equity Securities and Use  of Proceeds                                                                             |       |     | 43         |   |   |
| Item 3—Defaults Upon Senior Securities                                                                                                          |       |     | 43         |   |   |
| Item 4—Submission of Matters to a Vote of Security  Holders                                                                                     |       |     | 43         |   |   |
| Item  5—Other Information                                                                                                                       |       |     | 43         |   |   |
| Item 6—Exhibits                                                                                                                                 |       |     | 44         |   |   |
| SIGNATURES                                                                                                                                           |       |     | 47         |   |   |

 

2

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**PART I—FINANCIALINFORMATION**

**ITEM 1.   FINANCIALSTATEMENTS**

**ALLIANCE IMAGING, INCCONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)(in thousands)**

| ** **                                                   | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                   | ** ** | **2005**              | ** ** | **2006**               | ** ** |
| **ASSETS**                                                   |       |                  |       |                   |       |   |   |   |   |
| Current assets:                                              |       |                  |       |                   |       |   |   |   |   |
| Cash and cash equivalents                                    |       |                  | $          | 13,421                 |       |   |   | $ | 12,914 |   |   |
| Accounts receivable, net of allowance for doubtful  accounts |       |                  | 48,236     |                   |       |   | 56,465 |   |   |
| Deferred income taxes                                        |       |                  | 6,186      |                   |       |   | 18,008 |   |   |
| Prepaid expenses and other current assets                    |       |                  | 3,686      |                   |       |   | 4,788 |   |   |
| Other receivables                                            |       |                  | 8,983      |                   |       |   | 12,356 |   |   |
| Total current  assets                                        |       |                  | 80,512     |                   |       |   | 104,531 |   |   |
| Equipment, at  cost                                          |       |                  | 752,128    |                   |       |   | 761,356 |   |   |
| Less accumulated  depreciation                               |       |                  | (393,179   | )                      |       |   | (414,884 | ) |   |
| Equipment, net                                               |       |                  | 358,949    |                   |       |   | 346,472 |   |   |
| Goodwill                                                     |       |                  | 154,656    |                   |       |   | 154,723 |   |   |
| Other intangible  assets, net                                |       |                  | 39,071     |                   |       |   | 36,985 |   |   |
| Deferred  financing costs, net                               |       |                  | 8,236      |                   |       |   | 7,293 |   |   |
| Other assets                                                 |       |                  | 33,918     |                   |       |   | 24,264 |   |   |
| Total assets                                                 |       |                  | $          | 675,342                |       |   |   | $ | 674,268 |   |   |
| **LIABILITIES AND STOCKHOLDERS’  DEFICIT**              |       |                  |       |                   |       |   |   |   |   |
| Current liabilities:                                         |       |                  |       |                   |       |   |   |   |   |
| Accounts payable                                             |       |                  | $          | 23,672                 |       |   |   | $ | 12,349 |   |   |
| Accrued compensation and related expenses                    |       |                  | 14,088     |                   |       |   | 16,910 |   |   |
| Accrued interest payable                                     |       |                  | 4,561      |                   |       |   | 7,504 |   |   |
| Income taxes payable                                         |       |                  | 87         |                   |       |   | — |   |   |
| Other accrued liabilities                                    |       |                  | 29,064     |                   |       |   | 30,728 |   |   |
| Current portion of long-term debt                            |       |                  | 7,781      |                   |       |   | 6,750 |   |   |
| Total current  liabilities                                   |       |                  | 79,253     |                   |       |   | 74,241 |   |   |
| Long-term debt,  net of current portion                      |       |                  | 418,260    |                   |       |   | 383,467 |   |   |
| Senior  subordinated notes                                   |       |                  | 153,541    |                   |       |   | 153,541 |   |   |
| Minority  interests and other liabilities                    |       |                  | 4,400      |                   |       |   | 4,131 |   |   |
| Deferred income taxes                                        |       |                  | 60,144     |                   |       |   | 81,096 |   |   |
| Total liabilities                                            |       |                  | 715,598    |                   |       |   | 696,476 |   |   |
| Commitments and  contingencies (Note 11)                     |       |                  |       |                   |       |   |   |   |   |
| Stockholders’ deficit:                                  |       |                  |       |                   |       |   |   |   |   |
| Common stock                                                 |       |                  | 496        |                   |       |   | 499 |   |   |
| Additional paid-in deficit                                   |       |                  | (11,876    | )                      |       |   | (8,639 | ) |   |
| Accumulated comprehensive income                             |       |                  | 3,217      |                   |       |   | 3,027 |   |   |
| Accumulated deficit                                          |       |                  | (32,093    | )                      |       |   | (17,095 | ) |   |
| Total  stockholders’ deficit                            |       |                  | (40,256    | )                      |       |   | (22,208 | ) |   |
| Total liabilities  and stockholders’ deficit            |       |                  | $          | 675,342                |       |   |   | $ | 674,268 |   |   |

 

*See accompanying notes.*

3

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

| ** **                                                                                          | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                                                                          | ** ** | **September 30,** | ** ** | **September 30,**          | ** ** |
| ** **                                                                                          | ** ** | **2005**               | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| Revenues                                                                                            |       | $                      | 106,198    |                            | $          | 113,468 |   | $ | 320,596 |   | $ | 344,116 |   |
| Costs and expenses:                                                                                 |       |                   |       |                            |       |   |   |   |   |
| Cost of revenues,  excluding depreciation and amortization                                          |       | 55,901                 |       | 60,163                          |       | 163,729 |   | 182,621 |   |
| Selling, general  and administrative expenses                                                       |       | 11,747                 |       | 13,669                          |       | 37,110 |   | 41,037 |   |
| Employment  agreement costs                                                                         |       | —                 |       | —                          |       | 366 |   | — |   |
| Severance and  related costs                                                                        |       | —                 |       | —                          |       | — |   | 536 |   |
| Depreciation  expense                                                                               |       | 20,385                 |       | 20,818                          |       | 61,311 |   | 62,738 |   |
| Amortization  expense                                                                               |       | 937                    |       | 1,230                           |       | 2,719 |   | 3,703 |   |
| Interest expense,  net of interest income                                                           |       | 9,117                  |       | 10,053                          |       | 27,686 |   | 30,343 |   |
| Other (income)  and expense, net                                                                    |       | 56                     |       | (174                            | )          | (331 | ) | 298 |   |
| Total costs and  expenses                                                                           |       | 98,143                 |       | 105,759                         |       | 292,590 |   | 321,276 |   |
| Income before  income taxes, minority interest expense, and earnings from unconsolidated  investees |       | 8,055                  |       | 7,709                           |       | 28,006 |   | 22,840 |   |
| Income tax  expense                                                                                 |       | 3,494                  |       | 3,392                           |       | 11,795 |   | 10,401 |   |
| Minority interest  expense                                                                          |       | 550                    |       | 551                             |       | 1,506 |   | 1,586 |   |
| Earnings from  unconsolidated investees                                                             |       | (1,000                 | )          | (1,129                          | )          | (2,596 | ) | (4,145 | ) |
| Net income                                                                                          |       | $                      | 5,011      |                            | $          | 4,895 |   | $ | 17,301 |   | $ | 14,998 |   |
| Comprehensive income,  net of taxes:                                                                |       |                   |       |                            |       |   |   |   |   |
| Net income                                                                                          |       | $                      | 5,011      |                            | $          | 4,895 |   | $ | 17,301 |   | $ | 14,998 |   |
| Unrealized gain  (loss) on hedging transactions, net of taxes                                       |       | 1,450                  |       | (1,311                          | )          | 3,051 |   | (190 | ) |
| Comprehensive  income                                                                               |       | $                      | 6,461      |                            | $          | 3,584 |   | $ | 20,352 |   | $ | 14,808 |   |
| Earnings per common  share:                                                                         |       |                   |       |                            |       |   |   |   |   |
| Basic                                                                                               |       | $                      | 0.10       |                            | $          | 0.10 |   | $ | 0.35 |   | $ | 0.30 |   |
| Diluted                                                                                             |       | $                      | 0.10       |                            | $          | 0.10 |   | $ | 0.34 |   | $ | 0.30 |   |
| Weighted average number  of shares of common stock and common stock equivalents:                    |       |                   |       |                            |       |   |   |   |   |
| Basic                                                                                               |       | 49,517                 |       | 49,844                          |       | 49,313 |   | 49,737 |   |
| Diluted                                                                                             |       | 50,368                 |       | 50,505                          |       | 50,311 |   | 50,239 |   |

 

*See accompanying notes.*

4

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

| ** **                                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                            | ** ** | **2006** | ** ** |
| **Operating activities:**                                                          |       |                                                |       |   |   |
| Net income                                                                         |       | $                                                   | 17,301     |   | $ | 14,998 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                                |       |   |   |
| Provision for doubtful accounts                                                    |       | 2,035                                               |       | 2,625 |   |
| Non-cash share-based compensation                                                  |       | 189                                                 |       | 1,965 |   |
| Depreciation and amortization                                                      |       | 64,030                                              |       | 66,441 |   |
| Amortization of deferred financing costs                                           |       | 1,834                                               |       | 1,193 |   |
| Distributions  greater than equity in undistributed                                |       |                                                |       |   |   |
| income of investees                                                                |       | 70                                                  |       | 134 |   |
| Deferred income taxes                                                              |       | 10,838                                              |       | 9,453 |   |
| (Gain) loss on sale of assets                                                      |       | (331                                                | )          | 298 |   |
| Changes  in operating assets and liabilities:                                      |       |                                                |       |   |   |
| Accounts receivable                                                                |       | (1,558                                              | )          | (10,922 | ) |
| Prepaid expenses and other current assets                                          |       | (1,249                                              | )          | (1,102 | ) |
| Other receivables                                                                  |       | (3,951                                              | )          | (3,373 | ) |
| Other assets                                                                       |       | (1,825                                              | )          | (243 | ) |
| Accounts payable                                                                   |       | (3,276                                              | )          | (11,212 | ) |
| Accrued compensation and related expenses                                          |       | (3,133                                              | )          | 2,822 |   |
| Accrued interest payable                                                           |       | 6,208                                               |       | 2,943 |   |
| Income taxes payable                                                               |       | (410                                                | )          | (87 | ) |
| Other accrued liabilities                                                          |       | 6,189                                               |       | 1,591 |   |
| Minority interests and other liabilities                                           |       | 66                                                  |       | (357 | ) |
| Net cash provided by operating activities                                          |       | 93,027                                              |       | 77,167 |   |
| **Investing activities:**                                                          |       |                                                |       |   |   |
| Equipment purchases                                                                |       | (46,497                                             | )          | (56,516 | ) |
| (Increase) decrease in deposits on equipment                                       |       | (512                                                | )          | 7,944 |   |
| Acquisitions, net of cash received                                                 |       | (7,650                                              | )          | — |   |
| Proceeds from sale of assets                                                       |       | 1,455                                               |       | 4,663 |   |
| Net cash used in investing activities                                              |       | (53,204                                             | )          | (43,909 | ) |
| **Financing activities:**                                                          |       |                                                |       |   |   |
| Principal payments on equipment debt                                               |       | (4,485                                              | )          | (2,716 | ) |
| Proceeds from equipment debt                                                       |       | 558                                                 |       | — |   |
| Principal payments on revolving loan facility                                      |       | (15,000                                             | )          | (52,000 | ) |
| Proceeds from revolving loan facility                                              |       | 15,000                                              |       | 22,500 |   |
| Principal payments on term loan facility                                           |       | (25,000                                             | )          | (2,675 | ) |
| Payments of debt issuance costs                                                    |       | (531                                                | )          | (250 | ) |
| Proceeds from exercise of employee stock options                                   |       | 2,265                                               |       | 1,376 |   |
| Net cash used in financing activities                                              |       | (27,193                                             | )          | (33,765 | ) |
| Net increase (decrease) in cash and cash equivalents                               |       | 12,630                                              |       | (507 | ) |
| Cash and cash equivalents, beginning of period                                     |       | 20,721                                              |       | 13,421 |   |
| Cash and cash equivalents, end of period                                           |       | $                                                   | 33,351     |   | $ | 12,914 |   |
| **Supplemental disclosure of cash  flow information:**                             |       |                                                |       |   |   |
| Interest paid                                                                      |       | $                                                   | 20,074     |   | $ | 26,682 |   |
| Income taxes paid, net of refunds                                                  |       | 1,489                                               |       | 1,327 |   |
| **Supplemental disclosure of  non-cash investing and financing activities:**       |       |                                                |       |   |   |
| Net book value of assets exchanged                                                 |       | $                                                   | 5,698      |   | $ | 6,361 |   |
| Capital lease obligations assumed for the purchase of  equipment debt              |       | 1,577                                               |       | 1,839 |   |
| Equipment debt transferred to unconsolidated investee                              |       | —                                              |       | (2,772 | ) |
| Comprehensive  income from hedging transactions, net of taxes                      |       | 3,051                                               |       | (190 | ) |

 

*See accompanying notes.*

5

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**ALLIANCE IMAGING,INC.**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**September 30,2006**

**(Unaudited)**

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

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

**Basisof Presentation—****The** accompanying unauditedcondensed consolidated financial statements have been prepared by AllianceImaging, Inc. (the “Company”) in accordance with accounting principlesgenerally accepted in the United States of America and with the instructions toForm 10-Q and Article 10 of Regulation S-X of the Securitiesand Exchange Commission. Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. In the opinion of management, alladjustments (including normal recurring accruals) considered necessary for afair presentation have been included. Operating results for the nine-monthperiod ended September 30, 2006 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2006. Theaccompanying unaudited condensed consolidated financial statements should beread in conjunction with the audited consolidated financial statements andnotes to the consolidated financial statements for the year ended December 31,2005.

**Principlesof Consolidation—****The**accompanying unauditedcondensed consolidated financial statements of the Company include the assets,liabilities, revenues and expenses of all majority owned subsidiaries overwhich the Company exercises control. Intercompany transactions have beeneliminated. We record minority interest expense related to our consolidatedsubsidiaries which are not wholly owned. Investments in unconsolidatedinvestees are accounted for under the equity method.

**Use of Estimates—****The******preparation of condensed consolidated financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions thataffect the amounts reported in the condensed consolidated financial statementsand accompanying notes. Actual results could differ from those estimates.

**2.**                 Share-BasedCompensation

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123(R)(revised December 2004), “Share-Based Payment” (“SFAS 123(R)”), whichis a revision of SFAS No. 123, “Accounting for Stock-BasedCompensation” (“SFAS 123”) and supersedes Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).This statement requires that the fair value at the grant date resulting fromall share-based payment transactions be recognized in the financial statements.Further, SFAS 123(R) requires entities to apply a fair-value basedmeasurement method in accounting for these transactions. This value is recordedover the vesting period. The statement is effective for the first fiscal yearbeginning after June 15, 2005.

The Company adopted SFAS 123(R)for the fiscal year beginning January 1, 2006, using the modifiedprospective application transition method and, accordingly, has not restatedthe consolidated financial statements for prior interim periods or fiscal years.Under SFAS 123(R), the Company now records in its consolidated statementsof operations (i) compensation cost for options granted, modified,repurchased or cancelled on or after January 1, 2006 under the provisionsof SFAS 123(R) and (ii) compensation cost for the unvested portion ofoptions granted prior to January 1, 2006 over their remaining vestingperiods using the amounts previously measured under SFAS 123 for pro formadisclosure purposes.

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***Stock Option Plans and Awards***

In December 1997, the Company adopted an employeestock option plan (“1997 Equity Plan”) pursuant to which options with respectto a total of 4,685,450 shares of the Company’s common stock were available forgrant. Options were granted at their fair value at the date of grant. Alloptions have 10-year terms. On November 2, 1999, in connection witha series of transactions contemplated by an Agreement and Plan of Mergerbetween Viewer Acquisition Corp and the Company in November 1999 (the “1999Recapitalization Merger”), all options under the 1997 Equity Plan became fullyvested.

In connection with the Company’s acquisition of all ofthe outstanding common stock of Three Rivers Holding Corporation (“Three Rivers”),the parent corporation of SMT Health Services, Inc., in 1999, outstandingemployee stock options under the 1997 Three Rivers Stock Option Plan wereconverted into options to acquire shares of the Company’s common stock. TheThree Rivers stock option plan allowed for options with respect to a total of2,825,200 shares of the Company’s common stock to be available for grant. Optionswere granted at their fair value at the date of grant. All options have 10-yearterms. On November 2, 1999, in connection with the 1999 RecapitalizationMerger, all options under the 1997 Three Rivers Stock Option Plan became fullyvested.

In connection with the 1999 Recapitalization Merger,the Company adopted an employee stock option plan (“the 1999 Equity Plan”)pursuant to which options with respect to a total of 6,325,000 shares of theCompany’s common stock became available for grant. As of September 30,2006, a total of 1,290,375 shares are available for grant under the 1999 EquityPlan. Options are granted with exercise prices equal to fair value of theCompany’s common stock at the date of grant, except as noted below. All optionshave 10-year terms. A portion of the options vest in equal incrementsover five years and a portion vest after eight years (subject to accelerationif certain financial performance targets are achieved). The Company settlesstock option exercises with newly issued shares of common stock.

Consistent with the valuation method for thedisclosure-only provisions of SFAS 123, the Company is using the Black-Scholesoption pricing model to value the compensation expense associated withstock-based awards under SFAS 123(R). The fair value of each option awardis estimated on the date of grant using the Black-Scholes option pricingmodel that uses the assumptions noted in the table below. In addition,forfeitures are estimated when recognizing compensation expense, and the estimateof forfeitures will be adjusted over the requisite service period to the extentthat actual forfeitures differ, or are expected to differ, from such estimates.Changes in estimated forfeitures will be recognized through a cumulativecatch-up adjustment in the period of change and will also impact the amount ofcompensation expense to be recognized in future periods. For the quarter and nine months ended September 30,2005, the Company recorded $57 and $171, respectively, in non-cash share-basedcompensation for stock options granted with exercise prices below the fairvalue of the Company’s common stock at the date of grant and for certain stockoptions subject to amended performance targets under the 1999 Equity Plan, asdiscussed below. For the quarter and nine months ended September 30, 2006,of the total $657 and $1,965, respectively, in non-cash share-basedcompensation recorded, $501 and $1,489, respectively, was incrementalshare-based compensation as a result of the adoption of SFAS 123 (R).

The followingweighted average assumptions were used in the estimated grant date fair valuecalculations for stock option awards:

| ** **                        | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,**      | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                   | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** |
| Risk free  interest rate          |       |                                       | 4.84       | %                                                        |       |   | 3.79 | % |   |   | 4.58 | % |   |
| Expected dividend  yield          |       |                                       | 0.00       | %                                                        |       |   | 0.00 | % |   |   | 0.00 | % |   |
| Expected stock  price volatility  |       |                                       | 56.7       | %                                                        |       |   | 52.8 | % |   |   | 56.7 | % |   |
| Average expected life  (in years) |       |                                       | 6.51       |                                                     |       |   | 5.52 |   |   |   | 6.67 |   |   |

 

7

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There were no stock options granted during the thirdquarter ended September 30, 2005.

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

In November 2000, the Company granted stockoptions to certain employees at exercise prices below the fair value of theCompany’s common stock, of which 35,000 options were outstanding at September 30,2006. The exercise prices of these options and the fair value of the Company’scommon stock on the grant date were $5.60 and $9.52 per share, respectively.The Company recorded non-cash share-based compensation of $6 and $18,respectively, for the quarter and nine months ended September 30, 2005,with an offset to paid-in-capital deficit. As the Company adopted SFAS 123(R) effective January 1, 2006, any non-cash share-based compensationas a result of granting these stock options is included in the Company’sconsolidated total of share-based compensation of $657 and $1,965,respectively, for the quarter and nine months ended September 30, 2006.

Under the 1999 Equity Plan, a portion of the options grantedare “performance options.” These options vest on the eighth anniversary of thegrant date if the option holder is still an employee, but the vestingaccelerates if the Company meets the operating performance targets specified inthe option agreements. On June 20, 2001, the Company’s compensationcommittee authorized the Company to amend the option agreements under its 1999Equity Plan to reduce the performance targets for 1,899,600 performance optionsout of the 2,284,222 performance options outstanding. On May 18, 2004, theCompany’s compensation committee authorized the Company to make a secondamendment to the option agreements under its 1999 Equity Plan to further reducethe performance targets for all of the 1,914,500 performance options outstanding.As a result of the amendment, if the Company achieves the reduced performancetargets but does not achieve the original performance targets, and an optionholder terminates employment prior to the eighth anniversary of the optiongrant date, the Company would be required to record a non-cash stock-basedcompensation charge equal to the amount by which the actual value of the sharessubject to the performance option on the date of the amendment exceeded theoption’s exercise price. For the quarter and nine months ended September 30,2005 the Company recorded $57 and $171, respectively, in non-cash share-basedcompensation as a result of the amendment. As the Company adopted SFAS 123(R) effective January 1, 2006, any non-cash share-based compensationas a result of these amendments is included in the Company’s consolidated totalof non-cash stock-based compensation of $657 and $1,965, respectively,for the quarter and nine months ended September 30, 2006.

Thefollowing table summarizes the Company’s stock option activity:

| ** **                                                            | ** ** | ** **         | ** ** | ** **              | ** ** | **Weighted-**   | ** ** | ** **    | ** ** |
|-----------------------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|-----------------|------------|---------------|------------|
| ** **                                                            | ** ** | ** **         | ** ** | ** **              | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                                                            | ** ** | ** **         | ** ** | **Weighted-**           | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                                                            | ** ** | **Number of** | ** ** | **Average**             | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                                                            | ** ** | **Shares**         | ** ** | **Exercise Price** | ** ** | **Term**        | ** ** | **Value**     | ** ** |
| Outstanding at  December 31, 2005                                |       | 3,571,275          |       |                    | $          | 6.25            |       |          |       |   |   |   |   |   |   |   |
| Granted                                                               |       | 961,500            |       |                    | 4.45       |            |       |          |       |   |   |   |   |   |   |
| Exercised                                                             |       | (301,575           | )          |                    | 4.48       |            |       |          |       |   |   |   |   |   |   |
| Canceled                                                              |       | (352,150           | )          |                    | 7.51       |            |       |          |       |   |   |   |   |   |   |
| Outstanding at  September 30, 2006                               |       | 3,879,050          |       |                    | $          | 5.82            |       |          |       | 8.56 |   |   |   | $ | 13,303 |   |   |
| Vested and expected to vest in the future at  September 30, 2006 |       | 3,683,576          |       |                    | $          | 5.81            |       |          |       | 7.95 |   |   |   | $ | 12,618 |   |   |
| Exercisable at  September 30, 2006                               |       | 1,269,954          |       |                    | $          | 5.16            |       |          |       | 6.43 |   |   |   | $ | 4,167 |   |   |

 

8

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The weighted average grant-date fair value of optionsgranted during the quarter ended September 30, 2006 was $3.87 per share.The weighted average grant-date fair value of options granted during the ninemonths ended September 30, 2005 and 2006 was $6.12 per share and $2.71 pershare, respectively. The total intrinsic value of options exercised during thequarters ended September 30, 2005 and 2006 was $1,304 and $118,respectively. The total intrinsic value of options exercised during the ninemonths ended September 30, 2005 and 2006 was $3,610 and $507,respectively. The total cash received from employees as a result of stockoption exercises was $1,211 and $314 for the quarters ended September 30,2005 and 2006, respectively. The total cash received from employees as a resultof stock option exercises was $2,265 and $1,376 for the nine months ended September 30,2005 and 2006, respectively.

The followingtable summarizes the Company’s unvested stock option activity:

| ** **                           | ** ** | ** ** | ** ** | **Weighted**        | ** ** |
|--------------------------------------|------------|------------|------------|---------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | **Average**         | ** ** |
| ** **                           | ** ** | ** ** | ** ** | **Grant-Date**      | ** ** |
| ** **                           | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Unvested at  December 31, 2005  |       | 2,243,851  |       |                | $          | 3.86 |   |   |
| Granted                              |       | 961,500    |       |                | $          | 2.71 |   |   |
| Vested                               |       | (341,405   | )          |                | $          | 3.27 |   |   |
| Canceled                             |       | (254,850   | )          |                | $          | 3.96 |   |   |
| Unvested at  September 30, 2006 |       | 2,609,096  |       |                | $          | 3.50 |   |   |

 

At September 30,2006, the total unrecognized fair value compensation cost related to unvestedstock options granted to both employees and non-employees was $7,015, which isexpected to be recognized over a remaining weighted-average period of 3.65years. The valuation model applied in this calculation utilizes highlysubjective assumptions that could potentially change over time, including theexpected forfeiture rate and performance targets. Therefore the amount ofunrecognized compensation expense noted above does not necessarily representthe value that will ultimately be realized by the Company in the statements ofoperations. The total fair value of shares vested during the quarters ended September 30,2005 and 2006 were $102, and $91 respectively. The total fair value of sharesvested during the nine months ended September 30, 2005 and 2006 were $775,and $1,115, respectively.

***Employee Share-Based Compensation Expense***

The table below shows theamounts recognized in the financial statements for the quarter and nine monthsended September 30, 2006 for awards newly subject to compensation expenseunder SFAS 123(R). As discussed previously, prior to the adoption of SFAS 123(R),the Company recorded compensation expense for stock options granted withexercise prices below the fair value of the Company’s common stock at the dateof grant, certain stock options subject to amended performance targets underthe 1999 Equity Plan, and non-employee share-based awards granted tomembers of the Company’s advisory committee. The table below, therefore,excludes the effect of these awards.

| ** **                                                                             | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                                   | ** ** | **2006**                                            | ** ** |
| Selling, general, and administrative expenses                                          |       |                                       | $          | 501                                                 |       |   |   | $ | 1,489 |   |   |
| Total cost of non-cash share-based compensation  included in income, before income tax |       |                                       | 501        |                                                |       |   | 1,489 |   |   |
| Amount of income tax recognized in earnings                                            |       |                                       | (205       | )                                                   |       |   | (610 | ) |   |
| Amount charged against income                                                          |       |                                       | $          | 296                                                 |       |   |   | $ | 879 |   |   |
| Impact on net income per share:                                                        |       |                                       |       |                                                |       |   |   |   |   |
| Basic earnings per share:                                                              |       |                                       | $          | 0.01                                                |       |   |   | $ | 0.02 |   |   |
| Diluted earnings per share:                                                            |       |                                       | $          | 0.01                                                |       |   |   | $ | 0.02 |   |   |

 

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***Pro Forma Share-Based Compensation***

Prior to the adoption of SFAS 123(R), the Companyaccounted for non-cash share-based compensation awards using the intrinsicvalue method prescribed under APB 25, and its related interpretations, aspermitted by SFAS 123, as amended by SFAS 148, “Accounting forStock-Based Compensation—Transition and Disclosure.” Under the intrinsic valuemethod, the difference between the market price on the date of grant and theexercise price is charged to the consolidated statements of operations over thevesting period. Prior to the adoption of SFAS 123(R), the Companyrecognized compensation cost for only certain awards, as discussed above. Allother employee share-based awards were granted with an exercise price equal tothe market value of the underlying common stock on the date of grant and nocompensation cost is reflected in income from operations for those awards. SFAS 123,as amended by SFAS 148, required presentation of pro forma informationregarding net income and earnings per share determined as if the Company hadaccounted for its employee stock options under the fair value method of thatStatement.

Forpurposes of pro forma disclosures, the estimated fair value of the options isamortized to expense over the options’ expected vesting period. Hadcompensation cost for the Company’s stock option plan been determined based onthe estimated fair value at the grant dates for awards under the planconsistent with the fair value method of SFAS 123 utilizing theBlack-Scholes option-pricing model, the Company’s net income and basic anddiluted earnings per share for the quarter and nine months ended September 30,2005 would have approximated the pro forma amount indicated below:

| ** **                                                                                                   | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2005**                                   | ** ** | **2005**                                            | ** ** |
| Net income:                                                                                                  |       |                                       |       |                                                |       |   |   |   |   |
| As reported                                                                                                  |       |                                       | $          | 5,011                                               |       |   |   | $ | 17,301 |   |   |
| Add: Non-cash  share-based compensation expense included in reported net income, net of  related tax effects |       |                                       | 37         |                                                |       |   | 113 |   |   |
| Deduct: Non- cash  share-based compensation expense determined                                               |       |                                       |       |                                                |       |   |   |   |   |
| under fair value  based method, net of related tax effects                                                   |       |                                       | (349       | )                                                   |       |   | (1,062 | ) |   |
| Pro forma net  income                                                                                        |       |                                       | $          | 4,699                                               |       |   |   | $ | 16,352 |   |   |
| Basic earnings  per share:                                                                                   |       |                                       |       |                                                |       |   |   |   |   |
| As reported                                                                                                  |       |                                       | $          | 0.10                                                |       |   |   | $ | 0.35 |   |   |
| Pro forma                                                                                                    |       |                                       | 0.09       |                                                |       |   | 0.33 |   |   |
| Diluted earnings  per share:                                                                                 |       |                                       |       |                                                |       |   |   |   |   |
| As reported                                                                                                  |       |                                       | 0.10       |                                                |       |   | 0.34 |   |   |
| Pro forma                                                                                                    |       |                                       | 0.09       |                                                |       |   | 0.33 |   |   |

 

**3.      Recent Accounting Pronouncements**

**AccountingChanges and Error Corrections—****In**May 2005,the FASB issued SFAS 154, “Accounting for Changes and Error Corrections” (“SFAS 154”),which is a replacement of APB Opinion No. 20, “Accounting Changes,” and SFAS 3,“Reporting Accounting Changes in Interim Financial Statements.” This statementchanges the requirements for the accounting for and reporting of all voluntarychanges in accounting principle and in the instance that a pronouncement doesnot include specific transition provisions. This statement requiresretrospective application to prior periods’ financial statements of changes inaccounting principle, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. SFAS 154is effective for accounting changes and corrections of errors 

10

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made in fiscal yearsbeginning after December 15, 2005. The adoption of SFAS 154 did nothave a material impact on the Company’s consolidated financial position orresults of operations.

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

**Uncertaintyin Income Taxes—****In******July 2006,the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes”(“FIN 48”), an interpretation of FASB Statement No. 109, “Accountingfor Income Taxes” (“FASB 109”). FIN 48 clarifies the accounting for uncertaintyin income taxes recognized in an enterprise’s financial statements in accordancewith FASB 109. This Interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. FIN 48 alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition. FIN 48 is effectivefor fiscal years beginning after December 15, 2006. The Company iscurrently evaluating the provisions of FIN 48 and the impact on itsconsolidated financial position and results of operations. The Company willadopt FIN 48 for the fiscal year beginning January 1, 2007.

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

**Guidance on Materiality—****In**September 2006,the Securities Exchange Commission issued Staff Accounting Bulletin No. 108,“Considering the Effects of Prior Year Misstatements When QuantifyingMisstatements in Current Year Financial Statements” (“SAB 108”), which statesthat registrants should use both a balance sheet approach and an incomestatement approach when quantifying and evaluating the materiality of amisstatement, contains guidance on correcting errors under the dual approach,and provides transition guidance for correcting errors existing in prior years.SAB 108 is effective for fiscal years ending after November 15, 2006. TheCompany does not believe the adoption of SAB 108 will have a material impact onthe Company’s consolidated financial position or results of operations.

**4.      Transactions**

Effective September 1, 2005, the Company acquiredcertain assets associated with nine multi-modality fixed-site diagnosticimaging centers. The multi-modality fixed-site diagnostic imaging centersinclude one MRI system, six CT systems, and 29 other modality systems. Thepurchase price consisted of $7,650 in cash and $826 in assumed liabilities andtransaction costs. The acquisition was financed using the Company’s 

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internally generatedfunds. As a result of this acquisition, the Company recorded goodwill andintangible assets of $2,246 and $2,400, respectively. The intangible assetswere recorded at fair value at the acquisition date. All recorded goodwill isdeductible for tax purposes and will be amortized over 15 years for taxpurposes. The acquisition also includes $246 of contingent payment due to theshareholders of the centers if certain performance targets are met over a threeyear period. When the contingency is resolved and consideration isdistributable, the Company will record the fair value of the consideration asadditional purchase price to goodwill. Adjustments to goodwill may occur infuture periods as a result of changes in the original valuation of assets andliabilities acquired. During the quarter ended September 30, 2006, thecompany increased goodwill by $91 as a result of changes in the originalvaluation of assets and liabilities acquired. During the nine months ended September 30,2006, the company increased goodwill by $14 as a result of changes in theoriginal valuation of assets and liabilities acquired. The Company has notincluded pro forma information as this acquisition did not have a materialimpact on the Company’s consolidated financial position or results ofoperations.

Effective October 1, 2005, the Company acquired100% of the outstanding stock of PET Scans of America Corp. (“PSA”), a mobileprovider of PET and PET/CT services primarily to hospitals in 13 states. Thepurchase price consisted of $36,596 in cash and $3,692 in assumed liabilitiesand transaction costs. The acquisition was financed using the Company’srevolving line of credit, internally generated funds, and capital leases. As aresult of this acquisition the Company acquired intangible assets of $11,400,of which $9,100 was assigned to PSA customer contracts, which will be amortizedover 10 years, and $2,100 was assigned to certificates of need held by PSA,which have indefinite useful lives and are not subject to amortization. Theseassets were recorded at fair value at the acquisition date. The Companyrecorded total goodwill of $22,472, which includes $3,007 of goodwill relatedto income tax timing differences as a result of the acquisition. None of thegoodwill recorded is deductible for tax purposes. Adjustments to goodwill mayoccur in future periods as a result of changes in the original valuation ofassets and liabilities acquired. During the quarter ended September 30,2006, the company increased goodwill by $20 as a result of changes in theoriginal valuation of assets and liabilities acquired. During the nine monthsended September 30, 2006, the company decreased goodwill by $3 as a resultof changes in the original valuation of assets and liabilities acquired. TheCompany has not included pro forma information as this acquisition did not havea material impact on the Company’s consolidated financial position or resultsof operations.

In late December 2005,the Company purchased an additional equity interest in a joint venture theCompany formed in 2004 with the University of Pittsburgh Medical Center. Thejoint venture, Alliance Oncology (“AO”), is designed to partner with hospitalsto build and operate radiation oncology centers, with an emphasis on intensitymodulated radiation therapy and image guided radiation therapy. The purchaseprice for the additional equity interest was $8,000, which was financed throughthe Company’s revolving line of credit. The Company now owns 80% of AO. As aresult of this acquisition the Company recorded goodwill of $6,946, which isdeductible for tax purposes and will be amortized over 15 years for taxpurposes. Adjustments to goodwill may occur in future periods as a result ofchanges in the original valuation of assets and liabilities acquired. Therewere no adjustments recorded to goodwill during the quarter ended September 30,2006. During the nine months ended September 30, 2006, the companyincreased goodwill by $56 as a result of changes in the original valuation ofassets and liabilities acquired. During the quarter and nine months ended September 30,2005 the Company recorded earnings in unconsolidated investees for the Company’sshare of AO’s previously unconsolidated earnings. The Company has not includedpro forma information as this acquisition did not have a material impact on theCompany’s consolidated financial position or results of operations.

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**5.      Goodwill and Intangible Assets**

Changesin the carrying amount of goodwill are as follows:

| Balance at  December 31, 2005       |   | $  | 154,656 |   |
|------------------------------------------|--------|----|---------|--------|
| Additions to  goodwill during the period |   | 67 |    |
| Balance at  September 30, 2006      |   | $  | 154,723 |   |

 

Intangibleassets consisted of the following:

| ** **                                     | ** ** | **December 31, 2005** | ** ** | **September 30, 2006** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **Gross Carrying**         | ** ** | **Accumulated**                  | ** ** | **Intangible** | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** | **Intangible** | ** ** |
| ** **                                     | ** ** | **Amount**                      | ** ** | **Amortization**                 | ** ** | **Assets, net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Assets, net** | ** ** |
| Amortizing intangible  assets:                 |       |                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Customer contracts                             |       |                            | $          | 51,063                           |       |   |   | $ | (18,791 | ) |   |   | $ | 32,272 |   |   |   | $ | 51,063 |   |   |   | $ | (21,879 | ) |   |   | $ | 29,184 |   |   |
| Other                                          |       |                            | 4,467      |                             |       |   | (1,910 | ) |   |   | 2,557 |   |   |   | 7,147 |   |   |   | (2,525 | ) |   |   | 4,622 |   |   |
| Total amortizing intangible assets             |       |                            | $          | 55,530                           |       |   |   | $ | (20,701 | ) |   |   | $ | 34,829 |   |   |   | $ | 58,210 |   |   |   | $ | (24,404 | ) |   |   | $ | 33,806 |   |   |
| Intangible assets  not subject to amortization |       |                            |       |                             |       |   |   |   |   |   | $ | 4,242 |   |   |   |   |   |   |   |   |   |   |   | $ | 3,179 |   |   |
| Total other intangible  assets                 |       |                            |       |                             |       |   |   |   |   |   | $ | 39,071 |   |   |   |   |   |   |   |   |   |   |   | $ | 36,985 |   |   |

 

The Company reviews the recoverability of the carryingvalue of goodwill on an annual basis or more frequently when an event occurs orcircumstances change to indicate an impairment of these assets has possiblyoccurred. Goodwill is allocated to the Company’s various reporting units whichrepresent the Company’s geographical regions. The Company compares the fairvalue of the reporting unit to its carrying amount to determine if there ispotential impairment. The implied fair value for goodwill is determined basedon the fair value of assets and liabilities of the respective reporting units,in accordance with SFAS No. 142,“Goodwill and Other Intangible Assets,” based on discounted cash flows,market multiples, or appraised values as appropriate.

Amortization expense for intangible assets subject toamortization was $937 and $1,230 for the quarters ended September 30, 2005and 2006, respectively, and $2,719 and $3,703 for the nine months ended September 30,2005 and 2006, respectively. The intangible assets not subject to amortizationrepresent certificate of needs and regulatory authority rights which haveindefinite useful lives.

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

| 2006 |   | $     | 4,933  |   |
|------|--------|-------|--------|--------|
| 2007 |   | 4,722 |   |
| 2008 |   | 4,508 |   |
| 2009 |   | 4,187 |   |
| 2010 |   | 4,117 |   |

 

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**6.      Other Accrued Liabilities**

Otheraccrued liabilities consisted of the following:

| ** **                                    | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **2005**              | ** ** | **2006**               | ** ** |
| Accrued systems  rental and maintenance costs |       |                  | $          | 5,801                  |       |   |   | $ | 2,463 |   |   |
| Accrued site  rental fees                     |       |                  | 1,242      |                   |       |   | 1,570 |   |   |
| Accrued property  and sales taxes payable     |       |                  | 10,569     |                   |       |   | 11,477 |   |   |
| Accrued  self-insurance expense               |       |                  | 5,725      |                   |       |   | 6,429 |   |   |
| Other accrued expenses                        |       |                  | 5,727      |                   |       |   | 8,789 |   |   |
| Total                                         |       |                  | $          | 29,064                 |       |   |   | $ | 30,728 |   |   |

 

**7.      Long-Term Debt and Senior SubordinatedCredit Facility**

Long-termdebt consisted of the following:

| ** **                                 | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **2005**              | ** ** | **2006**               | ** ** |
| Term loan  facility                        |       |                  | $          | 384,875                |       |   |   | $ | 382,200 |   |   |
| Revolving loan  facility                   |       |                  | 29,500     |                   |       |   | — |   |   |
| Senior  subordinated notes                 |       |                  | 153,541    |                   |       |   | 153,541 |   |   |
| Equipment debt                             |       |                  | 11,666     |                   |       |   | 8,017 |   |   |
| Long-term debt,  including current portion |       |                  | 579,582    |                   |       |   | 543,758 |   |   |
| Less current  portion                      |       |                  | 7,781      |                   |       |   | 6,750 |   |   |
| Long-term debt                             |       |                  | $          | 571,801                |       |   |   | $ | 537,008 |   |   |

 

**8.      Derivatives**

In the second quarter of 2004, the Company enteredinto interest rate swap agreements, with notional amounts of $56,813, $46,813and $48,438 to hedge the future cash interest payments associated with aportion of the Company’s variable rate bank debt. These agreements are threeyears in length and mature in 2007. As of September 30, 2005, and 2006,the fair value of the Company’s interest rate swap agreements was anaccumulated income of $2,440 and $2,332, respectively. Under thesearrangements, the Company receives three-month London Interbank Offered Rate(“LIBOR”) and pays a fixed rate of 3.15%, 3.89% and 3.69%, respectively. Thenet effect of the hedges is to record interest expense at fixed rates of 5.65%,6.39% and 6.19 %, respectively, as the debt incurs interest based onthree-month LIBOR plus 2.50%. For the quarter and nine months endedSeptember 30, 2005 the Company paid net settlement amounts of $102 and$848, respectively. For the quarter and nine months ended September 30,2006, the Company received net settlement amounts of $649 and $1,420,respectively. The Company has designated these swaps as cash flow hedges ofvariable future cash flows associated with its long-term debt. For the quarterand nine months ended September 30, 2005, the Company recognizedcomprehensive income, net of tax, of $842, and $1,742, respectively, based onthe change in fair value of these instruments. For the quarter and nine monthsended September 30, 2006, the Company recognized a comprehensive loss, netof tax, of $591, and $295, respectively, based on the change in fair value ofthese instruments. The Company will continue to record subsequent changes inthe fair value of the swaps through comprehensive income during the periodthese instruments are designated as hedges.

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In the first quarter of 2005, the Company entered intomultiple interest rate collar agreements for its variable rate bank debt. Thetotal underlying notional amount of the debt was $178,000. Under thesearrangements the Company has purchased a cap on the interest rate of 4.00% andhas sold a floor of 2.25%. The Company paid a net purchase price of $1,462 forthese collars. These agreements are two and three years in length and mature atvarious dates between January 2007 and January 2008. As of September 30,2005 and 2006, the fair value of the Company’s interest rate collar agreementswas an accumulated income of $2,181 and $2,701, respectively. For the quarterand nine month period ended September 30, 2005, the Company did not recordany net settlement amount. For the quarter and nine month period ended September 30,2006, the Company received a net settlement amount of $519 and $874,respectively. The Company has designated these collars as cash flow hedges ofvariable future cash flows associated with its long-term debt. For the quarterand nine month period ended September 30, 2005, the Company recognizedcomprehensive income, net of tax, of $608 and $1,309 based on the change infair value of these instruments. For the quarter ended September 30, 2006,the Company recognized a comprehensive loss, net of tax, of $720 based on thechange in fair value of these instruments. For the nine months ended September 30,2006, the Company recognized comprehensive income, net of tax, of $105 based onthe change in fair value of these instruments. The Company will recordsubsequent changes in the fair value of the collars through comprehensiveincome during the period these instruments are designated as hedges.

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

**9.**                 IncomeTaxes

For the quarter and ninemonths ended September 30, 2006, the Company recorded a provision forincome taxes of $3,392 and $10,401, or 40.9% and 41.0% of the Company’s pretaxincome, respectively. For the quarter and nine months ended September 30,2005, the Company recorded a provision for income taxes of $3,494 and $11,795,or 41.1% and 40.5% of the Company’s pretax income, respectively. The Company’seffective tax rate was higher than statutory rates primarily as a result ofstate income taxes.

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**10.**          EarningsPer Common Share

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

| ** **                                                                                          | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                                   | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2006** | ** ** |
| Numerator:                                                                                          |       |                                       |       |                                                |       |   |   |   |   |
| Net income                                                                                          |       | $                                          | 5,011      |                                                | $          | 4,895 |   | $ | 17,301 |   | $ | 14,998 |   |
| Denominator:                                                                                        |       |                                       |       |                                                |       |   |   |   |   |
| Denominator for basic earnings per share—weighted-average  shares                              |       | 49,517                                     |       | 49,844                                              |       | 49,313 |   | 49,737 |   |
| Effect of  dilutive securities:                                                                     |       |                                       |       |                                                |       |   |   |   |   |
| Employee stock options                                                                              |       | 851                                        |       | 661                                                 |       | 998 |   | 502 |   |
| Denominator for diluted earnings per share—adjusted  weighted-average shares                   |       | 50,368                                     |       | 50,505                                              |       | 50,311 |   | 50,239 |   |
| Earnings per common  share:                                                                         |       |                                       |       |                                                |       |   |   |   |   |
| Basic                                                                                               |       | $                                          | 0.10       |                                                | $          | 0.10 |   | $ | 0.35 |   | $ | 0.30 |   |
| Diluted                                                                                             |       | $                                          | 0.10       |                                                | $          | 0.10 |   | $ | 0.34 |   | $ | 0.30 |   |
| Stock options excluded  from the computation of diluted per share amounts:                          |       |                                       |       |                                                |       |   |   |   |   |
| Weighted-average  shares for which the exercise price exceeds average market price of common  stock |       | 1,329                                      |       | 703                                                 |       | 1,219 |   | 765 |   |
| Average exercise price  per share that exceeds average market price of common stock                 |       | $                                          | 11.57      |                                                | $          | 11.69 |   | $ | 11.74 |   | $ | 11.55 |   |

 

**11.**          Commitmentsand Contingencies

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

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

It is not possible to determine the maximum potentialamount under these indemnification agreements due to the limited history ofprior indemnification claims and the unique facts and 

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circumstances involved ineach particular agreement. Historically, payments made related to theseindemnifications have been immaterial. At September 30, 2006 the Companyhas determined that no liability is necessary related to these guarantees andindemnities.

The Company guarantees a portion of a loan on behalfof an unconsolidated investee under an agreement executed prior to 2002. Themaximum potential future payment under this financial guarantee is $117 at September 30,2006. The Company has not recorded an obligation for this guarantee.

On May 5, 2005, Alliance Imaging, Inc. wasserved with a complaint (the “Class Action Complaint”) filed in AlamedaCounty Superior Court alleging wage and hour claims on behalf of a putativeclass of approximately 400 former and current California employees of the Company.On August 19, 2005, the plaintiffs filed an amended complaint, which theCompany answered on September 23, 2005. In this suit, captioned Linda S.Jones, et al. v. Alliance Imaging, Inc., et al., the plaintiffs allegeviolations of California’s wage, meal period, and break time laws andregulations. Plaintiffs sought recovery of unspecified economic damages,statutory penalties, attorneys’ fees, and costs of suit. On or about March 10,2006, plaintiffs filed a second amended complaint (later further amended by athird amended complaint) adding a cause of action for conversion and a plea forpunitive damages. The Company filed a demurrer and motion to strike seeking todismiss the new claim and plea. On July 19, 2006, the Company and thePlaintiffs entered into a tentative settlement of the Class ActionComplaint pursuant to which the Company has agreed to pay $2,500, which isincluded in other accrued liabilities at September 30, 2006, in exchangefor a dismissal with prejudice of all claims brought on behalf of the putativeclass under the Class Action Complaint. On September 8, 2006, thesettlement was preliminarily approved by the court and a conditional class wascertified for purposes of seeking class approval of the settlement. On October 2,2006, notice was mailed to the conditional class members outlining the terms ofthe settlement and providing all class members with an opportunity to opt outof the settlement prior to the final approval hearing scheduled for November 27,2006.

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

**12.**          Related-PartyTransactions

The Company recorded management fees payable toKohlberg Kravis Roberts & Co (“KKR”) of $163 and $488 for each of the quarters and nine months ended September 30,2005 and 2006, respectively, and will continue to receive financialadvisory services from KKR on an ongoing basis. At September 30, 2005 and2006, the Company has accrued $163 related to these services.

Revenue from managementagreements with unconsolidated equity investees was $3,338 and $4,346 for thequarters ended September 30, 2005 and 2006, respectively, and $10,638 and$12,875 for the nine months ended September 30, 2005 and 2006,respectively.

**13.**          Investmentsin Unconsolidated Investees

TheCompany has direct ownership in five unconsolidated investees at September 30,2006. The Company owns between 33.3 percent and 50 percent of these investees,and provides management services under agreements with four of these investees,expiring at various dates through 2023. As discussed in Note 4, in late December 2005the Company purchased an additional equity interest in AO, a joint ventureformed in 2004, which was an unconsolidated investee prior to purchase of theadditional equity interest. The Company’s earnings in unconsolidated investeesfor the nine months ended September 30, 2005 includes the Company’spercentage of AO’s earnings for this period. At September 30, 2006 theCompany also has ownership in an unconsolidated investee of AO. AO owns 50% ofthis investee and provides management services under an agreement which expiresin 2025. All of these investees are accounted for 

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under the equity method since the Company does notexercise control over the operations of these investees.

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

| ** **                    | ** ** | **December 31,  2005** | ** ** | **September 30,  2006** | ** ** |
|-------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Combined Balance  Sheet Data: |       |                        |       |                         |       |   |   |   |   |
| Current assets.               |       |                        | $          | 11,232                       |       |   |   | $ | 12,198 |   |   |
| Noncurrent assets             |       |                        | 31,958     |                         |       |   | 31,617 |   |   |
| Current  liabilites.          |       |                        | 12,230     |                         |       |   | 10,898 |   |   |
| Noncurrent  liabilites.       |       |                        | 12,779     |                         |       |   | 14,790 |   |   |
|                               |            |                             |            |                              |            |  |  |  |  |  |  |

 

| ** **                                      | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                   | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2006** | ** ** |
| Combined  Operating Results:                    |       |                                       |       |                                                |       |   |   |   |   |
| Revenues.                                       |       | $                                          | 9,156      |                                                | $          | 10,056 |   | $ | 25,153 |   | $ | 30,806 |   |
| Expenses                                        |       | 6,922                                      |       | 7,722                                               |       | 19,242 |   | 23,584 |   |
| Net income.                                     |       | 2,234                                      |       | 2,334                                               |       | 5,911 |   | 7,222 |   |
| Equity in earnings of  unconsolidated investees |       | 1,000                                      |       | 1,129                                               |       | 2,596 |   | 4,145 |   |
|                                                 |            |                                            |            |                                                     |            |  |  |  |  |  |  |  |  |

 

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

**Overview**

We are a leading nationalprovider of shared-service and fixed-site diagnostic imaging services, basedupon annual revenue and number of diagnostic imaging systems deployed. Ourprincipal sources of revenue are derived from magnetic resonance imaging (MRI)and positron emission tomography and positron emission tomography/computedtomography (PET and PET/CT). We provide imaging and therapeutic services primarilyto hospitals and other healthcare providers on a shared and full-time servicebasis. We also provide services through a growing number of fixed sitesprimarily to hospitals or health systems. Our services normally include the useof our imaging systems, technologists to operate the systems, equipmentmaintenance and upgrades and management of day-to-day shared-service andfixed-site diagnostic imaging operations. We also provide non scan-basedservices, which includes only the use of our imaging systems under a short-termcontract. In the first nine months of 2006, MRI services and PET and PET/CTservices generated 62% and 29% of our revenue, respectively. The remainingrevenue was comprised of other modality diagnostic imaging services revenue,primarily computed tomography (CT), and management contract revenue. We had 494diagnostic imaging systems, including 334 MRI systems and 71 PET or PET/CTsystems and served over 1,000 clients in 43 states at September 30, 2006.Of these 494 diagnostic imaging systems, 74 were located in fixed-sites, whichconstitutes systems installed in hospitals or other buildings on hospitalcampuses, including modular buildings, systems installed inside medical groups’offices or medical buildings, and free-standing fixed-sites, which includessystems installed in a medical office building, ambulatory surgical center, orother retail space. Of these 74 fixed-sites, 60 were MRI fixed-sites, 3 werePET or PET/CT fixed-sites and 11 were other modality fixed sites.

Approximately 87% of ourrevenues for the first nine months ended September 30, 2006 were generatedby providing services to hospitals and other healthcare providers, which werefer to as wholesale revenues. Our wholesale revenues are typically generatedfrom contracts that require our clients to pay us based on the number of scanswe perform on patients on our clients behalf, although some pay us a flat feefor a period of time regardless of the number of scans we perform. Thesepayments are due to us independent of our clients’ receipt of reimbursementfrom third-party payors. We typically deliver our services for a set number ofdays per week through exclusive, long-term contracts with hospitals and otherhealthcare providers. The initial terms of these contracts’ averageapproximately three years in length for mobile services and approximately sevento ten years in length for fixed-site arrangements. These contracts oftencontain automatic renewal provisions and certain contracts have cancellationclauses if the hospital or other healthcare provider purchases their ownsystem. We price our contracts based on the type of system used, the scanvolume, and the number of ancillary services provided. Pricing is also affectedby competitive pressures.

Approximately 13% of ourrevenues for the nine months ended September 30, 2006 were generated byproviding services directly to patients from our sites located at or nearhospitals or other healthcare provider facilities, which we refer to as retailrevenue. Our revenue from these sites is generated from direct billings topatients or their third-party payors, including Medicare, which are recordednet of contractual discounts and other arrangements for providing services atdiscounted prices. We typically charge a higher price per scan under retailbilling than we do under wholesale billing.

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

On February 8, 2006, the Deficit Reduction Act of2005 (“DRA”) was signed into law by President George W. Bush. The DRA imposescaps on Medicare payment rates for certain imaging services, including MRI, PETand PET/CT, furnished in physician’s offices and other non-hospital basedsettings. Under the cap, payments for specified imaging services cannot exceedthe hospital outpatient payment 

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rates for those services. Thischange is to apply to services furnished on or after January 1, 2007. Thelimitation is applicable to the technical component of the services only, whichis the payment the Company receives for the services for which the Companybills directly under the Medicare Physician Fee Schedule. The technicalreimbursement under the Physician Fee Schedule generally allows for higherreimbursement than under the hospital outpatient prospective payment system (“HOPPS”).The implementation of this reimbursementreduction contained in the DRA will have a significant effect on our financialcondition and results of operations beginning in 2007.

On July 18, 2006, the U.S.House of Representatives Energy and Commerce Committee’s Subcommittee on Healthconducted a hearing regarding quality and utilization of imaging services andthe provisions of the DRA that directly effect Medicare payment for imagingservices. Many members of Congress have expressed concern about the impact ofthe DRA, and a legislation bill has been introduced to delay the effective dateof the DRA for two years. Our current view is that the two year delay regardingimplementation of the DRA is unlikely to be upheld by Congress and that the DRAas it is currently structured will become effective January 1, 2007.

In August 2006, the Centers for Medicare andMedicaid Services (“CMS”) proposed reducing Medicare Part B HOPPSreimbursement for PET and PET/CT imaging procedures. On November 1, 2006,CMS issued a final determination of Medicare Part B HOPPS reimbursementrates for PET and PET/CT imaging procedures. The national rate for PET scanswill be reduced from the current rate of $1,150 per scan to $855 per scaneffective January 1, 2007. The national rate for PET/CT scans will bereduced from the current rate of $1,250 per scan to $950 per scan effective January 1,2007.

For full year 2006, we estimate that approximately5.6% of our revenue will be billed directly to the Medicare program, which hasincreased from approximately 4.3% of our revenue billed directly to theMedicare program in 2005. If the DRA had been in effect for full year 2006, weestimate the reduction in Medicare revenue due to the DRA reimbursement ratedecrease would have reduced revenue by approximately $9.7 million. Additionally,the PET and PET/CT Medicare HOPPS reduction would have reduced revenue byapproximately $2.8 million. Combined, the DRA and PET and PET/CT Medicare HOPPSrate reductions would have negatively impacted Alliance’s 2006 revenue by atotal of $12.5 million. We expect that theentire revenue decrease will directly effect earnings.

In addition, the DRA also codifies the reduction inreimbursement for multiple images on contiguous body parts. Effective January 1,2006, CMS pays 100% of the technical component of the higher priced imagingprocedure and 75% for the technical component of each additional imagingprocedure for multiple images of contiguous body parts within a family of codesperformed in the same session. We believe that the implementation of thisreimbursement reduction in 2006 has not had a significant impact on ourfinancial condition and results of operation.

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

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

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

In 2005 and the first ninemonths of 2006, the growth rate of MRI industry wide scan volumes has slowed inpart due to weak hospital volumes as reported by several investor-ownedhospital companies, a growing number of medical groups adding imaging capacitywithin their practice setting, the increasing 

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trendof third-party payors intensifying their utilization management efforts tocontrol MRI scan volume growth rate and additional patient-related cost-sharingprograms. We expect that this trend will continue throughout 2006.

Inrecent years, we began to see an increase in the competitive climate in the MRIindustry, resulting in an increase in activity by original equipmentmanufacturers, or OEM’s, selling systems directly to certain of our clients.Typically, OEM’s target our higher scan volume clients. This increase inactivity by OEM’s has resulted in overcapacity of systems in the marketplace,especially related to medical groups adding imaging capacity within theirpractice setting. This has caused an increase in the number of our higher scanvolume clients deciding not to renew their contracts. We replace these highervolume scan clients typically with lower volume clients. During 2006, our MRIrevenues modestly declined compared to 2005 levels and we believe that MRIrevenues will continue to modestly decline in future years.

**Seasonality**

We experience seasonality in the revenues and marginsgenerated for our services. First and fourth quarter revenues are historicallylower than those from the second and third quarters. First quarter revenue isaffected primarily by fewer calendar days and inclement weather, typicallyresulting in fewer patients being scanned during the period. Fourth quarterrevenue is affected primarily by holiday and client and patient vacationschedules and inclement weather, also resulting in fewer scans during theperiod. The variability in margins is higher than the variability in revenuesdue to the fixed nature of our costs.

In 2006, there are fivefewer scanning days in the second half of 2006 compared to the first half of2006. We generated approximately $1.6 million per scanning day in the firsthalf of 2006. If our revenue per scanning day for the second half of 2006remains flat with the first half of 2006, this would result in a decrease inrevenue of approximately $8.0 million in the second half of 2006 compared tothe first half of 2006.

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**Results ofOperations**

Thefollowing table shows our consolidated statements of income as a percentage ofrevenues for each of the quarters ended September 30:

| ** **                                                                                        | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2005**                                   | ** ** | **2006**                                            | ** ** | **   2005   ** | ** ** | **   2006   ** | ** ** |
| Revenues                                                                                          |       | 100.0                                      | %          | 100.0                                               | %          |   | 100.0 | % |   |   | 100.0 | % |   |
| Costs and expenses:                                                                               |       |                                       |       |                                                |       |   |   |   |   |   |   |   |   |
| Cost of revenues,  excluding depreciation and amortization                                        |       | 52.6                                       |       | 53.0                                                |       |   | 51.1 |   |   |   | 53.1 |   |   |
| Selling, general  and administrative expenses                                                     |       | 11.1                                       |       | 12.0                                                |       |   | 11.6 |   |   |   | 11.9 |   |   |
| Employment  agreement costs                                                                       |       | —                                     |       | —                                              |       |   | 0.1 |   |   |   | — |   |   |
| Severance and  related costs                                                                      |       | —                                     |       | —                                              |       |   | — |   |   |   | 0.2 |   |   |
| Depreciation  expense                                                                             |       | 19.2                                       |       | 18.4                                                |       |   | 19.1 |   |   |   | 18.2 |   |   |
| Amortization  expense                                                                             |       | 0.9                                        |       | 1.1                                                 |       |   | 0.9 |   |   |   | 1.1 |   |   |
| Interest expense,  net of interest income                                                         |       | 8.6                                        |       | 8.9                                                 |       |   | 8.6 |   |   |   | 8.8 |   |   |
| Other (income)  and expense, net                                                                  |       | —                                     |       | (0.2                                                | )          |   | (0.1 | ) |   |   | 0.1 |   |   |
| Total costs and  expenses                                                                         |       | 92.4                                       |       | 93.2                                                |       |   | 91.3 |   |   |   | 93.4 |   |   |
| Income before income taxes, minority interest  expense and earnings from unconsolidated investees |       | 7.6                                        |       | 6.8                                                 |       |   | 8.7 |   |   |   | 6.6 |   |   |
| Income tax  expense                                                                               |       | 3.3                                        |       | 3.0                                                 |       |   | 3.7 |   |   |   | 3.0 |   |   |
| Minority interest  expense                                                                        |       | 0.5                                        |       | 0.5                                                 |       |   | 0.5 |   |   |   | 0.4 |   |   |
| Earnings from  unconsolidated investees                                                           |       | (0.9                                       | )          | (1.0                                                | )          |   | (0.9 | ) |   |   | (1.2 | ) |   |
| Net income                                                                                        |       | 4.7                                        | %          | 4.3                                                 | %          |   | 5.4 | % |   |   | 4.4 | % |   |

 

Thetable below provides MRI statistical information:

| ** **                                    | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **September 30,** | ** ** | **September 30,**          | ** ** |
| ** **                                    | ** ** | **2005**               | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| MRI statistics                                |       |                   |       |                            |       |   |   |   |   |
| Average number of total systems               |       | 328.3                  |       | 332.6                           |       | 332.3 |   | 322.0 |   |
| Average number of scan-based systems          |       | 280.6                  |       | 265.9                           |       | 282.5 |   | 273.2 |   |
| Scans per system per day (scan-based systems) |       | 9.53                   |       | 9.37                            |       | 9.53 |   | 9.37 |   |
| Total number scan-based MRI scans             |       | 188,731                |       | 172,791                         |       | 575,251 |   | 535,082 |   |
| Price per scan                                |       | $                      | 350.80     |                            | $          | 361.05 |   | $ | 353.77 |   | $ | 360.38 |   |
|                                               |            |                        |            |                                 |            |  |  |  |  |  |  |  |  |

 

Thetable below provides PET and PET/CT statistical information:

| ** **                           | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **September 30,** | ** ** | **September 30,**          | ** ** |
| ** **                           | ** ** | **2005**               | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| PET and PET/CT  statistics           |       |                   |       |                            |       |   |   |   |   |
| Average number of systems            |       | 52.2                   |       | 68.2                            |       | 51.6 |   | 68.1 |   |
| Scans per system per day             |       | 5.45                   |       | 6.01                            |       | 5.34 |   | 5.91 |   |
| Total number of PET and PET/CT scans |       | 17,342                 |       | 25,521                          |       | 50,150 |   | 74,719 |   |
| Price per scan                       |       | $                      | 1,320      |                            | $          | 1,310 |   | $ | 1,339 |   | $ | 1,312 |   |
|                                      |            |                        |            |                                 |            |  |  |  |  |  |  |  |  |

 

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Followingare the components of revenue (in millions):

| ** **                          | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                   | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2006** | ** ** |
| Total MRI revenue                   |       | $                                          | 72.7       |                                                | $          | 69.1 |   | $ | 223.6 |   | $ | 212.7 |   |
| PET and PET/CT  revenue             |       | 23.0                                       |       | 33.9                                                |       | 67.5 |   | 99.2 |   |
| Other modalities  and other revenue |       | 10.5                                       |       | 10.5                                                |       | 29.5 |   | 32.2 |   |
| Total                               |       | $                                          | 106.2      |                                                | $          | 113.5 |   | $ | 320.6 |   | $ | 344.1 |   |

 

| ** **                              | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                   | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2006** | ** ** |
| Total fixed-site  revenue (in millions) |       | $                                          | 17.1       |                                                | $          | 18.8 |   |   | $ | 50.1 |   |   |   | $ | 55.5 |   |   |
|                                         |            |                                            |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Quarter Ended September 30, 2006 Compared toQuarter Ended September 30, 2005***

Revenue increased $7.3 million, or 6.8%, to $113.5million in the third quarter of 2006 compared to $106.2 million in the thirdquarter of 2005 primarily due to an increase in PET and PET/CT revenues offsetby lower MRI revenue. Other modalities and other revenue was $10.5 million inboth the third quarters of 2005 and 2006. PET and PET/CT revenue in the thirdquarter of 2006 increased $10.9 million, or 47.3%, compared to the thirdquarter of 2005. Total PET and PET/CT scan volumes increased 47.2% to 25,521scans in the third quarter of 2006 from 17,342 scans in the third quarter of2005, primarily as a result of growth in our core PET business and the PETScans of America Corp. acquisition. The average number of PET and PET/CTsystems in service increased to 68.2 systems in the third quarter of 2006 from52.2 systems in the third quarter of 2005. Scans per system per day increased10.3%, to 6.01 scans per system per day in the third quarter of 2006 from 5.45scans per system per day in the third quarter of 2005. These increases werepartially offset by a 0.8% decline in the average price per PET and PET/CTscan, to $1,310 per scan in the third quarter of 2006 compared to $1,320 perscan in the third quarter of 2005. MRI revenue decreased $3.6 million in thethird quarter of 2006, or 5.0%, compared to the third quarter of 2005.Scan-based MRI revenue decreased $3.8 million in the third quarter of 2006, or5.8%, to $62.4 million, from $66.2 million in the third quarter of 2005. Thisdecrease is primarily a result of an 8.4% decrease in our scan-based MRI scanvolume. Scan-based MRI scan volume decreased to 172,791 scans in the thirdquarter of 2006 from 188,731 scans in the third quarter of 2005, primarily dueto a decrease in the average number of scan-based systems in service due tolower client demand. Scan-based systems in service decreased to 265.9 systemsin the third quarter of 2006 from 280.6 systems in the third quarter of 2005 toadjust to modestly declining scan volumes and to increase the efficiency of ourmobile MRI systems. Average scans per system per day also decreased by 1.7% to9.37 in the third quarter of 2006 from 9.53 in the third quarter of 2005. Thesedecreases were partially offset by a 2.9% increase in the average price per MRIscan to $361.05 per scan in the third quarter of 2006 compared to $350.80 per scanin the third quarter of 2005 and an increase in non-scan based MRI revenue of$0.2 million in the third quarter of 2006 over the same period in 2005.

We had 334 MRI systems at September 30, 2006compared to 350 MRI systems at September 30, 2005. We had 71 PET andPET/CT systems at September 30, 2006 compared to 58 PET and PET/CT systemsat September 30, 2005. We operated 74 fixed sites at September 30,2006, compared to 72 fixed sites at September 30, 2005.

Cost of revenues, excluding depreciation and amortization,increased $4.3 million, or 7.6%, to $60.2 million in the thirdquarter of 2006 compared to $55.9 million in the third quarter of 2005.****Compensation and related employee expenses increased$1.4 million, or 5.1%, primarily as a result of an increase in the numberof PET and PET/CT technologists who have a higher average hourly wage rate 

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than MRI technologists andan increase in mileage reimbursement rates. This increase in compensation waspartially offset by a lower average headcount of MRI technologists as a resultof a decrease in the average number of MRI systems in use. Medical suppliesincreased $1.1 million, or 26.2%, primarily as a result of an increase in thenumber of PET and PET/CT scans, which use a radiopharmaceutical as a component ofthe PET and PET/CT scan. Maintenance and related costs increased $0.8 million,or 6.8%, primarily due to an increase in the number of PET/CT systems inservice, which have a higher average service cost per system than MRI systems.Management contract expenses increased $0.5 million, or 16.6%, primarily as aresult of an increase in expenses incurred on behalf of unconsolidatedinvestees. Site fee expenses increased $0.2 million, or 18.0%, primarily due toan increase in the number of retail sites in operation. All other cost ofrevenues, excluding depreciation and amortization, increased $0.3 million, or3.7%. Cost of revenues, as a percentage of revenue, increased to 53.0% in thethird quarter of 2006 from 52.6% in the third quarter of 2005 as a result of thefactors described above.

Selling, general and administrative expenses increased$2.0 million, or 16.4%, to $13.7 million in the third quarter of 2006 comparedto $11.7 million in the third quarter of 2005. Non-cash share-basedcompensation increased $0.6 million in the third quarter of 2006 from the thirdquarter of 2005, primarily as a result of the adoption of SFAS 123 (R),effective January 1, 2006. Professional services increased $0.5 million,or 32.9%, primarily due to legal costs associated with the tentative settlementon our class action lawsuit settlement. The provision for doubtful accountsincreased $0.5 million, or 85.2%. The provision for doubtful accounts as apercentage of revenue was 0.9% and 0.5% for each of the quarters ended September 30,2006 and 2005, respectively. Compensation and related employee expensesincreased $0.3 million, or 3.5%, primarily due to an increase in managementincentive compensation. All other selling, general and administrative expensesincreased $0.1 million, or 6.4%. Selling, general and administrative expensesas a percentage of revenue were 12.0% and 11.1% in the third quarter of 2006and 2005, respectively.

Depreciation expense increased $0.4 million, or 2.1%,to $20.8 million in the third quarter of 2006 compared to $20.4 million in thethird quarter of 2005.

Amortization expense increased by $0.3 million, or31.2%, to $1.2 million in the third quarter of 2006 compared to$0.9 million in the third quarter of 2005, primarily due to theamortization of intangible assets acquired in conjunction with our acquisitionsin the third and fourth quarters of 2005.

Interest expense, net, increased $1.0 million, or10.3%, to $10.1 million in the third quarter of 2006 compared to $9.1 millionin the third quarter of 2005. This increase is due to higher average debtbalances during the third quarter of 2006 as a result of 2005 acquisitions andhigher average interest rates on our variable rate term loans. The increase ininterest rates on our variable rate term loans was partially offset by theexecution of various interest rate swap and collar agreements in 2004 and 2005to hedge against future interest rate increases on most of our variable rateterm loans.

Income tax expense was $3.4 million and$3.5 million in the third quarter of 2006 and 2005, respectively,resulting in effective tax rates of 40.9% and 41.1% in the third quarter of2006 and 2005, respectively. Our effective tax rates were higher than statutoryrates principally as a result of state income taxes.

Minority interest expense was $0.5 million in both thethird quarter of 2006 and the third quarter of 2005.

Earnings from unconsolidated investees increased by$0.1 million, or 12.8%, to $1.1 million in the third quarter of 2006 comparedto $1.0 million in the third quarter of 2005.

Our net income was$4.9 million, or $0.10 per share on a diluted basis, in the third quarterof 2006 compared to $5.0 million, or $0.10 per share on a diluted basis,in the third quarter of 2005.

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***Nine Months Ended September 30, 2006 Compared to September 30,2005***

Revenue increased $23.5 million, or 7.3%, to $344.1million in the first nine months of 2006 compared to $320.6 million in thefirst nine months of 2005 primarily due to an increase in PET and PET/CTrevenues and higher other modalities and other revenue, offset by lower MRIrevenue. PET and PET/CT revenue in the first nine months of 2006 increased$31.7 million, or 46.8%, compared to the first nine months of 2005. Total PETand PET/CT scan volumes increased 49.0% to 74,719 scans in the first ninemonths of 2006 from 50,150 scans in the first nine months of 2005, primarily asa result of growth in our core PET and PET/CT business and the PET Scans ofAmerica Corp. acquisition. The average number of PET and PET/CT systems inservice increased to 68.1 systems in the first nine months of 2006 from 51.6systems in the first nine months of 2005. Scans per system per day increased10.7%, to 5.91 scans per system per day in the first nine months of 2006 from5.34 scans per system per day in the first nine months of 2005. These increaseswere partially offset by a 2.0% decline in the average price per PET and PET/CTscan, to $1,312 per scan in the first nine months of 2006 compared to $1,339per scan in the first nine months of 2005. Other modalities and other revenueincreased $2.7 million, or 9.5%, to $32.2 million in the first nine months of2006 compared to $29.5 million in the first nine months of 2005 primarily dueto an increase in other fixed-site modality revenue, management contractrevenue for our managed contracts and reimbursement of out-of-pocket expensesfrom unconsolidated investees. MRI revenue decreased $10.9 million in the firstnine months of 2006, or 4.9%, compared to the first nine months of 2005.Scan-based MRI revenue decreased $10.6 million in the first nine months of2006, or 5.2%, to $192.9 million, from $203.5 million in the first nine monthsof 2005. This decrease is , primarily a result of a 7.0% decrease in ourscan-based MRI scan volume. Scan-based MRI scan volume decreased to 535,082scans in the first nine months of 2006 from 575,251 scans in the first ninemonths of 2005, primarily due to a decrease in the average number of scan-basedsystems in service due to lower client demand. Scan-based systems in servicedecreased to 273.2 systems in the first nine months of 2006 from 282.5 systemsin the first nine months of 2005 to adjust to modestly declining scan volumesand to increase the efficiency of our mobile MRI systems. Average scans persystem per day also decreased by 1.7% to 9.37 in the first nine months of 2006from 9.53 in the first nine months of 2005. Non-scan based MRI revenuedecreased $0.3 million in the first nine months of 2006 over the same period in2005. These decreases were partially offset by a 1.9% increase in average priceper MRI scan to $360.38 per scan in first nine months of 2006 compared to$353.77 per scan in the first nine months of 2005.

We had 334 MRI systems at September 30, 2006compared to 350 MRI systems at September 30, 2005. We had 71 PET andPET/CT systems at September 30, 2006 compared to 58 PET and PET/CT systemsat September 30, 2005. We operated 74 fixed-sites at September 30,2006 compared to 72 fixed sites at September 30, 2005.

Cost of revenues, excluding depreciation andamortization, increased $18.9 million, or 11.5%, to $182.6 million inthe first nine months of 2006 compared to $163.7 million in the first ninemonths of 2005. Compensation and related employee expenses increased $5.9million, or 7.4%, primarily as a result of an increase in the number of PET andPET/CT technologists who have a higher average hourly wage rate than MRItechnologists and an increase in mileage reimbursement rates. This increase incompensation was partially offset by a lower average headcount of MRItechnologists as a result of a decrease in the average number of MRI systems inuse. Medical supplies increased $3.8 million, or 30.4%, primarily as a resultof an increase in the number of PET and PET/CT scans, which use aradiopharmaceutical as a component of the PET and PET/CT scan. During the firstnine months of 2006, we recorded a tentative settlement on our class actionlawsuit of $2.5 million. Management contract expenses increased $1.8 million,or 21.4%, primarily as a result of an increase in expenses incurred on behalfof unconsolidated investees. Maintenance and related costs increased $1.6million, or 5.1%, primarily due to an increase in the number of PET/CT systemsin service, which have a higher average service cost per system than MRIsystems. Equipment rental expense increased $0.7 million, or 21.0%, primarilydue to a higher number of 

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rental systems in use tosupport current clients while continuing to improve route efficiency. Fuelexpenses increased $0.7 million, or 14.8%, primarily due to higher averagediesel fuel prices in 2006. Site fee expenses increased $0.4 million, or 14.6%,primarily due to an increase in the number of retail sites in operation.Outside medical services increased $0.2 million, or 2.6%, primarily as a resultof an increase in outside radiologists service costs and physicist servicecosts associated with PET and PET/CT services. Tractor and transportationexpenses increased $0.1 million, or 6.7%, primarily due to an increase in thenumber of tractors on operating leases. All other cost of revenues, excludingdepreciation and amortization, increased $1.2 million, or 10.7%. Cost ofrevenues, as a percentage of revenue, increased to 53.1% in the first ninemonths of 2006 from 51.1% in the first nine months of 2005 as a result of thefactors described above.

Selling, general and administrative expenses increased$3.9 million, or 10.6%, to $41.0 million in the first nine months of 2006 compared to $37.1 million in the first nine months of 2005. Non-cash share-based compensationincreased $1.8 million in the first nine months of 2006 from the first ninemonths of 2005, primarily as a result of the adoption of SFAS 123 (R),effective January 1, 2006. Compensationand related employee expenses increased $1.0 million, or 4.0%, primarily due toan increase in management incentive compensation. These increases werepartially offset by a decrease in recruiting costs. The provision fordoubtful accounts increased $0.6 million, or 29.0%. The provision for doubtfulaccounts as a percentage of revenue was 0.8% for the nine month period ended September 30,2006 compared to 0.6% for the nine month period ended September 30, 2005.All other selling, general and administrative expenses increased $0.5 million,or 5.4%. Selling, general and administrative expenses as a percentage ofrevenue were 11.9% and 11.6% in the first nine months of 2006 and 2005,respectively.

We recorded employment agreement costs of $0.4 millionin the first nine months of 2005 related to payments under an amendment to anemployment agreement with our former chairman of the board.

We recorded severance and related costs of $0.6million in the first nine months of 2006 primarily for severance costsassociated with reductions-in-force primarily due to our consolidation of fivegeographic regions to four geographic regions and a reduction in administrativeheadcount.

Depreciation expense increased $1.4 million, or 2.3%,to $62.7 million in the first nine months of 2006 compared to $61.3 million inthe first nine months of 2005.

Amortization expense increased by $1.0 million, or36.2%, to $3.7 million in the first nine months of 2006 compared to$2.7 million in the first nine months of 2005, primarily due to theamortization of intangible assets acquired in conjunction with our acquisitionsin the third and fourth quarters of 2005.

Interest expense, net, increased $2.6 million, or9.6%, to $30.3 million in the first nine months of 2006 compared to $27.7million in the first nine months of 2005. This increase is due to higheraverage debt balances during the third quarter of 2006 as a result of 2005acquisitions and higher average interest rates on our variable rate term loans.The increase in interest rates on our variable rate term loans was partially offset by the execution of various interestrate swap and collar agreements in 2004 and 2005 to hedge against futureinterest rate increases on most of our variable rate term loans.

Income tax expense was$10.4 million and $11.8 million in the first nine months of 2006 and 2005,respectively, resulting in effective tax rates of 41.0% and 40.5% in the firstnine months of 2006 and 2005, respectively. Our effective tax rates were higherthan statutory rates for the first nine months of 2006 and 2005 primarily as aresult of state income taxes.

Minority interest expense increased $0.1 million, or5.3%, to $1.6 million in the first nine months of 2006 compared to $1.5 millionin the first nine months of 2005.

Earnings from unconsolidated investees increased by$1.5 million, or 59.7%, to $4.1 million in the first nine months of 2006compared to $2.6 million in the first nine months of 2005.

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Our net income was$15.0 million, or $0.30 per share on a diluted basis, in the first ninemonths of 2006 compared to $17.3 million, or $0.34 per share on a dilutedbasis, in the first nine months of 2005.

**Liquidity andCapital Resources**

Our primary source of liquidity is cash provided byoperating activities. We generated $77.2 million and $93.0 million of cash flowfrom operating activities in the first nine months of 2006 and 2005,respectively. Our ability to generate cash flow is affected by numerousfactors, including demand for MRI, PET and other diagnostic imaging services.Our ability to generate cash flow from operating activities is also dependentupon the collections of our accounts receivable. The provision for doubtfulaccounts increased by $0.6 million in the first nine months of 2006 compared tothe first nine months of 2005. Our number of days of revenue outstanding forour accounts receivable was 50 days and 48 days as of September 30, 2006and 2005, which we believe is among the more favorable in the healthcareservice industry. The number of days revenue outstanding as of September 30,2006 were negatively impacted due to a Centers for Medicare and MedicaidServices (“CMS”) claims payment hold for the last 9 days of September 2006due to CMS’s budget issues faced at its fiscal year end, which was September 30,2006. We resumed receiving Medicare claims payments in October 2006. Inaddition, as of September 30, 2006, we had $64.1 million availableborrowings under our revolving line of credit.

Our primary use of capital resources is to fundcapital expenditures. We used cash of $43.9 million and $53.2 million forinvesting activities in the first nine months of 2006 and 2005, respectively.We incur capital expenditures for the purposes of:

·purchasing new systems;

·replacing less advanced systems with new systems;

· providing upgradesof our MRI and PET and PET/CT systems and upgrading our corporateinfrastructure for future growth.

Capital expenditures totaled $56.5 million and $46.5million in the first nine months of 2006 and 2005, respectively. During thefirst nine months of 2006 we purchased 9 MRI systems, 20 PET/CT systems and 4CT systems. We traded-in or sold a total of 46 total systems for the ninemonths ended September 30, 2006. Our decision to purchase a new system istypically predicated on obtaining new or extending existing client contracts,which serve as the basis of demand for the new system. We expect to purchaseadditional systems in 2006 and finance substantially all of these purchaseswith our available cash, cash from operating activities, our revolving line ofcredit, and equipment leases. Based upon the client demand described above,which dictates the type of equipment purchased, we expect capital expendituresto total approximately $75 to $80 million in 2006.

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

**Recent AccountingPronouncements**

In May 2005, the FASB issued SFAS 154, “Accountingfor Changes and Error Corrections” (“SFAS 154”), which is a replacement ofAPB Opinion No. 20, “Accounting Changes,” and SFAS 3, “ReportingAccounting Changes in Interim Financial Statements.” This statement changes therequirements for the accounting for and reporting of all voluntary changes inaccounting principle and in the instance that a pronouncement does not includespecific transition provisions. This statement requires retrospectiveapplication to prior periods’ financial statements of changes in accountingprinciple, unless it is impracticable to determine either the period-specificeffects or the cumulative effect of the change. 

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SFAS 154 is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. The adoption of SFAS 154 did not have amaterial impact on our consolidated financial position or results ofoperations.

In June 2005, the FASB issued Emerging IssuesTask Force Issue No. 04-05, “Determining Whether a General Partner,or the General Partners as a Group, Controls a Limited Partnership or SimilarEntity When the Limited Partners Have Certain Rights”(“EITF 04-05”).EITF 04-05 clarifies how general partners in a limited partnershipshould determine whether they control a limited partnership. A general partnerof a limited partnership is presumed to control the limited partnership unlessthe limited partners have substantive kick-out rights or participating rights.For general partners of all new limited partnerships formed and for existinglimited partnerships for which the partnership agreements are modified,EITF 04-05 is effective after June 29, 2005. For generalpartners in all other limited partnerships, EITF 04-05 is effectivefor the first period in fiscal years beginning after December 15, 2005.The adoption of EITF 04-05 did not have a material impact on ourconsolidated financial position or results of operations.

**In**July 2006, the FASB issuedFASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”(“FIN48”), an interpretation of FASB Statement No. 109, “Accounting for IncomeTaxes” (“FASB 109”). FIN 48 clarifies the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements in accordance withFASB 109. This Interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. FIN 48 alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition. FIN 48 is effectivefor fiscal years beginning after December 15, 2006. We are currentlyevaluating the provisions of FIN 48 and the impact on our consolidatedfinancial position and results of operations. We will adopt FIN 48 for thefiscal year beginning January 1, 2007.

**In**September 2006, the FASBissued SFAS 157, “Fair Value Measurements” (“SFAS 157”), which enhances theexisting guidance for measuring assets and liabilities using fair value. Thisstatement provides a single definition of fair value, establishes a frameworkfor measuring fair value, and expands disclosures about fair valuemeasurements. SFAS 157 emphasizes fair value as a market-based measurement  instead of an entity-specific measurement. Thestatement sets out a fair value hierarchy with the highest priority beingquoted prices in active markets. SFAS 157 is effective for fiscal yearsbeginning after November 15, 2007 and interim periods within those fiscalyears. We are currently evaluating the provisions of SFAS 157 and the impact onour consolidated financial position and results of operations. We will adoptSFAS 157 for the fiscal year beginning January 1, 2008.

**In**September 2006,the Securities Exchange Commission issued Staff Accounting Bulletin No. 108,“Considering the Effects of Prior Year Misstatements When Quantifying Misstatementsin Current Year Financial Statements” (“SAB 108”), which states thatregistrants should use both a balance sheet approach and an income statementapproach when quantifying and evaluating the materiality of a misstatement,contains guidance on correcting errors under the dual approach, and providestransition guidance for correcting errors existing in prior years. SAB 108 iseffective for fiscal years ending after November 15, 2006. We do notbelieve the adoption of SAB 108 will have a material impact on our consolidatedfinancial position and results of operations.

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

**Certainstatements contained in Management’s Discussion and Analysis of FinancialCondition and Results of Operations, particularly in the section entitled“Liquidity and Capital Resources”, and elsewhere in this quarterly report onForm 10-Q, are “forward-looking statements,” within the meaning ofthe safe harbor provisions of the Private Securities Litigation Reform Act of1995. Statements which address activities, events or developments that weexpect or anticipate will or may occur in the future, including such things asresults of operations and financial condition, capital expenditures, theconsummation of acquisitions and financing transactions and the effect of suchtransactions on our business and our plans and objectives for future operationsand expansion are examples of forward-looking statements. In some cases you canidentify these statements by forward-looking words like “may”, “will”,“should”, “expect”, “anticipate”, “believe”, “estimate” “predict”, “continue”or similar words. These forward-looking statements are subject to risks anduncertainties which could cause actual outcomes and results to differmaterially from our expectations, forecasts and assumptions. These risks anduncertainties include factors affecting our leverage, including fluctuations ininterest rates, the risk that the counter-parties to our interest rate swapagreements fail to satisfy their obligations under these agreements, our abilityto incur financing, the effect of operating and financial restrictions in ourdebt instruments, the accuracy of our estimates regarding our capitalrequirements, the effect of intense levels of competition in our industry,changes in the rates or methods of third party reimbursements for diagnosticimaging services, changes in the healthcare regulatory environment, our abilityto keep pace with technological developments within our industry, and otherrisks and uncertainties, including those enumerated and described under “RiskFactors” in our Form 10-K, as filed with the Securities and ExchangeCommission, for the fiscal year ended December 31, 2005. The foregoingshould not be construed as an exhaustive list of all factors which could causeactual results to differ materially from those expressed in forward-lookingstatements made by us.**

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

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

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

During 2004 we entered into swap agreements which havenotional amounts of $56.8 million, $46.8 million and $48.4 million at September 30,2006. Under the terms of these agreements, we receive three-month LIBOR and paya fixed rate of 3.15%, 3.89%, and 3.69%, respectively. The net effect of thehedges is to record interest expense at fixed rates of 5.65%, 6.39% and 6.19%respectively, as the debt incurs interest based on three-month LIBOR plus2.50%. For the quarter and nine months ended September 30, 2006, we received a net settlement amount of $0.6 millionand $1.4 million, respectively. For the quarter and nine months ended September 30,2005 we paid a net settlement amount of $0.1 million and $0.8 million,respectively. The swap agreements mature during 2007.

During 2005 we entered into multiple interest ratecollar agreements which have a notional amount of $178.0 million. Under theterms of these agreements, we have purchased a cap on the interest rate of4.00% and have sold a floor of 2.25%. For the quarter and nine months ended September 30,2006, we 

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received a net settlementamount of $0.5 million and $0.9 million, respectively, on these collaragreements. For the quarter and nine months ended September 30, 2005, wedid not record any net settlement on these collar agreements. The collaragreements mature at various dates between January 2007 and January 2008.

The swap and collar agreements have been designated ascash flow hedges of variable future cash flows associated with our long termdebt. In accordance with SFAS 133, the swaps and collars are recorded at fairvalue. On a quarterly basis, the fair value of the swaps and collars will bedetermined based on quoted market prices and, assuming perfect effectiveness,the difference between the fair value and the book value of the swaps andcollars will be recognized in comprehensive income, a component of shareholders’equity. Any ineffectiveness of the swaps and collars is required to berecognized in earnings.

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

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

**ITEM 4.**                CONTROLSAND PROCEDURES

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

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

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

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**PART II—OTHERINFORMATION**

**ITEM 1.**                LEGALPROCEEDINGS

On May 5, 2005, Alliance Imaging, Inc. wasserved with a complaint (the “Class Action Complaint”) filed in AlamedaCounty Superior Court alleging wage and hour claims on behalf of a putativeclass of approximately 400 former and current California employees of theCompany. On August 19, 2005, the plaintiffs filed an amended complaint,which the Company answered on September 23, 2005. In this suit, captionedLinda S. Jones, et al. v. Alliance Imaging, Inc., et al., the plaintiffsallege violations of California’s wage, meal period, and break time laws andregulations. Plaintiffs sought recovery of unspecified economic damages,statutory penalties, attorneys’ fees, and costs of suit. On or about March 10,2006, plaintiffs filed a second amended complaint (later further amended by athird amended complaint) adding a cause of action for conversion and a plea forpunitive damages. The Company has filed a demurrer and motion to strike seekingto dismiss the new claim and plea. On July 19, 2006, the Company and thePlaintiffs entered into a tentative settlement of the Class ActionComplaint pursuant to which the Company has agreed to pay $2.5 million inexchange for a dismissal with prejudice of all claims brought on behalf of theputative class under the Class Action Complaint. On September 8,2006, the settlement was preliminarily approved by the court and a conditionalclass was certified for purposes of seeking class approval of the settlement. OnOctober 2, 2006, notice was mailed to the conditional class membersoutlining the terms of the settlement and providing all class members with anopportunity to opt out of the settlement prior to the final approval hearingscheduled for November 27, 2006.

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

**ITEM 1A.**        RISKFACTORS

**Risks Related toOur Business**

**Changes in therates or methods of third-party reimbursements for diagnostic imaging servicescould result in reduceddemand for our services or create downward pricing pressure, which would resultin a decline in our revenues and harm to our financial position.**

We derive approximately 13% of our revenues fromdirect billings to patients and third-party payors such as Medicare, Medicaidor private health insurance companies, and changes in the rates or methods ofreimbursement for the services we provide could have a significant negativeimpact on those revenues. Approximately 87% of our revenues are derived from healthcareprovider clients including hospitals, that generally rely on reimbursement fromthird-party payors. From time to time, initiatives have been proposed which, ifimplemented, could have the effect of substantially decreasing reimbursementrates for diagnostic imaging services.

For example, on February 8, 2006, the DeficitReduction Act of 2005, or DRA, was signed into law by President George W. Bush.The DRA imposes caps on Medicare payment rates for certain imaging services,including MRI, PET and CT, furnished in physician’s offices and othernon-hospital based settings. Under the cap, payments for specified imagingservices cannot exceed the hospital outpatient payment rates for thoseservices. This change is to apply to services furnished on or afterJanuary 1, 2007. The limitation is applicable to the technical componentof the services only (which is the payment we receive for the services forwhich we bill directly under the Medicare Physician Fee Schedule). If thetechnical component of the service established under the Physician Fee Schedule(without including geographic adjustments) exceeds the hospital outpatientpayment amount for the service (also without including geographic adjustments),then the payment is to be reduced. In other words, in those instances where thetechnical component for the particular service is greater for the non-hospital site,the DRA directs that the hospital outpatient payment rate be substituted forthe otherwise applicable Physician Fee 

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Schedule payment rates.The implementation of this reimbursement reduction contained in the DRA willhave a significant effect on our financial condition and results of operationsbeginning in 2007. On November 1, 2006, the Centers for Medicare and MedicaidServices (“CMS”) issued a final rule for the Medicare Part B hospitaloutpatient prospective payment system, or HOPPS reimbursement rates for PET andPET/CT imaging procedures. The national payment rate for nonmyocardial PETscans will be reduced from the current rate of $1,150 per scan to $855.43 perscan effective January 1, 2007. The national payment rate for PET/CT scans willbe reduced from the current rate of $1,250 per scan to $950 per scan effective,also January 1, 2007.

For full year 2006, Alliance estimates thatapproximately 5.6% of the Company’s revenue will be billed directly to theMedicare program, which has increased from approximately 4.3% of the Company’srevenue billed directly to the Medicare program in 2005. If the DRA had been ineffect for full year 2006, Alliance estimates the reduction in Medicare revenuedue to the DRA reimbursement rate decrease would have reduced revenue byapproximately $9.7 million. Additionally, the PET and PET/CT Medicare HOPPSreduction would have reduced revenue by approximately $2.8 million. Combined,the DRA and PET and PET/CT Medicare HOPPS rate reductions described above wouldhave negatively impacted Alliance’s 2006 revenue by a total of $12.5 million.Because a high percentage of our expenses are fixed, we expect a significantportion of this decrease in revenue to directly affect earnings.

In addition, the DRA alsocodifies the reduction in reimbursement for multiple images on contiguous bodyparts which was previously announced by the Center for Medicare and MedicaidServices, or CMS. The DRA mandates payment at 100% of the technical componentof the higher priced imaging procedure and 50% for the technical component ofeach additional imaging procedure for multiple images of contiguous body partswithin a family of codes performed in the same session. Initially, CMSannounced that it would phase in this reimbursement reduction over a two-yearperiod, resulting in a 25% reduction for each additional imaging procedure oncontiguous body parts in 2006 and an additional 25% reduction in 2007. OnNovember 1, 2006, however, CMS announced that it would not implement theadditional 25% reduction in 2007. The Company believes that the implementationof this reimbursement reduction will not have a significant impact on thefinancial condition and results of operation in the future.

**Our revenues mayfluctuate or be unpredictable and this may harm our financial results.**

The amount andtiming of revenues that we may derive from our business will fluctuate basedon:

·       variationsin the rate at which clients renew their contracts;

·       theextent to which our mobile shared-service clients become full-time clients;

·       changesin the number of days of service we can offer with respect to a givendiagnostic imaging system due to equipment malfunctions or the seasonal factorsdiscussed below; and

·       themix of wholesale and retail billing for our services.

In addition, we experienceseasonality in the sale of our services. For example, our revenues typicallydecline from our third fiscal quarter to our fourth fiscal quarter. First andfourth quarter revenues are typically lower than those from the second andthird quarters. First quarter revenue is affected primarily by fewer calendardays and inclement weather, the results of which are fewer patient scans duringthe period. Fourth quarter revenue is affected primarily by holiday and clientand patient vacation schedules and inclement weather, the results of which arefewer patient scans during the period. As a result, our revenues maysignificantly vary from quarter to quarter, and our quarterly results may bebelow market expectations. We may not be able to reduce our expenses, includingour debt service obligations, quickly enough to respond to these declines inrevenue, which would make our business difficult to operate and would harm ourfinancial results. If this happens, the price of our common stock may decline.

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**We may experiencecompetition from other medical diagnostic companies and equipment manufacturers and this competition couldadversely affect our revenues and our business.**

The market for diagnostic imaging services and systemsis competitive. Our major competitors include InSight Health Services Corp.,Medquest, Inc., Radiologix, Inc., Medical Resources, Inc.,Shared Medical Services, Kings Medical Company Inc. and Otter Tail PowerCompany. In addition to direct competition from other mobile providers, wecompete with independent imaging centers and referring physicians withdiagnostic imaging systems in their own offices, as well as with originalequipment manufacturers, or OEM’s, that aggressively sell or lease imagingsystems to healthcare providers for full-time installation. In recent years wehave seen an increase in activity by OEM’s sale of systems directly to acertain number of our clients. Typically, OEM’s target our higher scan volumeclients. This increase in activity by OEM’s has resulted in overcapacity ofsystems in the marketplace, especially related to medical groups adding imagingcapacity within their practice setting. This has caused an increase in thenumber of our higher scan volume clients deciding not to renew their contracts.We replace these higher volume scan clients typically with lower volumeclients. During 2005 our MRI revenues modestly declined compared to 2004 levelsand we believe that MRI revenues will continue to modestly decline in futureyears.

While we believe that wehad a greater number of diagnostic imaging systems deployed at the end of 2005than our principal competitors and also had greater revenue from diagnosticimaging services during our 2005 fiscal year than they did, some of our directcompetitors which provide diagnostic imaging services may now or in the futurehave access to greater financial resources than we do and may have access tonewer, more advanced equipment. In addition, some clients have in the pastelected to provide imaging services to their patients directly rather thanrenewing their contracts with us. Finally, we face competition from providersof competing technologies such as ultrasound and may face competition fromproviders of new technologies in the future. If we are unable to successfullycompete, our client base would decline and our business and financial conditionwould be harmed.

**Managed careorganizations may prevent healthcare providers from using our services whichwould cause us to losecurrent and prospective clients.**

Healthcare providersparticipating as providers under managed care plans may be required to referdiagnostic imaging tests to specific imaging service providers depending on theplan in which each covered patient is enrolled. These requirements currentlyinhibit healthcare providers from using our diagnostic imaging services in somecases. The proliferation of managed care may prevent an increasing number ofhealthcare providers from using our services in the future which would causeour revenues to decline.

**We may be unable toeffectively maintain our imaging systems or generate revenue when our systemsare not working.**

Timely, effective serviceis essential to maintaining our reputation and high utilization rates on ourimaging systems. Repairs to one of our systems can take up to two weeks andresult in a loss of revenue. Our warranties and maintenance contracts do notfully compensate us for loss of revenue when our systems are not working. Theprincipal components of our operating costs include depreciation, salaries paidto technologists and drivers, annual system maintenance costs, insurance andtransportation costs. Because the majority of these expenses are fixed, a reductionin the number of scans performed due to out-of-service equipment will result inlower revenues and margins. Repairs of our equipment are performed for us bythe equipment manufacturers. These manufacturers may not be able to performrepairs or supply needed parts in a timely manner. Thus, if we experiencegreater than anticipated system malfunctions or if we are unable to promptlyobtain the service necessary to keep our systems functioning effectively, ourrevenues could decline and our ability to provide services would be harmed.

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**Our ability tomaximize the utilization of our diagnostic imaging equipment may be adverselyimpacted by harshweather conditions which may affect our ability to generate revenue.**

Harsh weather conditionscan adversely impact our operations and financial condition. To the extentsevere weather patterns affect the regions in which we operate, potentialpatients may find it difficult to travel to our centers and we may havedifficulty moving our mobile systems along their scheduled routes. As a result,we would experience a decrease in scan volume during that period. Our equipmentutilization, scan volume or revenues could be adversely affected by similarconditions in the future.

**Technologicalchange in our industry could reduce the demand for our services and require usto incur significantcosts to upgrade our equipment.**

We operate in acompetitive, capital intensive, high fixed-cost industry. The development ofnew technologies or refinements of existing ones might make our existingsystems technologically or economically obsolete, or reduce the need for oursystems. MRI, PET and PET/CT and other diagnostic imaging systems are currentlymanufactured by numerous companies. Competition among manufacturers for agreater share of the MRI, PET and PET/CT and other diagnostic imaging systemsmarket has resulted in and likely will continue to result in technologicaladvances in the speed and imaging capacity of these new systems. Consequently,the obsolescence of our systems may be accelerated. Should new technologicaladvances occur, we may not be able to acquire the new or improved systems. Inthe future, to the extent we are unable to generate sufficient cash from ouroperations or obtain additional funds through bank financing or the issuance ofequity or debt securities, we may be unable to maintain a competitive equipmentbase. In addition, advancing technology may enable hospitals, physicians orother diagnostic service providers to perform procedures without the assistanceof diagnostic service providers such as ourselves. As a result, we may not beable to maintain our competitive position in our targeted regions or expand ourbusiness.

**Natural disasterscould adversely affect our business and operations.**

Our corporate headquartersis located in California and we currently operate in 43 states, located invarious geographic regions across the country, subject to varying risks fornatural disaster, including but not limited to, hurricanes, blizzards, floods,earthquakes and tornados. Depending upon their severity, these naturaldisasters could damage our facilities and imaging systems or prevent potentialpatients from traveling to our centers. Damage to our equipment or anyinterruption in our business would adversely affect our financial condition andcould result in the loss of the capital invested in the damaged facilities orimaging systems or anticipated future cash flows from those facilities orimaging systems.

**Continued high fuelcosts would harm our operations.**

Fuel costs constitute asignificant portion of our mobile operating expenses. Historically, fuel costshave been subject to wide price fluctuations based on geopolitical issues andsupply and demand. Fuel availability is also affected by demand for homeheating oil, diesel, gasoline and other petroleum products. Because of theeffect of these events on the price and availability of fuel, the cost andfuture availability of fuel cannot be predicted with any degree of certainty.In the event of a fuel supply shortage or further increases in fuel prices, acurtailment of scheduled mobile service could result. There have beensignificant increases in fuel costs and continued high fuel costs or furtherincreases would harm our financial condition and results of operations.

**We may be unable torenew or maintain our client contracts which would harm our business andfinancial results.**

Upon expiration of ourclients’ contracts, we are subject to the risk that clients will cease usingour imaging services and purchase or lease their own imaging systems or use ourcompetitors’ imaging systems. 

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Duringthe year ended December 31, 2005, we continued to experience a high rateof contract terminations primarily due to stepped up marketing, sales andattractive financing alternatives being offered by original equipmentmanufacturers to our clients. A portion of our clients can execute their earlytermination clause and discontinue service prior to maturity. As a result, our2005 MRI revenues declined compared to 2004 levels and we believe that MRIrevenues from our shared-service operations will continue to decline in futureperiods. If these contracts are not renewed, it could result in a significantnegative impact on our business. It is not always possible to immediatelyobtain replacement clients, and historically many replacement clients have beensmaller facilities which have a lower number of scans than lost clients.

**Because a highpercentage of our operating expenses are fixed, a relatively small decrease inrevenues could have asignificant negative impact on our financial results.**

A high percentage of ourexpenses are fixed, meaning they do not vary significantly with the increase ordecrease in revenues. Such expenses include, but are not limited to, debtservice and capital lease payments, rent and operating lease payments,salaries, maintenance, insurance and vehicle operation costs. As a result, arelatively small reduction in the prices we charge for our services orprocedure volume could have a disproportionate negative effect on our financialresults.

**We may be subjectto professional liability risks which could be costly and negatively impact ourbusiness and financialresults.**

We may be subject to professionalliability claims. Although there currently are no known hazards associated withMRI or our other scanning technologies when used properly, hazards may bediscovered in the future. Furthermore, there is a risk of harm to a patientduring an MRI if the patient has certain types of metal implants or cardiacpacemakers within his or her body. Patients are carefully screened to safeguardagainst this risk, but screening may nevertheless fail to identify the hazard. Anyclaim made against us could be costly to defend against, result in asubstantial damage award against us and divert the attention of our managementfrom our operations, which could have an adverse effect on our financialperformance.

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

We depend upon our management team to a substantialextent. In particular, we depend upon Mr. Viviano, our Chief ExecutiveOfficer and the Chairman of our Board of Directors for his skills, experienceand knowledge of the company and industry contacts. Effective May 9, 2005,Mr. Viviano entered into an employment agreement which ends on the secondanniversary of the effective date. The term of this agreement is subject toautomatic extensions on a quarterly basis after the initial term has beencompleted. Mr. Viviano can prevent a quarterly extension by giving noticeof a desire to modify or terminate the agreement at least thirty days prior tothe quarterly extension date. In addition, we do not have key employeeinsurance policies covering any of our management team. The loss ofMr. Viviano or other members of our management team, could have a materialadverse effect on our business, results of operations or financial condition.

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

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**Loss of, andfailure to attract, qualified employees and technologists, could limit ourgrowth and negativelyimpact our operations.**

Our future success dependson our continuing ability to identify, hire, develop, motivate and retainhighly skilled personnel for all areas of our organization. Competition in ourindustry for qualified employees is intense. In particular, there is a veryhigh demand for qualified technologists who are necessary to operate oursystems, particularly PET and PET/CT technologists. We may not be able to hireand retain a sufficient number of technologists, and we expect that our costsfor the salaries and benefits of technologists will continue to increase forthe foreseeable future because of the industry’s competitive demand for theirservices. Our continued ability to compete effectively depends on our abilityto attract new employees and to retain and motivate our existing employees.

**Our positronemission tomography and positron emission tomography/computed tomography, orPET and PET/CT servicesand some of our other imaging services require the use of radioactivematerials, which could subject us to regulation related costs and delays andpotential liabilities for injuries or violations of environmental, health andsafety laws.**

Our PET and PET/CT serviceand some of our other imaging services require radioactive materials. Whilethis radioactive material has a short half-life, meaning it quickly breaks downinto inert, or non-radioactive substances, storage, use and disposal of thesematerials presents the risk of accidental environmental contamination andphysical injury. We are subject to federal, state and local regulationsgoverning storage, handling and disposal of these materials and waste products.Although we believe that our safety procedures for storing, handling anddisposing of these hazardous materials comply with the standards prescribed bylaw and regulation, we cannot completely eliminate the risk of accidentalcontamination or injury from those hazardous materials. We maintainprofessional liability insurance with coverage that we believe is consistentwith industry practice and appropriate in light of the risks attendant to ourbusiness. However, in the event of an accident, we could be held liable for anydamages that result, and any liability could exceed the limits or fall outsidethe coverage of our insurance. We may not be able to maintain insurance on acceptableterms, or at all. We could incur significant costs and the diversion of ourmanagement’s attention in order to comply with current or future environmental,health and safety laws and regulations.

**We may not be ableto achieve the expected benefits from future acquisitions which would adverselyaffect our financialcondition and results.**

We havehistorically relied on acquisitions as a method of expanding our business. Inaddition, we will consider future acquisitions as opportunities arise. If we donot successfully integrate acquisitions, we may not realize anticipatedoperating advantages and cost savings. The integration of companies that havepreviously operated separately involves a number of risks, including:

·       demands on managementrelated to the increase in our size after an acquisition;

·       the diversion of ourmanagement’s attention from the management of daily operations to theintegration of operations;

·       difficulties in theassimilation and retention of employees;

·       potential adverse effectson operating results; and

·       challenges in retainingclients.

We may not be able tomaintain the levels of operating efficiency acquired companies have achieved ormight achieve separately. Successful integration of each of their operationswill depend upon our ability to manage those operations and to eliminateredundant and excess costs. Because of difficulties in 

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combiningoperations, we may not be able to achieve the cost savings and other sizerelated benefits that we hoped to achieve after these acquisitions which wouldharm our financial condition and operating results.

**We are controlledby a single stockholder who will be able to exert significant influence overmatters requiring stockholder approval, including change of controltransactions.**

Viewer Holdings L.L.C., an affiliate of KohlbergKravis Roberts & Co, or KKR, owns approximately 70% of our commonequity without giving effect to phantom shares held by three members of KKR’smanagement who are on our board of directors. These directors in the aggregatehold 49,231 phantom shares, which gives them the right to receive an equivalentnumber of shares of our common stock, or cash, upon their retirement orseparation from the board of directors or upon the occurrence of a change ofcontrol. KKR 1996 GP L.L.C. is the sole general partner of KKR Associates 1996L.P., which is the sole general partner of KKR 1996 Fund L.P. As of the datehereof, KKR 1996 Fund L.P. is the senior member of Viewer Holdings L.L.C.Michael W. Michelson, a member of our board of directors, is a member of KKR1996 GP L.L.C. Mr. Michelson is also the Chairperson of our CompensationCommittee and a member of our Executive Committee. James C. Momtazee andKenneth W. Freeman, who are also executives of KKR and limited partners of KKRAssociates 1996 L.P., are also members of our board of directors.Mr. Momtazee is also a member of our Compensation Committee and ourExecutive Committee. We sometimes refer to KKR 1996 GP L.L.C., KKR Associates1996 L.P., KKR 1996 Fund L.P. and various affiliated entities as KKR. KKRprovides management, consulting and financial services to us and we paid KKR anannual fee of $650,000 in 2005 and will pay $650,000 in 2006 in quarterlyinstallments in arrears at the end of each calendar quarter for those services.

As a result of thearrangements described above, KKR controls us and has the power to elect all ofour directors, appoint new management and approve any action requiring theapproval of the holders of shares of our common stock, including adoptingamendments to our certificate of incorporation and approving mergers,consolidations or sales of all or substantially all of our assets. Thisconcentration of ownership may also delay or prevent a change of control of ourcompany or reduce the price investors might be willing to pay for our commonstock. The interests of KKR may conflict with the interests of other holders ofour common stock.

**Possiblevolatility in our stock price could negatively affect us and our stockholders.**

The trading price of our common stock on the New YorkStock Exchange has fluctuated significantly in the past. During the period fromJanuary 1, 2004 through September 30, 2006, the trading price of ourcommon stock fluctuated from a high of $14.15 per share to a low of $3.38 pershare. In the past, we have experienced a drop in stock price following anannouncement of disappointing earnings or earnings guidance. Any suchannouncement in the future could lead to a similar drop in stock price. Theprice of our common stock could also be subject to wide fluctuations in thefuture as a result of a number of other factors, including the following:

·       changes in expectations asto future financial performance or buy/sell recommendations of securitiesanalysts;

·       our, or a competitor’s,announcement of new products or services, or significant acquisitions,strategic partnerships, joint ventures or capital commitments; and

·       the operating and stockprice performance of other comparable companies.

In addition, theU.S. securities markets have experienced significant price and volumefluctuations. These fluctuations often have been unrelated to the operatingperformance of companies in these markets. Broad market and industry factorsmay lead to volatility in the price of our common stock, regardless of 

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our operating performance.Moreover, our stock has limited trading volume, and this illiquidity mayincrease the volatility of our stock price.

In the past, followingperiods of volatility in the market price of an individual company’s securities,securities class action litigation often has been instituted against thatcompany. The institution of similar litigation against us could result insubstantial costs and a diversion of our management’s attention and resources,which could negatively affect our business, results of operations or financialcondition.

**Recently enactedand proposed changes in securities laws and regulations are likely to increaseour costs and may affect our ability to be in compliance with such newcorporate governance provisions in the future.**

The existing federalsecurities laws and regulations impose complex and continually changingregulatory requirements on our operations and reporting. With the enactment ofthe Sarbanes-Oxley Act of 2002 in July 2002, a significant number of newcorporate governance requirements have been adopted. These new requirementsimpose comprehensive reporting and disclosure requirements, set stricterindependence and financial expertise standards for audit committee members, andimpose increased civil and criminal penalties for companies, their chiefexecutive officers, chief financial officers and directors for securities lawviolations. We expect these developments to increase our legal compliancecosts, increase the difficulty and expense in obtaining director and officerliability insurance, and make it harder for us to attract and retain qualifiedmembers of our board of directors and/or qualified executive officers. Suchdevelopments could harm our results of operations and divert management’sattention from business operations.

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**Risks Related toGovernment Regulation of Our Business**

**Complying withfederal and state regulations is an expensive and time-consuming process, andany failure to comply could result in substantial penalties.**

We are directly or indirectly through our clientssubject to extensive regulation by both the federal government and the statesin which we conduct our business, including the federal Anti-Kickback Law andsimilar state anti-kickback laws, the Stark Law and similar state lawsaffecting physician referrals, the federal False Claims Act, the HealthInsurance Portability and Accountability Act of 1996 and similar state lawsaddressing privacy and security, state unlawful practice of medicine and feesplitting laws, state certificate of need laws, the Medicare and Medicaid statutesand regulations, the Medicare Prescription Drug, Improvement and ModernizationAct of 2003, and requirements for handling biohazardous and radioactivematerials and wastes.

If our operations arefound to be in violation of any of the laws and regulations to which we or ourclients are subject, we may be subject to the applicable penalty associatedwith the violation, including civil and criminal penalties, damages, fines andthe curtailment of our operations. Any penalties, damages, fines or curtailmentof our operations, individually or in the aggregate, could adversely affect ourability to operate our business and our financial results. The risk of ourbeing found in violation of these laws and regulations is increased by the factthat many of them have not been fully interpreted by the regulatory authoritiesor the courts, and their provisions are open to a variety of interpretations.Any action against us for violation of these laws or regulations, even if wesuccessfully defend against it, could cause us to incur significant legalexpenses and divert our management’s attention from the operation of ourbusiness.

**Federal and stateanti-kickback and anti-self-referral laws may adversely affect our operationsand income.**

Various federal and state laws govern financialarrangements among health care providers. The federal Anti-Kickback Lawprohibits the knowing and willful offer, payment, solicitation or receipt ofany form of remuneration in return for, or to induce, the referral of Medicare,Medicaid or other federal healthcare program patients, or in return for, or toinduce, the purchase, lease or order of items or services that are covered byMedicare, Medicaid or other federal healthcare programs. Many state laws alsoprohibit the solicitation, payment or receipt of remuneration in return for, orto induce the referral of patients in private as well as government programs.Violation of these laws may result in substantial civil or criminal penaltiesand/or exclusion from participation in federal or state healthcare programs. Webelieve that we are operating in compliance with applicable laws and believethat our arrangements with providers would not be found to violate the federaland state anti-kickback laws. However, these laws could be interpreted in amanner inconsistent with, and that could have an adverse effect on, ouroperations.

The Stark Law prohibits a physician from referringMedicare or Medicaid patients to any entity for certain designated healthservices (including MRI and other diagnostic imaging services) if the physicianhas a prohibited financial relationship with that entity, unless an exceptionapplies. Although we believe that our operations do not violate the Stark Law,our activities may be challenged. If a challenge to our activities issuccessful, it could have an adverse effect on our operations. In addition,legislation may be enacted in the future that further addresses Medicare andMedicaid fraud and abuse or that imposes additional requirements or burdens onus.

A number of states in which our diagnostic imagingcenters are located have adopted a form of anti-kickback law and/or Stark Law.The scope of these laws and the interpretations of them vary from state tostate and are enforced by state courts and regulatory authorities, each withbroad discretion. A determination of liability under the laws described in thisrisk factor could result in fines and penalties and restrictions on our abilityto operate in these jurisdictions.

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In addition, under theDRA, States are encouraged to adopt false claims acts similar to the federalFalse Claims Act, which establish liability for submission of fraudulent claimsto the State Medicaid Program and contain qui tam or whistleblowerprovisions.  States enacting such falseclaims statutes will receive an increased percentage of any recovery from aState Medicaid judgment or settlement. Adoption of new false claims statutes in states where we operate mayimpose additional requirements or burdens on us.

**Healthcare reformlegislation and future regulations could impact our operations or limit theprices we can charge for our services, which would reduce our revenues and harmour operating results.**

In addition to extensive existing governmenthealthcare regulation, there have been and continue to be numerous initiativesat the federal and state levels for reforms affecting the payment for andavailability of healthcare services, including proposals that wouldsignificantly limit reimbursement under the Medicare and Medicaid Programs.Limitations on reimbursement amounts and other cost containment pressures havein the past resulted in a decrease in the revenue we receive for each scan weperform. For example, the DRA, which was signed into law on February 8,2006, contains provisions affecting Medicare payment for imaging servicesfurnished in a number of settings.

In addition, on November 1, 2006, CMS issued a rulethat describes 14 new supplier standards applicable to independent diagnostictesting facilities, or IDTFs, enrolled or enrolling in the Medicare program,which includes some of the Company’s facilities. CMS has designed thesestandards to ensure that minimum quality standards are met to protectbeneficiaries. If an IDTF fails to meet one or more of the proposed standardsat the time of enrollment or at the time of re-enrollment, then its applicationwill be denied or the agency will revoke an IDTF’s billing privileges. Thesenew standards go into effect on January 1, 2007, and IDTFs must meet thesestandards to obtain or retain enrollment in the Medicare program. We believe wealready meet the requirements in all material respects. At this time, we cannotpredict the impact that these new standards will have on our business.

It is not clear at thistime what existing or future proposals, if any, will be made or adopted and, ifadopted, what effect these proposals would have on our business. Aspects ofcertain of these healthcare proposals, such as payment reductions in theMedicare and Medicaid Programs, containment of healthcare costs on an interimbasis by means that could include a short-term freeze on prices charged byhealthcare providers, and permitting greater state flexibility in theadministration of Medicaid, could limit the demand for our services or affectthe revenue per procedure that we can collect which would harm our business andresults of operations.

**The application orrepeal of state certificate of need regulations could harm our business andfinancial results.**

Some states require a certificate of need or similarregulatory approval prior to the acquisition of high-cost capital itemsincluding diagnostic imaging systems or provision of diagnostic imagingservices by us or our clients. Seventeen of the 43 states in which we operaterequire a certificate of need and more states may adopt similar licensureframeworks in the future. In many cases, a limited number of these certificatesare available in a given state. If we are unable to obtain the applicablecertificate or approval or additional certificates or approvals necessary toexpand our operations, these regulations may limit or preclude our operationsin the relevant jurisdictions.

Conversely, states inwhich we have obtained a certificate of need may repeal existing certificate ofneed regulations or liberalize exemptions from the regulations. For example,Pennsylvania, Nebraska, New York, Ohio and Tennessee have liberalizedexemptions from certificate of need programs. The repeal of certificate of needregulations in states in which we have obtained a certificate of need or acertificate of 

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needexemption would lower barriers to entry for competition in those states andcould adversely affect our business.

**If we fail tocomply with various licensure, certification and accreditation standards we maybe subject to loss of licensure, certification or accreditation which wouldadversely affect our operations.**

All of the states in whichwe operate require that the imaging technologists that operate our computedtomography, single photon emission computed tomography, and positron emissiontomography systems be licensed or certified. Also, each of our retail sitesmust continue to meet various requirements in order to receive payments fromthe Medicare Program. In addition, we are currently accredited by the JointCommission on Accreditation of Healthcare Organizations, an independent,non-profit organization that accredits various types of healthcare providerssuch as hospitals, nursing homes and providers of diagnostic imaging services.In the healthcare industry, various types of organizations are accredited tomeet certain Medicare certification requirements, expedite third-party payment,and fulfill state licensure requirements. Some managed care providers prefer tocontract with accredited organizations. Any lapse in our licenses,certifications or accreditations, or those of our technologists, or the failureof any of our retail sites to satisfy the necessary requirements under Medicarecould adversely affect our operations and financial results.

**Risks Related toOur Indebtedness**

**Our substantialindebtedness could restrict our operations and make us more vulnerable toadverse economic conditions.**

Our substantialindebtedness could have important consequences for our stockholders. Forexample, it could:

·       requireus to dedicate a substantial portion of our cash flow from operations topayments on our indebtedness, thereby reducing the availability of our cashflow to fund working capital, capital expenditures and acquisitions and forother general corporate purposes;

·       increaseour vulnerability to economic downturns and competitive pressures in ourindustry;

·       place us at a competitivedisadvantage compared to our competitors that have less debt in relation tocash flow; and

·       limit our flexibility inplanning for, or reacting to, changes in our business and our industry.

**If there is adefault under the agreements governing our material indebtedness, the value ofour assets may not be sufficient to repay our creditors.**

Our property and equipment which make up a significantportion of our tangible assets, had a net book value as of December 31,2005 of $358.9 million and $346.5 million as of September 30, 2006. Thebook value of these assets should not be relied on as a measure of realizablevalue for such assets. The realizable value may be greater or lower than suchnet book value. The value of our assets in the event of liquidation will dependupon market and economic conditions, the availability of buyers and similarfactors. A sale of these assets in a bankruptcy or similar proceeding wouldlikely be made under duress, which would reduce the amounts that could berecovered. Furthermore, such a sale could occur when other companies in ourindustry also are distressed, which might increase the supply of similar assetsand therefore reduce the amounts that could be recovered. Our goodwill andother intangible assets had a net book value as of December 31, 2005 of$193.7 million and $191.7 million as of September 30, 2006. These assetsprimarily consist of the excess of the acquisition cost over the fair marketvalue of the net assets acquired in purchase transactions, customer contractsand costs to obtain certificates of need. The value of goodwill and otherintangible assets will continue to depend significantly upon the success of ourbusiness 

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as a going concern and thegrowth in future cash flows. As a result, in the event of a default under theagreements governing our material indebtedness or any bankruptcy or dissolutionof our company, the realizable value of these assets will likely be substantiallylower and may be insufficient to satisfy the claims of our creditors.

The condition of ourassets will likely deteriorate during any period of financial distresspreceding a sale of our assets. In addition, much of our assets consist ofilliquid assets that may have to be sold at a substantial discount in aninsolvency situation. Accordingly, the proceeds of any such sale of our assetsmay not be sufficient to satisfy, and may be substantially less than, amountsdue to our creditors.

**Despite current indebtednesslevels, we and our subsidiaries may still be able to incur substantially moreindebtedness which could increase the risks described above.**

We and our subsidiariesmay be able to incur substantial additional indebtedness in the future. Theterms of the indentures that govern our 103¤8% senior subordinated notes due 2011 and71¤4% senior subordinated notesdue 2012 permit us or our subsidiaries to incur additional indebtedness,subject to certain restrictions. Further, the indentures allow for the incurrenceof indebtedness by our subsidiaries, all of which would be structurally seniorto the notes. In addition, as of September 30, 2006, our revolving creditfacility permitted additional borrowings of up to approximately $64.1 millionsubject to the covenants contained in the credit facility, and all of thoseborrowings would be senior to the notes. If new debt is added to our and oursubsidiaries’ current debt levels, the risks discussed above could intensify.

**If we are unable togenerate or borrow sufficient cash to make payments on our indebtedness or torefinance our indebtedness on acceptable terms, our financial condition wouldbe materially harmed, our business may fail and you may lose all of yourinvestment.**

Our ability to makescheduled payments on or to refinance our obligations with respect to our debtwill depend on our financial and operating performance, which will be affectedby general economic, financial, competitive, business and other factors beyondour control. We cannot assure you that our business will generate sufficientcash flow from operations or that future borrowings will be available to us inan amount sufficient to enable us to service our debt or to fund our otherliquidity needs. If we are unable to meet our debt obligations or fund ourother liquidity needs, we may need to restructure or refinance all or a portionof our debt on or before maturity or sell certain of our assets. We cannotassure you that we will be able to restructure or refinance any of our debt on commerciallyreasonable terms, if at all, which could cause us to default on our debtobligations and impair our liquidity. Any refinancing of our debt could be athigher interest rates and may require us to comply with more onerous covenants,which could further restrict our business operations.

**We may not be ableto finance future needs or adapt our business plan to changes because ofrestrictions placed on us by our credit facility, the indentures governing ournotes and instruments governing our other indebtedness.**

The indentures forour notes and our credit facility contain affirmative and negative covenantswhich restrict, among other things, our ability to:

·       incuradditional debt;

·       sellassets;

·       createliens or other encumbrances;

·       makecertain payments and dividends; or

·       mergeor consolidate.

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All of these restrictionscould affect our ability to operate our business and may limit our ability totake advantage of potential business opportunities as they arise. A failure tocomply with these covenants and restrictions would permit the relevantcreditors to declare all amounts borrowed under the relevant facility, togetherwith accrued interest and fees, to be immediately due and payable. If theindebtedness under the credit facility or our notes is accelerated, we may nothave sufficient assets to repay amounts due under the credit facility, thenotes or on other indebtedness then outstanding. If we are not able torefinance our debt, we could become subject to bankruptcy proceedings, and youmay lose all or a portion of your investment because the claims of ourcreditors on our assets are prior to the claims of our stockholders.

**Rises in interestrates could adversely affect our financial condition.**

An increase in prevailinginterest rates would have an immediate effect on the interest rates charged onour variable rate debt, which rise and fall upon changes in interest rates. AtSeptember 30, 2006, $230.1 million of our debt was at variableinterest rates. However, during 2005, we entered into multiple interest ratecollar agreements which have a total notional amount of $178.0 million, whichreduces our exposure on our total variable rate to the terms of theseagreements. Under the terms of these agreements, we have purchased a cap on theinterest rate of 4.00% and have sold a floor of 2.25%. The collar agreementsmature at various dates between January 2007 and January 2008.Increases in interest rates would also impact the refinancing of our fixed ratedebt. If interest rates are higher when our fixed debt becomes due, we may beforced to borrow at the higher rates. If prevailing interest rates or otherfactors result in higher interest rates, the increased interest expense wouldadversely affect our cash flow and our ability to service our debt. As aprotection against rising interest rates, we may enter into agreements such asinterest rate swaps, caps, floors and other interest rate exchange contracts.These agreements, however, increase our risks as to the other parties to theagreements not performing or that the agreements could be unenforceable.

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

Not applicable.

**ITEM 3.**                DEFAULTSUPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

**ITEM 5.**                OTHERINFORMATION

Not applicable.

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**ITEM 6.**                EXHIBITS

**(a) Exhibits**

| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                       |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | Amended and Restated Certificate of Incorporation of  Alliance.(7)                                                                                                                                                                                                                    |
| 3.2              |       | Amended and Restated By-laws of Alliance.(7)                                                                                                                                                                                                                                          |
| 4.1              |       | Indenture dated as of April 10, 2001 by and between  the Registrant and the Bank of New York with respect to $260 million  aggregate principal amount of 103¤8%  Senior Subordinated Notes due 2011.(5)                                                                     |
| 4.2              |       | Credit Agreement dated as of November 2, 1999,  as amended.(5)                                                                                                                                                                                                                   |
| 4.3              |       | Specimen certificate for shares of common stock,  $.01 par value, of Alliance.(7)                                                                                                                                                                                                     |
| 4.4              |       | Second Amendment dated as of June 10, 2002 to  Credit Agreement.(8)                                                                                                                                                                                                              |
| 4.5              |       | Indenture dated as of December 29, 2004 by and  between the Registrant and the Bank of New York with respect to $150 million  aggregate principal amount of 71¤4%  Senior Subordinated Notes due 2012 and 71¤4%  Series B Senior Subordinated Notes due 2012.(12) |
| 4.6              |       | Supplemental Indenture dated as of December 14,  2004 by and between Registrant and the Bank of New York with respect to 103¤8%  Senior Subordinated Notes due 2011.(12)                                                                                                    |
| 4.7              |       | Third Amendment dated as of December 29, 2004  to Credit Agreement.(12)                                                                                                                                                                                                          |
| 4.8              |       | Fourth Amendment dated as of December 19, 2005  to Credit Agreement.(14)                                                                                                                                                                                                         |
| 10.1             |       | The 1999 Equity Plan for Employees of Alliance and  Subsidiaries, as amended and restated.(17)                                                                                                                                                                                        |
| 10.2             |       | The Alliance 1997 Stock Option Plan, including form  of option agreement used thereunder, as amended.(5)                                                                                                                                                                              |
| 10.3             |       | The Three Rivers Holding Corp. 1997 Stock Option  Plan, as amended.(5)                                                                                                                                                                                                                |
| 10.4             |       | Alliance Directors’ Deferred Compensation Plan, as  amended.(6)                                                                                                                                                                                                                  |
| 10.5             |       | 2003 Incentive Plan(9)                                                                                                                                                                                                                                                                |
| 10.6             |       | Employment Agreement dated as of July 23, 1997  between Alliance and Richard N. Zehner.(1)                                                                                                                                                                                       |
| 10.7             |       | Agreement Not to Compete dated as of July 23,  1999 between Alliance and Richard N. Zehner.(1)                                                                                                                                                                                   |
| 10.8             |       | Amendment to Employment Agreement dated as of  July 23, 1997 between Alliance and Richard N. Zehner.(2)                                                                                                                                                                          |
| 10.9             |       | Amendment to Employment Agreement dated as of  December 31, 1997 between Alliance and Richard N. Zehner.(3)                                                                                                                                                                      |
| 10.10            |       | Second Amendment to Employment Agreement dated as of  February 5, 1998 between Alliance and Richard N. Zehner.(3)                                                                                                                                                                |
| 10.11            |       | Employment Agreement dated as of January 19,  1998 between Alliance and Kenneth S. Ord.(4)                                                                                                                                                                                       |
| 10.12            |       | Agreement Not to Compete dated as of January 19,  1998 between Alliance and Kenneth S. Ord.(4)                                                                                                                                                                                   |
| 10.15            |       | Employment Agreement dated as of April 29, 1998  between Alliance and Russell D. Phillips, Jr.(3)                                                                                                                                                                           |
| 10.16            |       | Agreement Not to Compete dated as of April 29, 1998  between Alliance and Russell D. Phillips,  Jr.(3)                                                                                                                                                                                |
| 10.17            |       | Employment Agreement dated as of January 1,  2003 between Alliance and Paul S. Viviano.(9)                                                                                                                                                                                       |
| 10.18            |       | Agreement Not to Compete dated as of January 1,  2003 between Alliance and Paul S. Viviano(9)                                                                                                                                                                                    |
| 10.19            |       | Stock Subscription Agreement dated as of  January 2, 2003 between Alliance and Paul S. Viviano.(9)                                                                                                                                                                               |
| 10.20            |       | Stock Subscription Agreement dated as of  February 3, 2003 between Alliance and Paul S. Viviano.(9)                                                                                                                                                                              |

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| 10.21 |   | Form of Stockholder’s Agreement.(5)                                                                                                                                   |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.23 |   | Registration Rights Agreement dated as of  November 2, 1999.(5)                                                                                                            |
| 10.24 |   | Management Agreement, dated as of November 2,  1999, between Alliance and Kohlberg Kravis Roberts & Co., LLP.(5)                                                  |
| 10.25 |   | Amendment No. 1 to Management Agreement,  effective as of January 1, 2000, between Alliance and Kohlberg Kravis  Roberts & Co., LLP.(5)                      |
| 10.26 |   | Form of Indemnification Agreement.(6)                                                                                                                                           |
| 10.27 |   | Amendment to Employment Agreement, Non-Qualified  Stock Option Agreement and Non-Compete Agreement, dated as of May 21,  2003, between Alliance and Richard N. Zehner.(10) |
| 10.29 |   | Amendment to Employment Agreement and Stockholders’  Agreement, dated March 29, 2004 by and  between Alliance, Viewer Holdings, LLC and Kenneth S. Ord.(11)                |
| 10.30 |   | Amended and Restated Employment Agreement dated as  of May 9, 2005 between Alliance and Paul S. Viviano.(13)                                                               |
| 10.31 |   | Agreement Not to Compete dated as of May 9,  2005 between Alliance and Paul S. Viviano.(13)                                                                                |
| 10.32 |   | Employment Agreement dated as of May 9, 2005  between Alliance and Andrew P. Hayek.(13)                                                                                    |
| 10.33 |   | Agreement Not to Compete dated as of May 9,  2005 between Alliance and Andrew P. Hayek.(13)                                                                                |
| 10.34 |   | Employment Agreement dated as of December 1,  2005 between Alliance and Howard K. Aihara.(15)                                                                              |
| 10.35 |   | Agreement Not to Compete dated as of  December 1, 2005 between Alliance and Howard K. Aihara.(15)                                                                          |
| 10.36 |   | Separation and Consulting Agreement and General  Release, dated January 26, 2006, between Alliance and Russell D.  Phillips, Jr.(16)                                  |
| 10.37 |   | 2006 Executive Incentive Plan †(16)                                                                                                                                        |
| 10.38 |   | Summary of compensation award to Nicholas A. Poan(18)                                                                                                                           |
| 21.1  |   | List of subsidiaries.(15)                                                                                                                                                       |
| 31    |   | Certifications of Chief Executive Officer and Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.(19)                                     |
| 32    |   | Certifications of Chief Executive Officer and Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.(19)                                     |

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

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

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

(4)          Incorporated byreference to exhibits filed in response to Item 6, “Exhibits” of the Company’sQuarterly Report on Form 10-Q for the quarter ended March 31,1998 (File No. 000-16334).

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

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

45

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

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

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

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

(11)  Incorporated by reference to exhibits filed inresponse to Item 6, “Exhibits” of the Company’s Quarterly Report on Form 10-Qfor the quarter ended March 31, 2004 (File No. 001-16609).

(12) Incorporated by reference to exhibits filed in response to Item9.01(c), “Exhibits” of the Company’s Current Report on Form 8-K,dated December 29, 2004 (File No. 001-16609).

(13) Incorporated by reference to exhibits filed in response to Item 6, “Exhibits”of the Company’s Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2005 (File No. 001-16609).

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

(15) Incorporated by reference herein to the indicated Exhibit responsein Item 15(a)(1), “Exhibits” of the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2005 (File No. 001-16609).

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

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

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

(19) Filed herewith

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

46

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

|                       | ** ** | **ALLIANCE, IMAGING, INC.**                             |
|-----------------------|------------|---------------------------------------------------------|
|                  |       |                                                    |
|                  |       |                                                    |
| November 9, 2006 | By:        | /s/ PAUL S.  VIVIANO                                    |
|                  |       | Paul S. Viviano                                         |
|                  | * *   | *Chairman of the Board and Chief Executive Officer*     |
|                  | * *   | *(Principal Executive Officer)*                         |
| November 9, 2006 | By:        | /s/ HOWARD K. AIHARA                                    |
|                  |       | Howard K. Aihara                                        |
|                  | * *   | *Executive Vice President and Chief Financial  Officer* |
|                  | * *   | *(Principal Financial Officer)*                         |
| * *              | * *   | * *                                                |
| November 9, 2006 | By:        | /s/ NICHOLAS A. POAN                                    |
| * *              |       | Nicholas A. Poan                                        |
| * *              | * *   | *Senior Vice President and Corporate Controller*        |
| * *              | * *   | *(Principal Accounting Officer)*                        |

 

47

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