**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q/A**

**(AmendmentNo. 1)**

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

**ForQuarter Ended:  June 30, 2007**

**CommissionFile Number:  1-16609**

**ALLIANCE  IMAGING,  INC.**

(Exact name of registrant as specified in its charter)

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

 

**1900 South State CollegeBoulevardSuite 600Anaheim, California 92806**

**(Address of principal executiveoffice)**

**(714) 688-7100**

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

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

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

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

 

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

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

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

 

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**ALLIANCE IMAGING,INC.**

**FORM 10-Q/A**

**For the FiscalQuarter Ended June 30, 2007**

**ExplanatoryNote**

Alliance Imaging, Inc. (the “Company”) is filingthis Amendment No. 1 to its Quarterly Report on Form 10-Q forthe quarter ended June 30, 2007 (the “10-Q”), originally filed onAugust 9, 2007, to restate its condensed consolidated balance sheet as ofJune 30, 2007, the condensed consolidated statement of cash flows for thesix months ended June 30, 2007, and related disclosures. Please refer toNote 14 in the accompanying condensed consolidated financial statements foradditional information.

Subsequent to the filing of the 10-Q, theCompany identified an error with respect to the accounting for marketablesecurities, which were incorrectly classified as cash and cash equivalents onits June 30, 2007 condensed consolidated balance sheet. Under GenerallyAccepted Accounting Principles (“GAAP”) these amounts should have beenclassified as marketable securities. Earlier this year, the Company beganaccumulating cash and cash equivalents with the expectation of funding selectfuture acquisitions. In June 2007, contrary to directions given by theCompany to its financial institution to invest the Company’s funds in cash andcash equivalents, the financial institution invested in marketable securitieswithout timely notifying the Company of the transactions. The Company learnedof the transactions and determined that its accounting for the transactions didnot comply with GAAP.

This Amendment No. 1 does not result in a changein the Company’s previously reported condensed consolidated statements ofoperations and comprehensive income. Furthermore, the Company has not modifiedor updated disclosures presented in the 10-Q in this Form 10-Q/A,except as required to reflect the effects of the item discussed above.Accordingly, this Form 10-Q/A does not reflect events occurringafter the filing of the 10-Q or modify or update those disclosuresaffected by subsequent events or discoveries. Information not affected by therestatement is unchanged and reflects the disclosures made at the time of theoriginal filing of the 10-Q on August 9, 2007. Events occurringafter the filing of the 10-Q or other disclosures necessary to reflectsubsequent events are addressed in the Company’s Quarterly Report onForm 10-Q for the quarterly period ended September 30, 2007,which will be filed with the Securities and Exchange Commission subsequent tothe date of this filing.

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

Part I—Item 1—Financial Statements

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

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

Part I—Item 4—Controls and Procedures

1

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**ALLIANCEIMAGING, INC.FORM 10-QJune 30, 2007Index**
|                                        | ** **                                                                                                                                       | ** ** | **Page** |
|----------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I—FINANCIAL INFORMATION |                                                                                                                                             |       |
|                                   | Item 1—Financial Statements:                                                                                                                | 3          |     |
|                                   | Condensed Consolidated  Balance Sheets   December 31, 2006 and June 30, 2007 (Unaudited) (as restated)                                 | 3          |     |
|                                   | Condensed Consolidated  Statements of Operations and Comprehensive Income   Quarter and six months ended June 30, 2006 and 2007 (Unaudited) | 4          |     |
|                                   | Condensed Consolidated  Statements of Cash Flows   Six months ended June 30, 2006 and 2007 (Unaudited) (as restated)                        | 5          |     |
|                                   | Notes to Condensed  Consolidated Financial Statements (Unaudited)                                                                                | 6          |     |
|                                   | Item 2—Management’s  Discussion and Analysis of Financial Condition and Results of   Operations                                        | 18         |     |
|                                   | Item 3—Quantitative and  Qualitative Disclosures about Market Risk                                                                          | 27         |     |
|                                   | Item 4—Controls and Procedures                                                                                                              | 29         |     |
| PART II—OTHER INFORMATION    |                                                                                                                                             |       |
|                                   | Item 1—Legal Proceedings                                                                                                                    | 30         |     |
|                                   | Item 1A—Risk Factors                                                                                                                        | 30         |     |
|                                   | Item 2—Unregistered Sales of  Equity Securities and Use of Proceeds                                                                         | 31         |     |
|                                   | Item 3—Defaults Upon Senior  Securities                                                                                                     | 31         |     |
|                                   | Item 4—Submission of Matters  to a Vote of Security Holders                                                                                 | 31         |     |
|                                   | Item 5—Other Information                                                                                                                    | 32         |     |
|                                   | Item 6—Exhibits                                                                                                                             | 32         |     |
| SIGNATURES                             | 36                                                                                                                                               |       |
|                                        |                                                                                                                                                  |            |          |  |

 

2

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**PART I—FINANCIALINFORMATION**

**ITEM1. FINANCIAL STATEMENTS**

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

| ** **                                                   | ** ** | **December 31,** | ** ** | **June 30,**                         | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|-------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**              | ** ** | **2007**                                  | ** ** |
| ** **                                                   | ** ** | ** **            | ** ** | **(as restated,  see Note 14)** | ** ** |
| **ASSETS**                                                   |       |                  |       |                                      |       |   | ** ** |   |   |
| Current assets:                                              |       |                  |       |                                      |       |   |   |   |   |
| Cash and cash equivalents                                    |       |                  | $          | 16,440                                    |       |   |   | $ | 21,507 |   |   |
| Marketable securities                                        |       |                  | —     |                                      |       |   | 15,000 |   |   |
| Accounts receivable, net  of allowance for doubtful accounts |       |                  | 51,569     |                                      |       |   | 57,096 |   |   |
| Deferred income taxes                                        |       |                  | 20,199     |                                      |       |   | 24,538 |   |   |
| Prepaid expenses and  other current assets                   |       |                  | 4,211      |                                      |       |   | 6,067 |   |   |
| Other receivables                                            |       |                  | 8,096      |                                      |       |   | 7,832 |   |   |
| Total current assets                                         |       |                  | 100,515    |                                      |       |   | 132,040 |   |   |
| Equipment, at cost                                           |       |                  | 769,967    |                                      |       |   | 772,482 |   |   |
| Less accumulated  depreciation                               |       |                  | (425,790   | )                                         |       |   | (432,877 | ) |   |
| Equipment, net                                               |       |                  | 344,177    |                                      |       |   | 339,605 |   |   |
| Goodwill                                                     |       |                  | 150,069    |                                      |       |   | 150,069 |   |   |
| Other intangible assets,  net                                |       |                  | 35,782     |                                      |       |   | 33,384 |   |   |
| Deferred financing costs,  net                               |       |                  | 6,947      |                                      |       |   | 6,337 |   |   |
| Other assets                                                 |       |                  | 27,036     |                                      |       |   | 17,159 |   |   |
| Total assets                                                 |       |                  | $          | 664,526                                   |       |   |   | $ | 678,594 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**               |       |                  |       |                                      |       |   |   |   |   |
| Current liabilities:                                         |       |                  |       |                                      |       |   |   |   |   |
| Accounts payable                                             |       |                  | $          | 14,525                                    |       |   |   | $ | 11,768 |   |   |
| Accrued compensation and  related expenses                   |       |                  | 16,993     |                                      |       |   | 13,092 |   |   |
| Accrued interest payable                                     |       |                  | 4,320      |                                      |       |   | 4,419 |   |   |
| Income taxes payable                                         |       |                  | 637        |                                      |       |   | — |   |   |
| Other accrued liabilities                                    |       |                  | 32,331     |                                      |       |   | 28,926 |   |   |
| Current portion of  long-term debt                           |       |                  | 2,858      |                                      |       |   | 3,042 |   |   |
| Total current liabilities                                    |       |                  | 71,664     |                                      |       |   | 61,247 |   |   |
| Long-term debt, net of  current portion                      |       |                  | 373,026    |                                      |       |   | 374,348 |   |   |
| Senior subordinated notes                                    |       |                  | 153,541    |                                      |       |   | 153,541 |   |   |
| Minority interests and  other liabilities                    |       |                  | 4,376      |                                      |       |   | 5,365 |   |   |
| Deferred income taxes                                        |       |                  | 78,893     |                                      |       |   | 87,691 |   |   |
| Total liabilities                                            |       |                  | 681,500    |                                      |       |   | 682,192 |   |   |
| Commitments and contingencies (Note 11)                      |       |                  |       |                                      |       |   |   |   |   |
| Stockholders’ deficit:                                  |       |                  |       |                                      |       |   |   |   |   |
| Common stock                                                 |       |                  | 499        |                                      |       |   | 503 |   |   |
| Additional paid-in  deficit                                  |       |                  | (7,070     | )                                         |       |   | (3,616 | ) |   |
| Accumulated comprehensive  income                            |       |                  | 1,356      |                                      |       |   | 825 |   |   |
| Accumulated deficit                                          |       |                  | (11,759    | )                                         |       |   | (1,310 | ) |   |
| Total stockholders’  deficit                            |       |                  | (16,974    | )                                         |       |   | (3,598 | ) |   |
| Total liabilities and stockholders’ deficit             |       |                  | $          | 664,526                                   |       |   |   | $ | 678,594 |   |   |

 

*See accompanying notes.*

3

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

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

 

*See accompanying notes.*

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

| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                      | ** ** | **2007** | ** ** |
| ** **                                                                         | ** ** | ** **                                    | ** ** | **(as restated,  see Note 14)** | ** ** |
| **Operating activities:**                                                          | ** ** | ** **                                    |       |   | ** ** |   |   |
| Net income                                                                         |       | $                                             | 10,399     |   |   | $ | 10,449 |   |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                          |       |   |   |   |   |
| Provision for doubtful  accounts                                                   |       | 1,593                                         |       |   | 2,334 |   |   |
| Non-cash share-based  compensation                                                 |       | 1,308                                         |       |   | 1,845 |   |   |
| Depreciation and  amortization                                                     |       | 44,393                                        |       |   | 43,993 |   |   |
| Amortization of deferred financing  costs                                          |       | 794                                           |       |   | 795 |   |   |
| Adjustment of swaps to  fair value                                                 |       | (494                                          | )          |   | 1,318 |   |   |
| Distributions less than  equity in undistributed income of investees               |       | (188                                          | )          |   | (469 | ) |   |
| Deferred income taxes                                                              |       | 6,552                                         |       |   | 5,361 |   |   |
| Excess tax benefit from  share-based payment arrangements                          |       | —                                        |       |   | (567 | ) |   |
| Loss (gain) on sale of  assets                                                     |       | 472                                           |       |   | (531 | ) |   |
| Changes in operating assets and liabilities:                                       |       |                                          |       |   |   |   |   |
| Accounts receivable                                                                |       | (6,903                                        | )          |   | (7,861 | ) |   |
| Prepaid expenses and  other current assets                                         |       | (1,312                                        | )          |   | (1,856 | ) |   |
| Other receivables                                                                  |       | (2,091                                        | )          |   | 264 |   |   |
| Other assets                                                                       |       | (848                                          | )          |   | (945 | ) |   |
| Accounts payable                                                                   |       | (8,915                                        | )          |   | (3,470 | ) |   |
| Accrued compensation and  related expenses                                         |       | 1,866                                         |       |   | (3,901 | ) |   |
| Accrued interest payable                                                           |       | 128                                           |       |   | 99 |   |   |
| Income taxes payable                                                               |       | (11                                           | )          |   | (637 | ) |   |
| Other accrued liabilities                                                          |       | 1,934                                         |       |   | (3,389 | ) |   |
| Minority interests and  other liabilities                                          |       | (259                                          | )          |   | 989 |   |   |
| Net cash provided  by operating activities                                         |       | 48,418                                        |       |   | 43,821 |   |   |
| **Investing activities:**                                                          | ** ** | ** **                                    |       |   | ** ** |   |   |
| Equipment  purchases                                                               |       | (43,035                                       | )          |   | (34,935 | ) |   |
| Decrease in  deposits on equipment                                                 |       | 10,388                                        |       |   | 9,814 |   |   |
| Purchases of  marketable securities                                                |       | —                                        |       |   | (15,000 | ) |   |
| Proceeds from sale  of assets                                                      |       | 2,322                                         |       |   | 1,978 |   |   |
| Net cash used in  investing activities                                             |       | (30,325                                       | )          |   | (38,143 | ) |   |
| **Financing activities:**                                                          | ** ** | ** **                                    |       |   | ** ** |   |   |
| Principal payments  on equipment debt                                              |       | (1,934                                        | )          |   | (1,550 | ) |   |
| Proceeds from  equipment debt                                                      |       | —                                        |       |   | 138 |   |   |
| Principal payments  on term loan facility                                          |       | (2,675                                        | )          |   | (600 | ) |   |
| Principal payments  on revolving loan facility                                     |       | (28,825                                       | )          |   | (7,000 | ) |   |
| Proceeds from  revolving loan facility                                             |       | 13,500                                        |       |   | 7,000 |   |   |
| Payments of debt  issuance costs                                                   |       | (186                                          | )          |   | (185 | ) |   |
| Proceeds from  exercise of employee stock options                                  |       | 1,029                                         |       |   | 1,019 |   |   |
| Excess tax benefit  from share-based payment arrangements                          |       | —                                        |       |   | 567 |   |   |
| Net cash used in  financing activities                                             |       | (19,091                                       | )          |   | (611 | ) |   |
| Net (decrease)  increase in cash and cash equivalents                              |       | (998                                          | )          |   | 5,067 |   |   |
| Cash and cash  equivalents, beginning of period                                    |       | 13,421                                        |       |   | 16,440 |   |   |
| Cash and cash  equivalents, end of period                                          |       | $                                             | 12,423     |   |   | $ | 21,507 |   |   |
| **Supplemental disclosure of cash flow  information:**                             | ** ** | ** **                                    |       |   | ** ** |   |   |
| Interest paid                                                                      |       | $                                             | 19,676     |   |   | $ | 18,794 |   |   |
| Income taxes paid,  net of refunds                                                 |       | 767                                           |       |   | 2,113 |   |   |
| **Supplemental disclosure of non-cash investing  and financing activities:**       | ** ** | ** **                                    |       |   | ** ** |   |   |
| Net book value of  assets exchanged                                                |       | $                                             | 5,439      |   |   | $ | 1,016 |   |   |
| Capital lease  obligations assumed for the purchase of equipment debt              |       | 1,839                                         |       |   | 3,518 |   |   |
| Equipment debt  transferred to unconsolidated investee                             |       | (2,772                                        | )          |   | — |   |   |
| Comprehensive  income (loss) from hedging transactions, net of taxes               |       | 825                                           |       |   | (531 | ) |   |

 

*See accompanying notes.*

5

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**ALLIANCE IMAGING,INC.**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**June 30, 2007**

**(Unaudited)**

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

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

**Basis ofPresentation—**The accompanyingunaudited condensed consolidated financial statements have been prepared byAlliance Imaging, Inc. (the “Company”) in accordance with accountingprinciples generally accepted in the United States of America and with theinstructions to Form 10-Q and Article 10 of Regulation S-X ofthe Securities and Exchange Commission. Accordingly, they do not include all ofthe information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, alladjustments (including normal recurring accruals) considered necessary for afair presentation have been included. Operating results for the quarter andsix-month periods ended June 30, 2007 are not necessarily indicative ofthe results that may be expected for the year ending December 31, 2007. Theaccompanying unaudited condensed consolidated financial statements should beread in conjunction with the audited consolidated financial statements andnotes to the consolidated financial statements for the year ended December 31,2006.

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

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

**2.   Share-BasedCompensation**

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

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

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***Stock Option Plans and Awards***

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

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

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

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

 

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

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

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

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

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

Thefollowing table summarizes the Company’s stock option activity:

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

 

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

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

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

 

At June 30, 2007, thetotal unrecognized fair value compensation cost related to unvested stockoptions granted to both employees and non-employees was $5,383, which isexpected to be recognized over a remaining weighted-average period of 3.39years. The valuation model applied in this calculation utilizes highlysubjective assumptions that could potentially change over time, including theexpected forfeiture 

8

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

***Restricted Stock Awards***

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

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

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

 

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

***Stock Bonus Award***   

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

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

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**3.   RecentAccounting Pronouncements**

**Uncertainty in Income Taxes****—In July 2006,the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes,” (“FIN 48”), an interpretation of FASB Statement No. 109, “Accountingfor Income Taxes,” (“FASB 109”). FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB 109. This Interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.FIN 48 also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure, and transition. FIN 48 waseffective for fiscal years beginning after December 15, 2006. Thecumulative effect, if any, of applying FIN 48 is to be reported as anadjustment to the opening balance of retained earnings in the year of adoption.The impact of the Company’s reassessment of its tax positions in accordancewith FIN 48 did not have a material effect on the results of operations,financial condition or liquidity. See further discussion of FIN 48 at Note 9.**

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

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

**4.**   MarketableSecurities

Investments with original maturities greater than 90days are accounted for in accordance with SFAS No. 115, “Accounting forCertain Investments in Debt and Equity Securities” and are classifiedaccordingly by the Company at the time of purchase. As of June 30, 2007, theCompany’s investments in marketable securities of $15,000 consisted ofinvestment grade auction rate securities, all classified as available-for-saleand reported at fair value.

The interest rates of auction rate securities resetthrough an auction process at predetermined periods ranging from seven to 49days. Due to the frequent nature of the reset feature, the investments’ marketprices approximate their fair value. The Company has not recognized any gainsor losses associated with these marketable securities.

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**5.   Goodwilland Intangible Assets**

Changesin the carrying amount of goodwill are as follows:

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

 

Intangibleassets consisted of the following:

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

 

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

Amortization expense for intangible assets subject toamortization was $1,229 and $1,194 for the quarters ended June 30, 2006and 2007, respectively, and $2,473 and $2,404 for the six months ended June 30,2006 and 2007, respectively. The intangible assets not subject to amortizationrepresent certificate of needs and regulatory authority rights which haveindefinite useful lives.

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

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

 

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**6.   Other Accrued Liabilities**

Otheraccrued liabilities consisted of the following:

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

 

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

Long-termdebt consisted of the following:

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

 

**8.**   Derivatives

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

In the first quarter of 2005, the Company entered intomultiple interest rate collar agreements for its variable rate bank debt. Thetotal underlying notional amount of the debt was $178,000. Under thesearrangements the Company has purchased a cap on the interest rate of 4.00% andhas sold a floor of 2.25%. The Company paid a net purchase price of $1,462for these collars. These agreements are two and three years in length andmature at various dates between January 2007 and January 2008. As of June 30,2006 and 2007, the fair value of the Company’s interest rate collar agreementswas $3,901 and 

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$1,393, respectively. Forthe quarter and six month period ended June 30, 2006, the Company receiveda net settlement amount of $287 and $355, respectively. For the quarter and sixmonth period ended June 30, 2007, the Company received a net settlement amountof $468 and $1,096, respectively. The Company has designated these collars ascash flow hedges of variable future cash flows associated with its long-termdebt. For the quarters ended June 30, 2006 and 2007, the Companyrecognized $273 and ($262), net of tax, respectively, in comprehensive income(loss), based on the change in fair value of these instruments. For the sixmonths ended June 30, 2006 and 2007, the Company recognized $825, and ($531),net of tax, respectively, based on the change in fair value of theseinstruments. The Company will record subsequent changes in the fair value ofthe collars through comprehensive income (loss) during the period theseinstruments 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 may designate the derivative as a hedge of the identifiedexposure. The Company formally documents all relationships between hedginginstruments and hedged items, as well as the risk-management objective andstrategy for undertaking various hedge transactions. In this documentation, theCompany specifically identifies the firm commitment or forecasted transactionthat has been designated as a hedged item and states how the hedging instrumentis expected to hedge the risks related to the hedged item. The Company formallymeasures effectiveness of its hedging relationships, both at the hedgeinception and on an ongoing basis, in accordance with its risk managementpolicy. The Company would discontinue hedge accounting prospectively (i) ifit is determined that the derivative is no longer effective in offsettingchange in the cash flows of a hedged item, (ii) when the derivativeexpires or is sold, terminated or exercised, (iii) because it is probablethat the forecasted transaction will not occur, (iv) because a hedged firmcommitment no longer meets the definition of a firm commitment, or (v) ifmanagement determines that designation of the derivative as a hedge instrumentis no longer appropriate. The Company’s derivatives are recorded on the balancesheet at their fair value. For derivatives accounted for as cash flow hedgesany unrealized gains or losses on fair value are included in comprehensiveincome, net of tax, assuming perfect effectiveness. Any ineffectiveness isrecognized in earnings.

**9.   Income Taxes**

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

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

As of January 1, 2007, the Company provided a liabilityof $1,495 for unrecognized tax benefits related to various federal and stateincome tax matters. This entire amount would reduce the Company’s effectiveincome tax rate if recognized.

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

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

**10.   Earnings Per Common Share**

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

| ** **                                                                                          | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2006**                              | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
| Numerator:                                                                                          |       |                                  |       |                                          |       |   |   |   |   |
| Net income                                                                                          |       | $                                     | 5,066      |                                          | $          | 4,778 |   | $ | 10,399 |   | $ | 10,449 |   |
| Denominator:                                                                                        |       |                                  |       |                                          |       |   |   |   |   |
| Denominator for basic earnings per  share—weighted-average shares                              |       | 49,758                                |       | 50,462                                        |       | 49,684 |   | 50,210 |   |
| Effect of  dilutive securities:                                                                     |       |                                  |       |                                          |       |   |   |   |   |
| Employee stock options                                                                              |       | 474                                   |       | 1,147                                         |       | 423 |   | 1,143 |   |
| Denominator for diluted earnings per share—adjusted  weighted-average shares                   |       | 50,232                                |       | 51,609                                        |       | 50,107 |   | 51,353 |   |
| Earnings per  common share:                                                                         |       |                                  |       |                                          |       |   |   |   |   |
| Basic                                                                                               |       | $                                     | 0.10       |                                          | $          | 0.09 |   | $ | 0.21 |   | $ | 0.21 |   |
| Diluted                                                                                             |       | $                                     | 0.10       |                                          | $          | 0.09 |   | $ | 0.21 |   | $ | 0.20 |   |
| Stock options  excluded from the computation of diluted per share amounts:                          |       |                                  |       |                                          |       |   |   |   |   |
| Weighted-average  shares for which the exercise price exceeds average market price of common  stock |       | 1,141                                 |       | 530                                           |       | 1,182 |   | 587 |   |
| Average exercise price  per share that exceeds average market price of common stock                 |       | $                                     | 11.32      |                                          | $          | 11.79 |   | $ | 11.31 |   | $ | 11.59 |   |

 

**11.   Commitments and Contingencies**

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

In the normal course of business, the Company has madecertain guarantees and indemnities, under which it may be required to makepayments to a guaranteed or indemnified party, in relation to certain 

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transactions. The Companyindemnifies other parties, including customers, lessors, and parties to othertransactions with the Company, with respect to certain matters. The Company hasagreed to hold the other party harmless against losses arising from certainevents as defined within the particular contract, which may include, forexample, litigation or claims arising from a breach of representations orcovenants. In addition, the Company has entered into indemnification agreementswith its executive officers and directors and the Company’s bylaws containsimilar indemnification obligations. Under these arrangements, the Company isobligated to indemnify, to the fullest extent permitted under applicable law, itscurrent or former officers and directors for various amounts incurred withrespect to actions, suits or proceedings in which they were made, or threatenedto be made, a party as a result of acting as an officer or director.

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

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

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

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

**12.   Related-Party Transactions**

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

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

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

**13.   Investments in Unconsolidated Investees**

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

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

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

 

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

 

**14.**   Restatementof Previously Issued Financial Statements

Subsequent to the filingof its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,2007, the Company identified an error with respect to the accounting for marketablesecurities. As discussed in Note 4, the Company held marketable securitieswhich were incorrectly classified as cash and cash equivalents on its condensedconsolidated financial statements at June 30, 2007, as previously reported. TheCompany has determined that these amounts should have been classified asmarketable securities and do not meet the definition of cash equivalents atJune 30, 2007.

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*Effects ofRestatement*

As a result, the Company has restated its condensedconsolidated balance sheet as of June 30, 2007 and its condensedconsolidated statement of cash flows for the six months ended June 30, 2007,and the notes to the consolidated financial statements for such period asappropriate to correct the error.

The following is a summaryof the corrections described above:

**CONDENSEDCONSOLIDATED BALANCE SHEET(in thousands)**

| ** **                 | ** ** | **As previously** | ** ** | ** **     | ** ** | ** **           | ** ** |
|----------------------------|------------|------------------------|------------|----------------|------------|----------------------|------------|
| ** **                 | ** ** | **reported**           | ** ** | **Adjustment** | ** ** | **As restated** | ** ** |
| ***As  of June 30, 2007*** |       |                   |       |           |       |                 |       |   |   |   |   |   |   |
| Cash and cash  equivalents |       |                   | $          | 36,507         |       |                 |       | $ | (15,000 | ) |   |   | $ | 21,507 |   |   |
| Marketable securities      |       |                   | —     |           |       |                 | 15,000     |   |   |   | $ | 15,000 |   |   |
|                            |            |                        |            |                |            |                      |            |  |  |  |  |  |  |  |  |  |

 

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

| ** **                                            | ** ** | **As previously** | ** ** | ** **     | ** ** | ** **           | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|----------------|------------|----------------------|------------|
| ** **                                            | ** ** | **reported**           | ** ** | **Adjustment** | ** ** | **As restated** | ** ** |
| ***Six  Months Ended June 30, 2007***                 |       |                   |       |           |       |                 |       |   |   |   |   |   |   |
| Purchases of marketable  securities                   |       |                   | $          | —         |       |                 |       | $ | (15,000 | ) |   |   | $ | (15,000 | ) |   |
| Net cash used in  investing activities                |       |                   | (23,143    | )              |       |                 | (15,000    | ) |   |   | (38,143 | ) |   |
|                                                  |       |                   | —     |           |       |                 |       |   |   |   |   |   |   |
| Net (decrease) increase  in cash and cash equivalents |       |                   | $          | 20,067         |       |                 |       | $ | (15,000 | ) |   |   | $ | 5,067 |   |   |
| Cash and cash  equivalents, end of period             |       |                   | 36,507     |           |       |                 | (15,000    | ) |   |   | 21,507 |   |   |

 

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

**Overview**

We are a leading nationalprovider of shared-service and fixed-site diagnostic imaging services, basedupon annual revenue and number of diagnostic imaging systems deployed. Ourprincipal sources of revenue are derived from magnetic resonance imaging (MRI)and positron emission tomography and positron emission tomography/computedtomography (PET and PET/CT). We provide imaging and therapeutic 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. For the six months ended June 30, 2007, MRI services and PET andPET/CT services generated 60% and 31% of our revenue, respectively. Theremaining revenue was comprised of other modality diagnostic imaging servicesrevenue, primarily computed tomography (CT), and management contract revenue.We had 484 diagnostic imaging systems, including 318 MRI systems and 75 PET orPET/CT systems and served over 1,000 clients in 43 states at June 30,2007. Of these 484 diagnostic imaging systems, 74 were located in fixed-sites,which constitutes systems installed in hospitals or other buildings on hospitalcampuses, including modular buildings, systems installed inside medical groups’offices or medical buildings, and free-standing fixed-sites, which includessystems installed in a medical office building, ambulatory surgical center, orother retail space. Of these 74 fixed-sites, 63 were MRI fixed-sites, fourwere PET or PET/CT fixed-sites and seven were other modality fixed-sites.

Approximately 90% of ourrevenues for the six months ended June 30, 2007 were generated byproviding services to hospitals and other healthcare providers, which we referto as wholesale revenues. Our wholesale revenues are typically generated fromcontracts that require our clients to pay us based on the number of scans weperform on patients on our clients’ behalf, although some pay us a flat fee fora period of time regardless of the number of scans we perform. These paymentsare due to us independent of our clients’ receipt of reimbursement fromthird-party payors. We typically deliver our services for a set number of daysper week through exclusive, long-term contracts with hospitals and otherhealthcare providers. The initial terms of these contracts average approximatelythree years in length for mobile services and approximately five to 10 years inlength for fixed-site arrangements. These contracts often contain automaticrenewal provisions and certain contracts have cancellation clauses if thehospital or other healthcare provider purchases their own system. We price ourcontracts based on the type of system used, the scan volume, and the number ofancillary services provided. Pricing is also affected by competitive pressures.

Approximately 10% of our revenuesfor the six months ended June 30, 2007 were generated by providingservices directly to patients from our sites located at or near hospitals orother healthcare provider facilities, which we refer to as retail revenue. Ourrevenue from these sites is generated from direct billings to patients or theirthird-party payors, including Medicare, which are recorded net of contractualdiscounts and other arrangements for providing services at discounted prices.We typically charge a higher price per scan under retail billing than we dounder wholesale billing.

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

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

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

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

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

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

In addition, the DRA also codifies the reduction inreimbursement for multiple images on contiguous body parts. The DRA mandatespayment at 100% of the technical component of the higher-priced imagingprocedure and 50% for the technical component of each additional imagingprocedure for multiple images of contiguous body parts within a family of codesperformed in the same session. Initially, CMS announced that it would phase inthis reimbursement reduction over a two-year period, resulting in a 25%reduction for each additional imaging procedure on contiguous body parts in2006 and an additional 25% reduction in 2007. On November 1, 2006,however, CMS announced that it would not implement the additional 25% reductionin 2007. The implementation of this reimbursement reduction did not have amaterial impact on our consolidated financial position or results of operationsfor the year ended December 31, 2006 or the first six months of 2007. Wecontinue to believe that the implementation of this reimbursement reductionwill not have a material impact on our consolidated financial position orresults of operations in the future.

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

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

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

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

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

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

**Seasonality**

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

**Results ofOperations**

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

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

 

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

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

 

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

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

 

Followingare the components of revenue (in millions):

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

 

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

 

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

Revenue for the secondquarter of 2007 was negatively impacted by the Medicare reimbursementreductions related to the DRA and HOPPS reimbursement rate reduction for PETand PET/CT imaging procedures which came into effect for services furnished onor after January 1, 2007. The full year 2007 revenue impact of the DRA andPET and PET/CT HOPPS reimbursement rate reductions is expected to totalapproximately $14 million. Revenue was also negatively impacted byapproximately $1.6 million in the second quarter of 2007 over the secondquarter of 2006 due to our decision to close 11 unprofitable fixed-sites during2006.

Revenue decreased $3.5million, or 3.1%, to $111.8 million in the second quarter of 2007 compared to$115.3 million in the second quarter of 2006 primarily due to decrease in totalMRI revenue and decrease in other modalities and other revenue, offset by anincrease in PET and PET/CT revenues. Total MRI revenue decreased $4.7 millionin the second quarter of 2007, or 6.5%, compared to the second quarter of 2006.Scan-based MRI revenue decreased $5.6 million in the second quarter of 2007, or8.6%, to $59.4 million in the second quarter of 2007 from $65.0 million in thesecond quarter of 2006. This decrease is primarily a result of an 8.8% decreasein our scan-based MRI scan volume. Scan-based MRI scan volume decreased to163,979 scans in the second quarter of 2007 from 179,869 scans in the secondquarter of 2006, primarily due to a decrease in the average number ofscan-based systems in service due to lower client demand. Scan-based systems inservice decreased to 254.5 systems in the second quarter of 2007 from 274.1systems in the second quarter of 2006 to adjust to a decline in MRI scanvolumes and to increase the efficiency of our mobile MRI systems. Average scansper system per day also decreased by 0.3% to 9.35 in the second quarter of 2007from 9.38 in the second quarter of 2006. These decreases were partially offsetby a 0.2% increase in the average price per MRI scan to $362.28 per scan insecond quarter of 2007 compared to $361.54 per scan in second quarter of 2006and an increase in non-scan based MRI revenue of $1.0 million in the secondquarter of 2007 over the same period in 2006. Other modalities and otherrevenue decreased $1.1 million, or 11.2%, to $9.7 million in the second quarterof 2007 compared to $10.8 million in the second quarter of 2006 primarily dueto a decrease in other fixed-site modality revenue primarily related to theCompany’s decision to close 11 unprofitable fixed-sites in 2006, a decrease inmanagement contract revenue for our management agreements and a decrease inreimbursement of expenses from unconsolidated investees. PET and PET/CT revenuein the second quarter of 2007 increased $2.3 million, or 7.0%, compared to thesecond quarter of 2006. Total PET and PET/CT scan volumes increased 17.9% to29,150 scans in the second quarter of 2007 from 24,734 scans in the secondquarter of 2006, primarily as a result of growth in our core PET business. Theaverage number of PET and PET/CT systems in service increased to 72.3 systemsin the second quarter of 2007 from 69.1 systems in the second quarter of 2006.Scans per system per day increased 7.8%, to 6.35 scans per system per day inthe second quarter of 2007 from 5.89 scans per system per day in the secondquarter of 2006. These PET and PET/CT increases were partially offset by an8.7% decline in the average price per PET and PET/CT scan, to $1,200 per scan inthe second quarter of 2007 compared to $1,314 per scan in the second quarter of2006. The decline in PET and PET/CT average price per scan is primarily due tothe impact of the DRA and HOPPS reimbursement rate reductions which becameeffective January 1, 2007.

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

Cost of revenues,excluding depreciation and amortization, decreased $4.4 million, or 7.1%,to $58.2 million in the second quarter of 2007 compared to$62.6 million in the second quarter of 2006. During the second quarter of 2006we recorded a class action settlement of $2.5 million. Medical suppliesdecreased $0.8 million, or 14.8%, primarily as a result of a decrease in filmcosts due to lower MRI scan volume. Medical supplies also decreased due to adecrease in radiopharmaceutical, or FDG, costs, which are used as a componentof a PET and PET/CT scan, as a result of sourcing discounts, partially offsetby an 

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increasein FDG costs due to an increase in the number of PET and PET/CT scans. Outsidemedical services decreased $0.5 million, or 20.6%, primarily as a result of adecrease in radiologist service costs associated with a decrease in costsincurred at fixed-sites related to our decision to close 11 unprofitablefixed-sites in 2006 and lower MRI scan volume. Equipment rental expensedecreased $0.3 million, or 18.5%, primarily due to a lower number of rentalsystems in use to support current clients as a result of improved systemutilization. Fuel expenses and tractor and transportation expenses decreased $0.4million, or 16.6% primarily due to improved mobile route efficiency. Thesedecreases were partially offset by a $0.7 million increase in maintenance andrelated costs, or 6.4%, primarily due to an increase in the per unit cost forservice contracts. All other cost of revenues, excluding depreciation andamortization, decreased $0.6 million, or 2.1%. Cost of revenues, as apercentage of revenue, decreased to 52.0% in the second quarter of 2007 from 54.2%in the second quarter of 2006 as a result of the factors described above.

Selling, general andadministrative expenses increased $0.9 million, or 6.8%, to $14.5 million inthe second quarter of 2007 compared to $13.6 million in the second quarter of2006. Non-cash share-based compensation increased $0.3 million in the secondquarter of 2007 from the second quarter of 2006 due to new equity awardsgranted during the first quarter of 2007. Bad debt expense increased $0.7million, or 80.6%, to $1.5 million in the second quarter of 2007 compared to$0.8 million in the second quarter of 2006. All other selling, general andadministrative expenses decreased $0.1 million, or 0.8%. Selling, general andadministrative expenses as a percentage of revenue were 13.0% and 11.8% in thesecond quarter of 2007 and 2006, respectively.

Severance and relatedcosts were $0.2 million in the second quarter of 2007 compared to $0.1 millionin the second quarter of 2006.

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

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

Interest expense, net,increased $0.4 million, or 3.7%, to $10.4 million in the second quarter of 2007compared to $10.0 million in the second quarter of 2006. Variability in thefair value of our interest rate swaps executed in 2004 accounted for $0.7million of this increase in interest expense. This increase in interest expensewas also the result of higher average interest rates in the second quarter of2007 on our variable rate term loans. The increase in interest rates on ourvariable rate term loans was partially offset by existing interest rate swapand collar agreements. These increases were further offset by a decrease ininterest expense due to lower average debt balances during 2007 as a result ofthe repayment of debt in the second half of 2006.

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

Minority interest expensewas $0.5 million in the second quarter of 2007 and 2006.

Earnings fromunconsolidated investees decreased by $0.2 million, or 11.4%, to $1.8 millionin the second quarter of 2007 compared to $2.0 million in the second quarter of2006.

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

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

Revenue for the first sixmonths of 2007 was negatively impacted by the Medicare reimbursement reductionsrelated to the DRA and HOPPS reimbursement rate reduction for PET and PET/CTimaging 

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

Revenue decreased $9.4million, or 4.1%, to $221.2 million in the first six months of 2007 compared to$230.6 million in the first six months of 2006 primarily due to a decrease inMRI revenue and other modalities and other revenue, offset by an increase inPET and PET/CT revenues. MRI revenue decreased $11.0 million in the first sixmonths of 2007, or 7.7%, compared to the first six months of 2006. Scan-basedMRI revenue decreased $12.3 million in the first six months of 2007, or 9.4%,compared to the first six months of 2006, from $130.4 million in the first sixmonths of 2006 to $118.1 million in the first six months of 2007. Scan-basedMRI scan volume decreased to 326,779 scans in the first six months of 2007 from362,291 scans in the first six months of 2006, primarily due to a decrease inthe average number of scan-based systems in service due to lower client demand.Scan-based systems in service decreased to 255.5 systems in the first sixmonths of 2007 from 276.9 systems in the first six months of 2006 to adjust to adecline in MRI scan volumes and to increase the efficiency of our mobile MRIsystems. Average scans per system per day also decreased by 1.5% to 9.23 in thefirst six months of 2007 from 9.37 in the first six months of 2006. Thesedecreases were partially offset by a 0.4% increase in the average price per MRIscan to $361.49 per scan in the first six months of 2007 compared to $360.06per scan in the first six months of 2006 and an increase in non-scan basedrevenue of $1.3 million in the six months of 2007 over the same period in 2006.Other modalities and other revenue decreased $2.6 million, or 11.7%, to $19.3million in the first six months of 2007 compared to $21.9 million in the firstsix months of 2006 primarily due to a decrease in other fixed-site modalityrevenue primarily related to the closure of 11 unprofitable fixed sites during2006, a decrease in management contract revenue for our management agreementsand a decrease in reimbursement of expenses from unconsolidated investees. PETand PET/CT revenue in the first six months of 2007 increased $4.2 million, or6.3%, compared to the first six months of 2006. Total PET and PET/CT scanvolumes increased 15.6% to 56,863 scans in the first six months of 2007 from49,198 scans in the first six months of 2006, primarily as a result of growthin our core PET business. The average number of PET and PET/CT systems inservice increased to 71.1 systems in the first six months of 2007 from 68.1systems in the first six months of 2006. Scans per system per day alsoincreased 7.8%, to 6.32 scans per system per day in the first six months of2007 from 5.86 scans per system per day in the first six months of 2006. ThesePET and PET/CT increases were partially offset by a 7.8% decline in the averageprice per PET and PET/CT scan, to $1,210 per scan in the first six months of2007 compared to $1,313 per scan in the first six months of 2006. The declinein PET and PET/CT average price per scan is primarily due to the impact of theDRA and HOPPS reimbursement rate reductions which became effective January 1,2007.

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

Cost of revenues,excluding depreciation and amortization, decreased $8.2 million, or 6.6%,to $114.3 million in the first six months of 2007 compared to$122.5 million in the first six months of 2006. During the first sixmonths of 2006, we recorded a class action settlement of $2.5 million. Medicalsupplies decreased $1.3 million, or 11.5%, primarily as a result of a decreasein film costs related to lower MRI scan volume. Medical supplies also decreaseddue to a decrease in FDG costs, which are used as a component of a PET andPET/CT scan as a result of sourcing discounts, partially offset by an increasein FDG costs due to an increase in the number of PET and PET/CT scans. Compensationand related employee expenses decreased $1.2 million, or 2.2%, primarily as aresult of labor efficiencies and a lower average headcount of MRI technologistsas a result of a decrease in the average number of MRI systems in use. Outsidemedical services decreased $1.1 million, or 23.7%, primarily as a result of adecrease in radiologist 

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servicecosts associated with a decrease in costs incurred at fixed-sites related toour decision to close 11 unprofitable fixed-sites in 2006 and lower MRI scanvolume, and a decrease in temporary staffing needs. Equipment rental expensedecreased $0.9 million, or 30.0%, primarily due to a lower number of rentalsystems in use to support current clients as a result of improved systemutilization. Fuel expenses decreased $0.5 million, or 14.1%, primarily due toimproved mobile route efficiency. Management contract expenses decreased $0.4million, or 5.6%, primarily as a result of a decrease in expenses incurred onbehalf of unconsolidated investees. Tractor and transportation expensesdecreased $0.3 million, or 19.5%, primarily due to decrease in the number oftractors on operating leases. Site fee expense decreased $0.3 million, or13.6%, primarily due to a decrease in the number of retail fixed-sites inoperation. These decreases were partially offset by a $1.6 million increase inmaintenance and related costs, or 7.3%, primarily due to an increase in the perunit cost for service contracts. All other cost of revenues, excludingdepreciation and amortization, decreased $1.3 million, or 15.8%. Cost ofrevenues, as a percentage of revenue, decreased to 51.7% in the first sixmonths of 2007 from 53.1% in the first six months of 2006 as a result of thefactors described above.

Selling, general andadministrative expenses increased $1.9 million, or 7.0%, to $29.3 million inthe first six months of 2007compared to $27.4 million in the first sixmonths of 2006. Professional services increased $0.9 million, or 28.7%,due to an increase in legal costs and consulting services. Non-cash share-based compensationincreased $0.5 million in the first six months of 2007 from the first sixmonths of 2006 due to new equity awards granted during the first quarter of2007. All other selling, general and administrative expenses increased $0.5million, or 2.2%. Selling, general and administrative expenses as a percentageof revenue were 13.2% and 11.9% in the first six months of 2007 and 2006,respectively.

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

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

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

Interestexpense, net, increased $0.7 million, or 3.4%, to $20.5 million in the firstsix months of 2007 compared to $19.8 million in the first six months of 2006.Variability in the fair value of ourinterest rate swaps executed in 2004 accounted for $1.8 million of the increasein interest expense. The increase in interest expense was also the result ofhigher average interest rates in the first six months of 2007 on our variablerate term loans. The increase in interest rates on our variable rate term loanswas partially offset by existing interest rate swap and collar agreements.These increases were further offset by a decrease in interest expense due to loweraverage debt balances during 2007 as a result of the repayment of debt in thesecond half of 2006.

Incometax expense was $7.2 million in the first six months of 2007 and 2006,resulting in effective tax rates of 40.8% and 40.9% in the first six months of2007 and 2006, respectively. Our effective tax rates were higher than statutoryrates for the first six months of 2007 and 2006 primarily as a result of stateincome taxes.

Minority interest expensewas $1.0 million in both the first six months of 2007 and 2006.

Earnings fromunconsolidated investees increased by $2.2 million, or 73.6%, to $5.2 millionin the first six months of 2007 compared to $3.0 million in the first sixmonths of 2006, primarily due to a $2.0 million gain on sale from a sale/leaseback transaction in one ofthe Company’s unconsolidated investees as well as an increase inearnings of unconsolidated investees.

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

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**Liquidity and Capital Resources**

Our primary source ofliquidity is cash provided by operating activities. We generated $43.8 millionand $48.4 million of cash flow from operating activities in the first sixmonths of 2007 and 2006, respectively. Our ability to generate cash flow isaffected by numerous factors, including demand for MRI, PET and otherdiagnostic imaging services. Our ability to generate cash flow from operatingactivities is also dependent upon the collections of our accounts receivable.The provision for doubtful accounts increased by $0.7 million in the first sixmonths of 2007 compared to the first six months of 2006. Our number of days ofrevenue outstanding for our accounts receivable was 51 days as of June 30,2007, which we believe is among the more favorable in the healthcare serviceindustry. In addition, as of June 30, 2007, we had $64.1 million ofavailable borrowings under our revolving line of credit.

Ourprimary use of capital resources is to fund capital expenditures. We used cashof $38.1 million and $30.3 million for investing activities in the first sixmonths ended June 30, 2007 and 2006, respectively. We incur capitalexpenditures for the purposes of:

·       purchasingnew systems;

·       replacingless advanced systems with new systems;

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

Capital expenditurestotaled $34.9 million and $43.0 million in the first six months ended June 30,2007 and 2006, respectively. During the first six months of 2007, we purchased10 MRI systems, eight PET/CT systems and three CT systems. We traded-in or solda total of 33 MRI, PET, or CT systems for the six months ended June 30,2007. In the second quarter of 2007 we opened one radiation therapy center andfinanced the equipment through a capital lease. Our decision to purchase orlease a new system is typically predicated on obtaining new or extendingexisting client contracts, which serve as the basis of demand for the newsystem. We expect to purchase additional systems in 2007 and financesubstantially all of these purchases with our available cash, cash fromoperating activities, our revolving line of credit, and equipment leases. Basedupon the client demand described above, which dictates the type of equipmentpurchased, we expect capital expenditures to total approximately $75 to $85million in 2007.

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

**Recent Accounting Pronouncements**

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

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157, “FairValue Measurements,” (“SFAS 157”), which enhances the existing guidance formeasuring assets and 

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liabilitiesusing fair value. This statement provides a single definition of fair value,establishes a framework for measuring fair value, and expands disclosures aboutfair value measurements. SFAS 157 emphasizes fair value as a market-basedmeasurement instead of an entity-specific measurement. The statement sets out afair value hierarchy with the highest priority being quoted prices in activemarkets. SFAS 157 is effective for fiscal years beginning after November 15,2007 and interim periods within those fiscal years. We are currently evaluatingthe provisions of SFAS 157 and the impact on our consolidated financial positionand results of operations. We will adopt SFAS 157 for the fiscal year beginningJanuary 1, 2008.

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

**Cautionary Statement Pursuant to the PrivateSecurities Litigation Reform Act of 1995**

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

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

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

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

During 2004 we enteredinto swap agreements which have notional amounts of $56.8 million, $46.8 millionand $48.4 million at June 30, 2007. Under the terms of these agreements,we receive three-month LIBOR and pay a fixed rate of 3.15%, 3.89%, and 3.69%,respectively. The net effect is to record interest expense at fixed rates of5.65%, 6.39% and 6.19% respectively, as the debt incurs interest based onthree-month LIBOR plus 2.50%. For the quarter and six months ended June 30,2007, we received a net settlement amount of$0.3 million and $1.0 million, respectively. For the quarter ended and sixmonths ended June 30, 2006 we received a net settlement amount of $0.5million and $0.8 million, respectively. Two of the swap agreementsmatured during the second quarter of 2007 and one of the swap agreements willmature during the fourth quarter of 2007.

During 2005 we enteredinto multiple interest rate collar agreements which have a notional amount of$178.0 million. Under the terms of these agreements, we have purchased a cap onthe interest rate of 4.00% and have sold a floor of 2.25%. For the quarter andsix months ended June 30, 2007, we received a net settlement amount of$0.5 million and $1.1 million, respectively, on these collar agreements. Forthe quarter and six months ended June 30, 2006, we received a netsettlement amount of $0.3 million and $0.4 million, respectively, on thesecollar agreements. The collar agreements mature at various dates between January 2007and January 2008.

The collar agreements havebeen designated as cash flow hedges of variable future cash flows associatedwith our long term debt. In accordance with SFAS 133, “Accounting forDerivative Instruments and Hedging Activities,” the collars are recorded atfair value. On a quarterly basis, the fair value of the collars will bedetermined based on quoted market prices and, assuming perfect effectiveness,the difference between the fair value and the book value of the collars will berecognized in comprehensive income, a component of shareholders’ equity. Anyineffectiveness of the collars is required to be recognized in earnings.

The outstanding interestrate swaps and collars expose us to credit risk in the event that the counterpartiesto the agreements do not or cannot meet their obligations. The notional amountis used to measure interest to be paid or received and does not represent theamount of exposure to credit loss. The loss would be limited to the amount thatwould have been received, if any, over the remaining life of the swap andcollar agreements. The counterparties to the swaps and collars are majorfinancial institutions and we expect the counterparties to be able to performtheir obligations under the swaps and collars. We use derivative financialinstruments for hedging purposes only and not for trading or speculativepurposes.

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 and marketable securities. The Company maintains its cashequivalents in financial instruments with original maturities of 90 days orless. The Company also holds investments in marketable securities, which consistprimarily of investment grade auction rate securities, all classified asavailable-for-sale with original maturities greater than 90 days. The recordedcarrying amounts of cash and cash equivalents and marketable securities approximatefair value due to their short-term maturities.

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**ITEM4.**                CONTROLS ANDPROCEDURES

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

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

In October 2007, weidentified an error in the condensed consolidated financial statements for thequarter and six months ended June 30, 2007 with respect to an incorrectclassification of marketable securities as cash and cash equivalents. For moreinformation regarding the effects of the restatement, see Note 14 to theaccompanying condensed consolidated financial statements.

In connection with therestatement and the filing of this Form 10-Q/A, management, with theparticipation of our Chief Executive Officer and our Chief Financial Officer,re-evaluated our disclosure controls and procedures. In performing there-evaluation, management considered the control deficiency that resulted inthe error in the classification of cash and cash equivalents and marketablesecurities. Based on our re-evaluation, we concluded that the restatement wasthe result of a significant deficiency in our internal control over financialreporting relating to the financial presentation of cash and cash equivalentsand marketable securities. In reaching this conclusion, we considered theeffects of the restatement to the condensed consolidated financial statementsfor the quarter and six months ended June 30, 2007.

Based on the foregoingre-evaluation of our disclosure controls and procedures as of the end of thequarter covered by this report, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective atthe reasonable assurance level.

There were no changes inthe Company’s internal control over financial reporting occurring during thefiscal quarter covered by this report which have materially affected or arereasonably likely to materially affect the Company’s internal control overfinancial reporting. Subsequent to the identification of the significantdeficiency in October 2007, the Company has adopted the following changes inits internal control over financial reporting to address the foregoingsignificant deficiency: We enhanced the review process of the cashreconciliation process by knowledgeable management in order to properlydistinguish cash and cash equivalents from other types of cash investments. Asa result of these changes, management believes that the Company’s internalcontrol over financial reporting is effective at the reasonable assurancelevel, although the Company will not be able to determine whether thesignificant deficiency has been fully remediated until completion of controlstesting conducted in connection with the Company’s assessment of internalcontrol over financial reporting as of December 31, 2007.

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**PART II—OTHERINFORMATION**

**ITEM 1.**                LEGALPROCEEDINGS

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

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

**ITEM 1A.**        RISKFACTORS

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

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

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

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

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

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

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

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

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

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

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

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

Not applicable.

**ITEM 3.**                DEFAULTSUPON SENIOR SECURITIES

Not applicable.

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

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

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

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

**Proposaland Vote Tabulation**

| ** **                                                                                                                                                         | ** ** | **Votes Cast** | ** ** | ** **  | ** ** | **Broker**  | ** **         |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------|------------|-------------|--------------------|
| ** **                                                                                                                                                         | ** ** | **For**             | ** ** | **Against** | ** ** | **Abstain** | ** **         | **Non-votes** | ** ** |
| Approval of the  appointment of Deloitte & Touche LLP as independent registered  public accounting firm for the fiscal year ending December 31, 2007 |       | 42,852,627          |       | 846,142     |       | 2,412       |     | — |   |
| Approval of the  amended and restated 1999 Equity Plan                                                                                                        |       | 34,848,778          |       | 4,885,395   |       | 546,589     |     | 3,420,419 |   |

 

**Election of Directors**

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

 

**ITEM5.**                OTHER INFORMATION

Not applicable.

**ITEM6.**                EXHIBITS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

34

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(15)   Incorporated by referenceherein to the indicated Exhibit response in Item 15(a)(3), “Exhibits” ofthe Company’s Annual Report on Form 10-K for the year ended December 31,2006 (File No. 001-16609).

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

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

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

(19)   Filed herewith

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

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                        |   | **ALLIANCE, IMAGING, INC.**                             |
|------------------------|--------|---------------------------------------------------------|
| November 9,  2007 | By:    | /s/ PAUL S. VIVIANO                                     |
| * *               |   | Paul S. Viviano                                         |
| * *               |   | *Chairman of the Board and Chief Executive Officer*     |
| * *               |   | *(Principal Executive Officer)*                         |
| November 9,  2007 | By:    | /s/ HOWARD K. AIHARA                                    |
| * *               |   | Howard K. Aihara                                        |
| * *               |   | *Executive Vice President and Chief Financial  Officer* |
| * *               |   | *(Principal Financial Officer)*                         |
| November 9,  2007 | By:    | /s/ NICHOLAS A. POAN                                    |
| * *               |   | Nicholas A. Poan                                        |
| * *               |   | *Senior Vice President, Finance, and Corporate*         |
| * *               |   | *Controller and Chief Accounting Officer*               |
| * *               |   | *(Principal Accounting Officer)*                        |

 

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