**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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

**ForQuarter Ended:  September 30, 2005**

**CommissionFile Number: 1-16609**

**ALLIANCE IMAGING, INC.**

(Exact name of registrantas specified in its charter)

| **DELAWARE**                                                                      | ** ** | **33-0239910**                        |
|-----------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)                  |       | (IRS Employer  Identification Number) |
| **1900 South State College Boulevard  Suite 600  Anaheim, California 92806** |
| (Address of  principal executive office)                                          |
| **(714) 688-7100**                                                                |
| Registrant’s  telephone number, including area code                          |

 

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

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

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

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of October 31,2005:

Common Stock, $.01par value, 49,564,706 shares

 

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

**September 30, 2005**

**Index**

| ** **                                                                                                                                            | **Page** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I—FINANCIAL INFORMATION                                                                                                                |     |   |
| Item  1—Financial Statements:                                                                                                                    |     |   |
| Condensed Consolidated  Balance Sheets  December 31, 2004 and September 30, 2005 (Unaudited)                                                | 3        |   |
| Condensed Consolidated  Statements of Operations and Comprehensive Income  Quarter and nine months ended September 30, 2004 and 2005 (Unaudited) | 4        |   |
| Condensed Consolidated  Statements of Cash Flows  Nine months ended September 30, 2004 and 2005 (Unaudited)                                      | 5        |   |
| Notes to Condensed  Consolidated Financial Statements (Unaudited)                                                                                     | 6        |   |
| Item 2—Management’s Discussion  and Analysis of Financial Condition and Results of  Operations                                              | 16       |   |
| Item 3—Quantitative and  Qualitative Disclosures about Market Risk                                                                               | 26       |   |
| Item 4—Controls and Procedures                                                                                                                   | 27       |   |
| PART II—OTHER INFORMATION                                                                                                                   |     |   |
| Item 1—Legal Proceedings                                                                                                                         | 29       |   |
| Item 2—Unregistered Sales of  Equity Securities and Use of Proceeds                                                                              | 29       |   |
| Item 3—Defaults Upon Senior  Securities                                                                                                          | 29       |   |
| Item 4—Submission of Matters  to a Vote of Security Holders                                                                                      | 29       |   |
| Item 5—Other Information                                                                                                                         | 29       |   |
| Item 6—Exhibits                                                                                                                                  | 29       |   |
| SIGNATURES                                                                                                                                            | 33       |   |

 

2

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**PART I—FINANCIAL INFORMATION**

**ITEM 1.**                FINANCIALSTATEMENTS

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

| ** **                                                   | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                   | ** ** | **2004**              | ** ** | **2005**               | ** ** |
| **ASSETS**                                                   |       |                  |       | ** **             |       |   | ** ** | ** ** |   |
| Current assets:                                              |       |                  |       | ** **             |       |   |   | ** ** |   |
| Cash and cash equivalents                                    |       |                  | $          | 20,721                 |       |   |   | $ | 33,351 |   |   |
| Accounts receivable, net  of allowance for doubtful accounts |       |                  | 50,146     |                   |       |   | 50,869 |   |   |
| Deferred income taxes                                        |       |                  | 12,782     |                   |       |   | 20,081 |   |   |
| Prepaid expenses and  other current assets                   |       |                  | 3,082      |                   |       |   | 4,331 |   |   |
| Other receivables                                            |       |                  | 3,323      |                   |       |   | 7,274 |   |   |
| Total current assets                                         |       |                  | 90,054     |                   |       |   | 115,906 |   |   |
| Equipment, at cost                                           |       |                  | 727,232    |                   |       |   | 726,581 |   |   |
| Less accumulated  depreciation                               |       |                  | (373,721   | )                      |       |   | (386,891 | ) |   |
| Equipment, net                                               |       |                  | 353,511    |                   |       |   | 339,690 |   |   |
| Goodwill                                                     |       |                  | 122,992    |                   |       |   | 125,238 |   |   |
| Other intangible assets,  net                                |       |                  | 28,249     |                   |       |   | 28,875 |   |   |
| Deferred financing  costs, net                               |       |                  | 9,264      |                   |       |   | 7,961 |   |   |
| Other assets                                                 |       |                  | 18,128     |                   |       |   | 25,696 |   |   |
| Total assets                                                 |       |                  | $          | 622,198                |       |   |   | $ | 643,366 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**               |       |                  |       |                   |       |   |   |   |   |
| Current liabilities:                                         |       |                  |       |                   |       |   |   |   |   |
| Accounts payable                                             |       |                  | $          | 20,518                 |       |   |   | $ | 17,242 |   |   |
| Accrued compensation and  related expenses                   |       |                  | 15,661     |                   |       |   | 12,528 |   |   |
| Accrued interest payable                                     |       |                  | 717        |                   |       |   | 6,925 |   |   |
| Income taxes payable                                         |       |                  | 865        |                   |       |   | 455 |   |   |
| Other accrued  liabilities                                   |       |                  | 22,177     |                   |       |   | 28,981 |   |   |
| Current portion of  long-term debt                           |       |                  | 9,390      |                   |       |   | 8,104 |   |   |
| Total current  liabilities                                   |       |                  | 69,328     |                   |       |   | 74,235 |   |   |
| Long-term debt, net of  current portion                      |       |                  | 412,733    |                   |       |   | 386,669 |   |   |
| Senior subordinated  notes                                   |       |                  | 153,541    |                   |       |   | 153,541 |   |   |
| Minority interests and  other liabilities                    |       |                  | 4,164      |                   |       |   | 3,513 |   |   |
| Deferred income taxes                                        |       |                  | 49,960     |                   |       |   | 68,742 |   |   |
| Total liabilities                                            |       |                  | 689,726    |                   |       |   | 686,700 |   |   |
| Commitments and contingencies (Note 12)                      |       |                  |       |                   |       |   |   |   |   |
| Stockholders’ deficit:                                  |       |                  |       |                   |       |   |   |   |   |
| Common stock                                                 |       |                  | 490        |                   |       |   | 496 |   |   |
| Additional paid-in  deficit                                  |       |                  | (15,798    | )                      |       |   | (11,962 | ) |   |
| Accumulated comprehensive  (loss) income                     |       |                  | (278       | )                      |       |   | 2,773 |   |   |
| Accumulated deficit                                          |       |                  | (51,942    | )                      |       |   | (34,641 | ) |   |
| Total stockholders’  deficit                            |       |                  | (67,528    | )                      |       |   | (43,334 | ) |   |
| Total liabilities and stockholders’ deficit             |       |                  | $          | 622,198                |       |   |   | $ | 643,366 |   |   |

 

*See accompanying notes.*

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

| ** **                                                                                         | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2004**                                   | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2005** | ** ** |
| Revenues                                                                                           |       | $                                          | 109,760    |                                                | $          | 106,198 |   | $ | 324,887 |   | $ | 320,596 |   |
| Costs and  expenses:                                                                               |       |                                       |       |                                                |       |   |   |   |   |
| Cost of revenues,  excluding depreciation and amortization                                         |       | 54,832                                     |       | 55,901                                              |       | 162,640 |   | 163,729 |   |
| Selling, general  and administrative expenses                                                      |       | 11,549                                     |       | 11,747                                              |       | 35,469 |   | 37,110 |   |
| Employment  agreement costs                                                                        |       | 275                                        |       | —                                              |       | 1,790 |   | 366 |   |
| Severance and  related costs                                                                       |       | 627                                        |       | —                                              |       | 627 |   | — |   |
| Depreciation  expense                                                                              |       | 19,832                                     |       | 20,385                                              |       | 60,466 |   | 61,311 |   |
| Amortization  expense                                                                              |       | 885                                        |       | 937                                                 |       | 2,640 |   | 2,719 |   |
| Interest expense,  net of interest income                                                          |       | 11,192                                     |       | 9,117                                               |       | 32,620 |   | 27,686 |   |
| Other (income)  and expense, net                                                                   |       | (473                                       | )          | 56                                                  |       | (600 | ) | (331 | ) |
| Total costs and  expenses                                                                          |       | 98,719                                     |       | 98,143                                              |       | 295,652 |   | 292,590 |   |
| Income before income taxes, minority interest  expense, and earnings from unconsolidated investees |       | 11,041                                     |       | 8,055                                               |       | 29,235 |   | 28,006 |   |
| Income tax  expense                                                                                |       | 4,701                                      |       | 3,494                                               |       | 7,227 |   | 11,795 |   |
| Minority interest  expense                                                                         |       | 524                                        |       | 550                                                 |       | 1,956 |   | 1,506 |   |
| Earnings from  unconsolidated investees                                                            |       | (1,150                                     | )          | (1,000                                              | )          | (3,177 | ) | (2,596 | ) |
| Net income                                                                                         |       | $                                          | 6,966      |                                                | $          | 5,011 |   | $ | 23,229 |   | $ | 17,301 |   |
| Comprehensive income,  net of taxes:                                                               |       |                                       |       |                                                |       |   |   |   |   |
| Net income                                                                                         |       | $                                          | 6,966      |                                                | $          | 5,011 |   | $ | 23,229 |   | $ | 17,301 |   |
| Unrealized (loss)  gain on hedging transactions, net of taxes                                 |       | (601                                       | )          | 1,450                                               |       | (724 | ) | 3,051 |   |
| Comprehensive  income                                                                              |       | $                                          | 6,365      |                                                | $          | 6,461 |   | $ | 22,505 |   | $ | 20,352 |   |
| Earnings per  common share:                                                                        |       |                                       |       |                                                |       |   |   |   |   |
| Basic                                                                                              |       | $                                          | 0.14       |                                                | $          | 0.10 |   | $ | 0.48 |   | $ | 0.35 |   |
| Diluted                                                                                            |       | $                                          | 0.14       |                                                | $          | 0.10 |   | $ | 0.48 |   | $ | 0.34 |   |
| Weighted average  number of shares of common stock and common stock equivalents:                   |       |                                       |       |                                                |       |   |   |   |   |
| Basic                                                                                              |       | 48,344                                     |       | 49,517                                              |       | 48,169 |   | 49,313 |   |
| Diluted                                                                                            |       | 48,943                                     |       | 50,368                                              |       | 48,562 |   | 50,311 |   |

 

*See accompanying notes.*

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

| ** **                                                                          | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                                            | ** ** | **2005** | ** ** |
| **Operating activities:**                                                           |       |                                                |       |   |   |
| Net income                                                                          |       | $                                                   | 23,229     |   | $ | 17,301 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:  |       |                                                |       |   |   |
| Provision for doubtful  accounts                                                    |       | 322                                                 |       | 2,035 |   |
| Non-cash stock-based  compensation                                                  |       | 259                                                 |       | 189 |   |
| Depreciation and  amortization                                                      |       | 63,106                                              |       | 64,030 |   |
| Amortization of deferred  financing costs                                           |       | 2,279                                               |       | 1,834 |   |
| Distributions (less than)  greater than equity in undistributed income of investees |       | (1,310                                              | )          | 70 |   |
| Deferred income taxes                                                               |       | 15,117                                              |       | 10,838 |   |
| Gain on sale of assets                                                              |       | (600                                                | )          | (331 | ) |
| Changes in operating assets and liabilities:                                        |       |                                                |       |   |   |
| Accounts receivable                                                                 |       | (3,124                                              | )          | (1,558 | ) |
| Prepaid expenses and  other current assets                                          |       | (949                                                | )          | (1,249 | ) |
| Other receivables                                                                   |       | (430                                                | )          | (3,951 | ) |
| Other assets                                                                        |       | (2,067                                              | )          | (1,825 | ) |
| Accounts payable                                                                    |       | 5,704                                               |       | (3,276 | ) |
| Accrued compensation and  related expenses                                          |       | 4,569                                               |       | (3,133 | ) |
| Accrued interest payable                                                            |       | 6,651                                               |       | 6,208 |   |
| Income taxes payable                                                                |       | (8,970                                              | )          | (410 | ) |
| Other accrued liabilities                                                           |       | 3,329                                               |       | 6,189 |   |
| Minority interests and  other liabilities                                           |       | (20                                                 | )          | 66 |   |
| Net cash provided  by operating activities                                          |       | 107,095                                             |       | 93,027 |   |
| **Investing activities:**                                                           |       |                                                |       |   |   |
| Equipment purchases                                                                 |       | (68,950                                             | )          | (46,497 | ) |
| Decrease  (increase) in deposits on equipment                                       |       | 4,386                                               |       | (512 | ) |
| Acquisitions, net  of cash received                                                 |       | —                                              |       | (7,650 | ) |
| Investment in  unconsolidated joint ventures                                        |       | (145                                                | )          | — |   |
| Proceeds from sale  of assets                                                       |       | 5,580                                               |       | 1,455 |   |
| Net cash used in  investing activities                                              |       | (59,129                                             | )          | (53,204 | ) |
| **Financing activities:**                                                           |       |                                                |       |   |   |
| Principal payments  on equipment debt                                               |       | (4,762                                              | )          | (4,485 | ) |
| Proceeds from  equipment debt                                                       |       | 4,176                                               |       | 558 |   |
| Principal payments  on revolving loan facility                                      |       | —                                              |       | (15,000 | ) |
| Proceeds from  revolving loan facility                                              |       | —                                              |       | 15,000 |   |
| Principal payments  on term loan facility                                           |       | (26,250                                             | )          | (25,000 | ) |
| Payments of debt  issuance costs                                                    |       | (170                                                | )          | (531 | ) |
| Proceeds from  issuance of common stock                                             |       | 50                                                  |       | — |   |
| Proceeds from  exercise of employee stock options                                   |       | 2,831                                               |       | 2,265 |   |
| Net cash used in  financing activities                                              |       | (24,125                                             | )          | (27,193 | ) |
| Net increase in  cash and cash equivalents                                          |       | 23,841                                              |       | 12,630 |   |
| Cash and cash  equivalents, beginning of period                                     |       | 20,931                                              |       | 20,721 |   |
| Cash and cash  equivalents, end of period                                           |       | $                                                   | 44,772     |   | $ | 33,351 |   |
| **Supplemental disclosure of cash flow  information:**                              |       |                                                |       |   |   |
| Interest paid                                                                       |       | $                                                   | 23,812     |   | $ | 20,074 |   |
| Income taxes paid,  net of refunds                                                  |       | 777                                                 |       | 1,489 |   |
| **Supplemental disclosure of non-cash investing  and financing activities:**        |       |                                                |       |   |   |
| Net book value of  assets exchanged                                                 |       | $                                                   | 262        |   | $ | 5,698 |   |
| Capital lease  obligations assumed for the purchase of equipment                    |       | —                                              |       | 1,577 |   |
| Comprehensive  (loss) income from hedging transactions, net of taxes                |       | (724                                                | )          | 3,051 |   |

 

*See accompanying notes.*

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

**1. Basisof Presentation, Principles of Consolidation, and Use of Estimates**

**Basisof Presentation—****The**accompanying unauditedcondensed consolidated financial statements have been prepared by AllianceImaging, Inc. (the “Company”) in accordance with accounting principlesgenerally accepted in the United States of America and with the instructions toForm 10-Q and Article 10 of Regulation S-X of theSecurities and Exchange Commission. Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. In the opinion of management, alladjustments (including normal recurring accruals) considered necessary for afair presentation have been included. Operating results for the nine-monthperiod ended September 30, 2005 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2005. Theaccompanying unaudited condensed consolidated financial statements should beread in conjunction with the audited consolidated financial statements andnotes to the consolidated financial statements for the year ended December 31,2004.

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

**Use of Estimates—****The**preparation ofcondensed consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the amounts reportedin the condensed consolidated financial statements and accompanying notes.Actual results could differ from those estimates.

**2. Stock-Based Compensation**

The Company accounts for stock-based compensationawards using the intrinsic value method prescribed under Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”),and its related interpretations. Other than the awards discussed inNote 8, all other stock-based awards were granted with an exercise priceequal to the market value of the underlying common stock on the date of grantand no compensation cost is reflected in net income from operations for thoseawards.

Statement of Financial Accounting Standard No. 123,“Accounting for Stock-Based Compensation” (“SFAS 123”) as amended by SFAS148, “Accounting for Stock-Based Compensation—Transition and Disclosure,”requires presentation of pro forma information regarding net income andearnings per share determined as if the Company has accounted for its employeestock options granted subsequent to December 31, 1994 under the fair valuemethod of that Statement. The fair value for these options was estimated as ofthe date of grant using the Black-Scholes option pricing model with thefollowing weighted-average assumptions for the third quarter of 2004: risk-freeinterest rates of 3.76%; no dividend yield; volatility factor of the expectedmarket price of the Company’s common stock of 42.6%; and a weighted-averageexpected life of the options of 6.50 years. There were no stock optionsgranted during the third quarter of 2005. The Company used the followingweighted-average assumptions for the first nine months of 2004 and 2005,respectively: risk-free interest rates of 3.32% and 3.79%; no dividend yield; volatility

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factors of the expectedmarket price of the Company’s common stock of 53.4% and 52.8%; and a weighted-averageexpected life of the options of 5.68 years and 5.52 years. Theweighted-average fair value of options granted during the third quarter of 2004was $2.01. The weighted-average fair value of options granted during the firstnine months of 2004 and 2005 was $1.99 and $6.12, respectively.

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

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

| ** **                                                                                                      | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2004**                                   | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net income:                                                                                                     |       |                                       |       |                                                |       |   |   |   |   |
| As reported                                                                                                     |       | $                                          | 6,966      |                                                | $          | 5,011 |   | $ | 23,229 |   | $ | 17,301 |   |
| Add: Stock-based  compensation expense included in reported net income, net of related tax  effects             |       | 37                                         |       | 37                                                  |       | 154 |   | 113 |   |
| Deduct:  Stock-based compensation expense determined under fair value based method,  net of related tax effects |       | (265                                       | )          | (349                                                | )          | (881 | ) | (1,062 | ) |
| Pro forma net  income                                                                                           |       | $                                          | 6,738      |                                                | $          | 4,699 |   | $ | 22,502 |   | $ | 16,352 |   |
| Basic earnings  per share:                                                                                      |       |                                       |       |                                                |       |   |   |   |   |
| As reported                                                                                                     |       | $                                          | 0.14       |                                                | $          | 0.10 |   | $ | 0.48 |   | $ | 0.35 |   |
| Pro forma                                                                                                       |       | 0.14                                       |       | 0.09                                                |       | 0.47 |   | 0.33 |   |
| Diluted earnings  per share:                                                                                    |       |                                       |       |                                                |       |   |   |   |   |
| As reported                                                                                                     |       | 0.14                                       |       | 0.10                                                |       | 0.48 |   | 0.34 |   |
| Pro forma                                                                                                       |       | 0.14                                       |       | 0.09                                                |       | 0.46 |   | 0.33 |   |

 

**3. RecentAccounting Pronouncements**

**Exchangesof Nonmonetary Assets—****In**December 2004, theFinancial Accounting Standards Board (“FASB”) issued SFAS 153, “Exchangesof Nonmonetary Assets” (“SFAS 153”), which is an amendment of APB Opinion No. 29,“Accounting for Nonmonetary Transactions,” (“APB 29”). This statementaddresses the measurement of exchanges of nonmonetary assets, and eliminatesthe exception from fair value measurement for nonmonetary exchanges of similarproductive assets as defined in paragraph 21(b) of APB 29, andreplaces it with an exception for exchanges that do not have commercialsubstance. This statement specifies that a nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. SFAS 153 is effective fornonmonetary asset exchanges occurring in fiscal periods beginning after June 15,2005. The adoption of SFAS 153 did not have a material impact on theCompany’s consolidated financial position or results of operations.

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**ShareBased Payment—****In**December 2004, the FASBissued SFAS 123(R) (revised December 2004), “Share-Based Payment”(“SFAS 123(R)”), which is a revision of SFAS 123 and supersedes APB No. 25.This statement requires that the fair value at the grant date resulting fromall share-based payment transactions be recognized in the financial statements.Further, SFAS 123(R) requires entities to apply a fair-value basedmeasurement method in accounting for these transactions. This value is recordedover the vesting period. This statement is effective for the first fiscal yearbeginning after June 15, 2005. The Company is currently evaluating theprovisions of SFAS 123(R) and the impact on its consolidatedfinancial position and results of operations. The Company will adoptSFAS 123(R) for the fiscal year beginning January 1, 2006.

**AssetRetirement Obligations—****In**March 2005, the FASBissued FASB Interpretation No. 47, “Accounting for Conditional AssetRetirement Obligations” (“FIN 47”), an interpretation of SFAS 143, “Accountingfor Conditional Asset Retirement Obligations.” This interpretation clarifiesthat an entity is required to recognize a liability for the fair value of aconditional asset retirement obligation when incurred if the liability’s fairvalue can be reasonably estimated. This interpretation also clarifies when anentity would have sufficient information to reasonably estimate the fair valueof an asset retirement obligation. This statement is effective for the first fiscalyear beginning after December 15, 2005. The Company believes the adoptionof FIN 47 will not have a material impact on its consolidated financialposition or results of operations.

**AccountingChanges and Error Corrections—****In**May 2005,the FASB issued SFAS 154, “Accounting for Changes and Error Corrections” (“SFAS 154”),which is a replacement of APB Opinion No. 20, “Accounting Changes,” andSFAS 3, “Reporting Accounting Changes in Interim Financial Statements.”This statement changes the requirements for the accounting for and reporting ofall voluntary changes in accounting principle and in the instance that apronouncement does not include specific transition provisions. This statementrequires retrospective application to prior periods’ financial statements ofchanges in accounting principle, unless it is impracticable to determine eitherthe period-specific effects or the cumulative effect of the change.SFAS 154 is effective for accounting changes and corrections of errorsmade in fiscal years beginning after December 15, 2005. The Companybelieves the adoption of SFAS 154 will not have a material impact on itsconsolidated financial position or results of operations.

**LimitedPartnerships—****In**June 2005, the FASB issuedEmerging Issues Task Force Issue No. 04-05, “Determining Whether aGeneral Partner, or the General Partners as a Group, Controls a LimitedPartnership or Similar Entity When the Limited Partners Have Certain Rights”(“EITF 04-05”).EITF 04-05 clarifies how general partners in a limited partnershipshould determine whether they control a limited partnership. A general partnerof a limited partnership is presumed to control the limited partnership unlessthe limited partners have substantive kick-out rights or participating rights.For general partners of all new limited partnerships formed and for existinglimited partnerships for which the partnership agreements are modified,EITF 04-05 is effective after June 29, 2005. For generalpartners in all other limited partnerships, EITF 04-05 is effectivefor the first period in fiscal years beginning after December 15, 2005.The Company believes the adoption of EITF 04-05 will not have amaterial impact on its consolidated financial position or results ofoperations.

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

8

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**4. Transactions**

Effective September 1,2005, the Company acquired certain assets associated with nine multi-modalityfixed-site diagnostic imaging centers. The multi-modality fixed-site diagnosticimaging centers include one MRI system, six CT systems, and 29 other modalitysystems. The purchase price consisted of $7,650 in cash and $500 in assumedliabilities. The acquisition was financed using the Company’s internallygenerated funds. As a result of this acquisition, the Company recorded goodwilland intangible assets of $2,246 and $2,400, respectively. The acquisition alsoincludes $246 of contingent payment due to the shareholders of the centers ifcertain performance targets are met over a three year period. When thecontingency is resolved and consideration is distributable, the Company willrecord the fair value of the consideration as additional purchase price togoodwill. Adjustments to goodwill may occur in future periods as a result ofchanges in the original valuation of assets and liabilities acquired. TheCompany’s third quarter ended September 30, 2005 includes one month ofoperations from this acquisition. The Company has not included pro formainformation as this acquisition did not have a material impact on the Company’sconsolidated financial position or results of operations.

**5. Goodwill and Intangible Assets**

Changesin the carrying amount of goodwill are as follows:

| Balance at  December 31, 2004       |   | $     | 122,992 |   |
|------------------------------------------|--------|-------|---------|--------|
| Additions to  goodwill during the period |   | 2,246 |    |
| Balance at  September 30, 2005      |   | $     | 125,238 |   |

 

Intangibleassets consisted of the following:

| ** **                                    | ** ** | **December 31, 2004** | ** ** | **September 30, 2005** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **Gross**                       | ** ** | ** **                       | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Carrying**                    | ** ** | **Accumulated**                  | ** ** | **Intangible** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Intangible** | ** ** |
| ** **                                    | ** ** | **Amount**                      | ** ** | **Amortization**                 | ** ** | **Assets, net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Assets, net** | ** ** |
| Amortizing  intangible assets:                |       |                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Customer contracts                            |       | $                               | 40,426     |                             |       | $ | (15,528 | ) |   |   | $ | 24,898 |   |   | $ | 41,763 |   |   | $ | (17,758 | ) |   |   | $ | 24,005 |   |   |
| Other                                         |       | 3,272                           |       |                             | (2,010     | ) |   |   | 1,262 |   |   | 4,437 |   |   | (1,709 | ) |   |   | 2,728 |   |   |
| Total amortizing intangible assets            |       | $                               | 43,698     |                             |       | $ | (17,538 | ) |   |   | $ | 26,160 |   |   | $ | 46,200 |   |   | $ | (19,467 | ) |   |   | $ | 26,733 |   |   |
| Intangible assets not subject to amortization |       |                            |       |                             |       |   |   |   | $ | 2,089 |   |   |   |   |   |   |   |   |   | $ | 2,142 |   |   |
| Total other intangible  assets                |       |                            |       |                             |       |   |   |   | $ | 28,249 |   |   |   |   |   |   |   |   |   | $ | 28,875 |   |   |

 

The Company reviews the recoverability of the carryingvalue of goodwill on an annual basis or more frequently when an event occurs orcircumstances change to indicate an impairment of these assets has possiblyoccurred. Goodwill is allocated to the Company’s various reporting units whichrepresent the Company’s geographical regions. The Company compares the fairvalue of the reporting unit to its carrying amount to determine if there ispotential impairment. The implied fair value for goodwill is determined basedon the fair value of assets and liabilities of the respective reporting units,in accordance with SFAS 142, “Goodwill and Other Intangible Assets,” basedon discounted cash flows, market multiples, or appraised values as appropriate.

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Amortization expense for intangible assets subject toamortization was $885and $937 for the quarters ended September 30, 2004and 2005, respectively, and $2,640 and $2,719 for the nine months ended September 30,2004 and 2005, respectively. The intangible assets not subject to amortizationrepresent certificate of needs and regulatory authority rights which haveindefinite useful lives.

Estimatedannual amortization expense for existing intangibles for each of the fiscalyears ending December 31 is presented below:

| 2005 |   | $     | 3,715  |   |
|------|--------|-------|--------|--------|
| 2006 |   | 3,933 |   |
| 2007 |   | 3,717 |   |
| 2008 |   | 3,503 |   |
| 2009 |   | 3,181 |   |

 

**6. Other Accrued Liabilities**

Otheraccrued liabilities consisted of the following:

| ** **                                    | ** ** | **December 31,  2004** | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Accrued systems  rental and maintenance costs |       |                        | $          | 3,058                        |       |   |   | $ | 5,511 |   |   |
| Accrued site  rental fees                     |       |                        | 1,796      |                         |       |   | 1,239 |   |   |
| Accrued property  and sales taxes payable     |       |                        | 8,061      |                         |       |   | 9,129 |   |   |
| Accrued  self-insurance expense               |       |                        | 4,789      |                         |       |   | 5,727 |   |   |
| Other accrued  expenses                       |       |                        | 4,473      |                         |       |   | 7,375 |   |   |
| Total                                         |       |                        | $          | 22,177                       |       |   |   | $ | 28,981 |   |   |

 

**7. Long-Term Debt**

Long-termdebt consisted of the following:

| ** **                                 | ** ** | **December 31,  2004** | ** ** | **September 30,  2005** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Term loan  facility                        |       |                        | $          | 409,875                      |       |   |   | $ | 384,875 |   |   |
| Senior  subordinated notes                 |       |                        | 153,541    |                         |       |   | 153,541 |   |   |
| Equipment debt                             |       |                        | 12,248     |                         |       |   | 9,898 |   |   |
| Long-term debt,  including current portion |       |                        | 575,664    |                         |       |   | 548,314 |   |   |
| Less current  portion                      |       |                        | 9,390      |                         |       |   | 8,104 |   |   |
| Long-term debt                             |       |                        | $          | 566,274                      |       |   |   | $ | 540,210 |   |   |

 

**8. Non-CashStock-Based Compensation**

In November 2000, the Company granted stockoptions to certain employees at exercise prices below the fair value of theCompany’s common stock, of which 35,000 options were outstanding at September 30,2005. The exercise prices of these options and the fair value of the Company’scommon stock on the grant date were $5.60 and $9.52 per share, respectively.Compensation expense of $28 will be recognized on a straight-line basis overthe remaining vesting period of the options. The Company recorded non-cashstock-based compensation of $6 for each of the quarters ended September 30,2004 and 2005, respectively, and $42 and $18, for the first nine months of 2004and 2005, respectively, with an offset to paid-in-capital deficit.

On June 20, 2001, the Company’s compensationcommittee authorized the Company to amend the option agreements under its 1999Equity Plan to reduce the performance targets for 1,899,600 

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performance options out ofthe 2,284,222 performance options outstanding. On May 18, 2004, theCompany’s compensation committee authorized the Company to make a secondamendment to the option agreements under its 1999 Equity Plan to further reducethe performance targets for all of the 1,914,500 performance optionsoutstanding. These options vest on the eighth anniversary of the grant date ifthe option holder is still an employee, but the vesting accelerates if theCompany meets the operating performance targets specified in the optionagreements. As a result of the amendments, if the Company achieves the reducedperformance targets but does not achieve the previous performance targets, andan option holder terminates employment prior to the eighth anniversary of theoption grant date, the Company would be required to record a non-cashstock-based compensation charge equal to the amount by which the actual valueof the shares subject to the performance option on the date of the respectiveamendment exceeded the option’s exercise price. Under the first amendment,management estimates that the Company could incur an additional $100 to $300 inthe aggregate of these non-cash stock-based compensation charges over the next3 months. Under the second amendment, management estimates that the Companycould incur an additional $100 to $200 in the aggregate of these non-cashstock-based compensation charges over the next 3 3/4 years. These charges,however, may not be evenly distributed over each of these respective periods orover the four quarters in any one year, depending upon the timing of employeeturnover and the number of shares subject to the options held by departingemployees.

For each of the quartersended September 30, 2004 and 2005, the Company recorded $57 in non-cashstock-based compensation as a result of these amendments. For the nine monthsended September 30, 2004 and 2005, the Company recorded $217 and $171,respectively, in non-cash stock-based compensation as a result of theseamendments. Non-cash stock-based compensation is included as a component ofselling, general and administrative expenses.

**9. Derivatives**

In the second quarter of 2004, the Company enteredinto interest rate swap agreements, with notional amounts of $56,813, $46,813and $48,438 to hedge the future cash interest payments associated with aportion of the Company’s variable rate bank debt. These agreements are threeyears in length and mature in 2007. As of September 30, 2005, the fairvalue of the Company’s interest rate swap agreements was an accumulated incomeof $2,440. Under these arrangements, the Company receives three-month LondonInterbank Offered Rate (“LIBOR”) and pays a fixed rate of 3.15%, 3.89% and3.69%, respectively. The net effect of the hedges is to record interest expenseat fixed rates of 5.40%, 6.14% and 5.94%, respectively, as the debt incursinterest based on three-month LIBOR plus 2.25%. For the quarter and nine monthsended September 30, 2004, the Company recorded a net settlement amount of$564. For the quarter and nine months ended September 30, 2005, theCompany recorded net settlement amounts of $102 and $848, respectively. TheCompany has designated these swaps as cash flow hedges of variable future cashflows associated with its long-term debt. For the quarter and nine month periodended September 30, 2004 the Company recognized a comprehensive loss, netof tax, of $601 and $724, respectively, based on the change in fair value of theseinstruments. For the quarter and nine month period ended September 30,2005 the Company recognized a comprehensive income, net of tax, of $842 and$1,742, respectively, based on the change in fair value of these instruments.The Company will continue to record subsequent changes in the fair value of theswaps through comprehensive income during the period these instruments aredesignated as hedges.

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

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income of $2,181. For thequarter and nine month period ended September 30, 2005, the Company didnot record any net settlement amount. The Company has designated these collarsas cash flow hedges of variable future cash flows associated with its long-termdebt. For the quarter and nine month period ended September 30, 2005, theCompany recognized a comprehensive income, net of tax, of $608 and $1,309 basedon the change in fair value of these instruments. The Company will recordsubsequent changes in the fair value of the collars through comprehensiveincome during the period these instruments are designated as hedges.

The Company accounts forderivative instruments and hedging activities in accordance with the provisionsof SFAS 133, “Accounting for Derivative Instruments and Hedging Actvities”(“SFAS 133”) and SFAS 138, “Accounting for Certain DerivativeInstruments and Hedging Activities” (“SFAS 138”), an amendment ofSFAS 133. On the date the Company enters into a derivative contract,management designates the derivative as a hedge of the identified exposure. TheCompany does not enter into derivative instruments that do not qualify as cashflow hedges as described in SFAS 133 and SFAS 138. The Companyformally documents all relationships between hedging instruments and hedgeditems, as well as the risk-management objective and strategy for undertakingvarious hedge transactions. In this documentation, the Company specificallyidentifies the firm commitment or forecasted transaction that has beendesignated as a hedged item and states how the hedging instrument is expectedto hedge the risks related to the hedged item. The Company formally measureseffectiveness of its hedging relationships, both at the hedge inception and onan ongoing basis, in accordance with its risk management policy. The Companywould discontinue hedge accounting prospectively (i) if it is determinedthat the derivative is no longer effective in offsetting change in the cashflows of a hedged item, (ii) when the derivative expires or is sold,terminated or exercised, (iii) because it is probable that the forecastedtransaction will not occur, (iv) because a hedged firm commitment nolonger meets the definition of a firm commitment, or (v) if managementdetermines that designation of the derivative as a hedge instrument is nolonger appropriate. The Company’s derivatives are recorded on the balance sheetat their fair value. For derivatives accounted for as cash flow hedges anyunrealized gains or losses on fair value are included in comprehensive income(loss), net of tax.

**10. Income Taxes**

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

For the quarter and ninemonths ended September 30, 2004, the Company recorded income tax expense of$4,701 and $7,227, respectively. The third quarter 2004 effective income taxrate was 40.3% of the Company’s pretax income, which was higher than federalstatutory rates primarily as a result of state income taxes. For the ninemonths ended September 30, 2004, the effective income tax rate was 23.7%,which was lower than federal statutory rates due to the reversal of income taxreserves of $5,099 primarily related to the favorable outcome of examinationsof the Company’s 1998 and 1999 federal income tax returns and a favorable finalIRS determination letter related to the treatment of an income item in afederal income tax return of one of the Company’s subsidiaries.

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**11. Earnings Per Common Share**

The following table setsforth the computation of basic and diluted earnings per share (amounts inthousands, except per share amounts):

| ** **                                                                                                | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                | ** ** | **2004**                                   | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2005** | ** ** |
| Numerator:                                                                                                |       |                                       |       |                                                |       |   |   |   |   |
| Net income                                                                                                |       | $                                          | 6,966      |                                                | $          | 5,011 |   | $ | 23,299 |   | $ | 17,301 |   |
| Denominator:                                                                                              |       |                                       |       |                                                |       |   |   |   |   |
| Denominator for basic  earnings per share  —weighted-average shares                                  |       | 48,344                                     |       | 49,517                                              |       | 48,169 |   | 49,313 |   |
| Effect of dilutive securities:                                                                            |       |                                       |       |                                                |       |   |   |   |   |
| Employee stock options                                                                                    |       | 599                                        |       | 851                                                 |       | 393 |   | 998 |   |
| Denominator for diluted  earnings per share  —adjusted weighted-average shares                       |       | 48,943                                     |       | 50,368                                              |       | 48,562 |   | 50,311 |   |
| Earnings per common share:                                                                                |       |                                       |       |                                                |       |   |   |   |   |
| Basic                                                                                                     |       | $                                          | 0.14       |                                                | $          | 0.10 |   | $ | 0.48 |   | $ | 0.35 |   |
| Diluted                                                                                                   |       | $                                          | 0.14       |                                                | $          | 0.10 |   | $ | 0.48 |   | $ | 0.34 |   |
| 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 |       | 607                                        |       | 1,329                                               |       | 3,241 |   | 1,219 |   |
| Average exercise price  per share that exceeds average market price of common stock                  |       | $                                          | 11.28      |                                                | $          | 11.57 |   | $ | 6.44 |   | $ | 11.74 |   |

 

**12. Commitments and Contingencies**

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

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

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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 September 30, 2005 the Companyhas determined that no liability is necessary related to these guarantees andindemnities.

The Company guarantees a portion of a loan on behalfof an unconsolidated investee under an agreement executed prior to 2002. Themaximum potential future payment under this financial guarantee is $227 at September 30,2005. 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 wageclaims on behalf of a putative class of an estimated 350 former and currentCalifornia employees of Alliance Imaging. In Linda S. Jones, et al. v. AllianceImaging, Inc., et al., the plaintiffs allege violations of California’swage, meal period, and break time laws and regulations. Plaintiffs seekrecovery of unspecified economic damages, statutory penalties, punitivedamages, attorneys’ fees and costs of suit. Alliance Imaging responded to thecomplaint on August 26, 2005, and the parties are currently takingdiscovery to develop facts relevant to the named plaintiffs’ expected motionfor certification of one or more classes. No date for the filing or hearing ofsuch a motion has been set. We are currently evaluating the allegations of thecomplaint and are unable to predict the likely timing or outcome of thislawsuit.

The Company from time totime is also involved in other 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.

**13. Investmentsin Unconsolidated Investees**

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

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

| ** **                    | ** ** | **September30,** | ** ** |
|-------------------------------|------------|------------------|------------|
| ** **                    | ** ** | **2004**         | ** ** | **2005** | ** ** |
| Combined Balance  Sheet Data: |       |             |       |   |   |
| Current assets                |       | $                | 9,037      |   | $ | 11,762 |   |
| Noncurrent assets             |       | 23,093           |       | 29,514 |   |
| Current  liabilites           |       | 7,962            |       | 9,120 |   |
| Noncurrent liabilites         |       | 11,209           |       | 13,252 |   |
|                               |            |                  |            |  |  |  |  |

 

| ** **                                      | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                      | ** ** | **2004**                                   | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2005** | ** ** |
| Combined Operating  Results:                    |       |                                       |       |                                                |       |   |   |   |   |
| Revenues                                        |       | $                                          | 8,345      |                                                | $          | 9,156 |   | $ | 22,709 |   | $ | 25,153 |   |
| Expenses                                        |       | 5,766                                      |       | 6,922                                               |       | 15,813 |   | 19,242 |   |
| Net income                                      |       | 2,579                                      |       | 2,234                                               |       | 6,896 |   | 5,911 |   |
| Equity in  earnings of unconsolidated investees |       | 1,150                                      |       | 1,000                                               |       | 3,177 |   | 2,596 |   |
|                                                 |            |                                            |            |                                                     |            |  |  |  |  |  |  |  |  |

 

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**14. Related-Party Transactions**

The Company recorded management fees payable toKohlberg Kravis Roberts & Co (“KKR”) of $163 and $488 for each of thequarters and for each of the nine months ended September 30, 2004 and2005, and will continue to receive financial advisory services from KKR on anongoing basis. At September 30, 2004 and 2005, the Company has accrued$163 related to these services.

Revenue from managementagreements with unconsolidated equity investees was $3,042 and $3,338 for thequarters ended September 30, 2004 and 2005, respectively, and $8,409 and$10,638 for the nine months ended September 30, 2004 and 2005,respectively.

**15. Subsequent Events**

Effective October 1, 2005, the Company acquired100% of the outstanding common stock of PET Scans of America Corp, a mobileprovider of PET and PET/CT services primarily to hospitals in 13 states. TheCompany acquired nine PET and PET/CT systems in connection with the acquisition.The purchase price consisted of $36,596 in cash and $3,993 of assumedliabilities and transaction costs, which was substantially financed through acombination of the Company’s revolving line of credit, internally generatedfunds, and capital leases. The Company has not yet completed the evaluation andallocation of the purchase price for the acquisition as the valuation ofcertain intangible assets is not yet complete.

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

**Overview**

We are a leading national provider of shared-serviceand fixed-site diagnostic imaging services, based upon annual revenue andnumber of diagnostic imaging systems deployed. Our principal sources of revenueare derived from magnetic resonance imaging (MRI) and positron emissiontomography and positron emission tomography/computed tomography (PET andPET/CT) services on a shared-service and full-time basis, primarily inpartnership with hospitals or health systems and other healthcare providers. Wealso provide services through a growing number of fixed sites. Our servicesnormally include the use of our imaging systems, technologists to operate thesystems, equipment maintenance and upgrades, and management of day-to-dayshared-service and fixed-site diagnostic imaging operations. We also providenon scan-based services, which includes only the use of our imaging systemsunder a short-term contract. In the first nine months of 2005, MRI services andPET and PET/CT services generated 70% and 21% of our revenues, respectively.The remaining revenue was comprised of other modality diagnostic imagingservices revenue, primarily computed tomography (CT), and management contractrevenue. We had 497 diagnostic imaging systems, including 350 MRI systemsand 58 PET or PET/CT systems and served over 1,000 clients in 44 states at September 30,2005.

Our fixed-sites diagnostic imaging services areclassified into one of three categories. The first category is hospital-basedfixed-sites, which includes systems installed in hospitals or other buildingson hospital campuses, including modular buildings. The second category isphysician-based fixed-sites, which includes systems installed inside medicalgroups’ offices. The third category is free-standing fixed-sites, whichincludes systems installed in a medical office building, ambulatory surgicalcenter, or other retail space. At September 30, 2005 we had 72fixed-sites. Of these fixed-sites, 38 were hospital-based fixed-sites, 12 werephysician-based fixed-sites, and 22 were free-standing fixed-sites or full-timesystems under a long-term contract. Of the 72 fixed-sites at September 30,2005, there were 57 MRI fixed-sites and 3 PET or PET/CT fixed-sites.

Approximately 87% of our revenues for the first ninemonths ended September 30, 2005 were generated by providing services tohospitals and other healthcare providers, which we refer to as wholesalerevenues. Our wholesale revenues are typically generated from contracts thatrequire our clients to pay us based on the number of scans we perform, althoughsome pay us a flat fee for a period of time regardless of the number of scanswe perform. These payments are due to us independent of our clients’ receipt ofreimbursement from third-party payors. We typically deliver our services for aset number of days per week through exclusive, long-term contracts withhospitals and other healthcare providers. The contracts initial terms averageapproximately three years in length for mobile services and approximately sevento ten years in length for fixed-site arrangements. These contracts oftencontain automatic renewal provisions and certain contracts have cancellationclauses if the hospital or other healthcare provider purchases their ownsystem. We price our contracts based on the type of system used, the scanvolume, and the number of ancillary services provided. Pricing is also affectedby competitive pressures.

In November 2004, the Centers for Medicare andMedicaid Services announced a 21% reduction in PET hospital reimbursement rateseffective January 1, 2005. Although the effect of this rate reduction todate has not had a material adverse effect on our PET or PET/CT revenues, thiscould have a significant negative impact on our PET and PET/CT revenues in thefuture. Our healthcare provider clients on whom we depend for the majority ofour PET and PET/CT revenues generally rely on reimbursement from Medicare andother third-party payors. Because unfavorable reimbursement policies mayconstrict the profit margins of the hospitals and other healthcare providers webill directly, we may need to lower our fees to retain existing PET and PET/CTclients and attract new ones.

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

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

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

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

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

Prior to 2004, MRI industry-wide scan volumes wereadversely affected by relatively flat hospital growth rates of outpatientprocedures and inpatient admissions. In addition, the increase in patient co-payments,higher patient deductibles, and the uncertain U.S. employment climate contributedto lower MRI industry wide scan volumes. In 2004, MRI industry-wide scanvolumes returned to a more normal growth rate primarily due to improvedhospital growth rates of outpatient procedures and inpatient admissions. In thefirst nine months of 2005, the growth rate of MRI industry-wide scan volumeshas slowed in part due to weak hospital volumes as reported by severalinvestor-owned hospital companies, the increasing trend of third-party payorsintensifying their utilization management efforts to control MRI scan volumegrowth rate and additional patient-related cost-sharing programs. We expectthat this trend will continue through the fourth quarter of 2005. The quarterended September 30, 2005 was also impacted by the disruption of operationscaused by Hurricanes Katrina and Rita.

In recent years, we beganto see an increase in the competitive climate in the MRI industry, resulting inan increase in activity by original equipment manufacturers, or OEM’s, sellingsystems directly to certain of our clients. Typically, OEM’s target our higherscan volume clients. This increase in activity by OEM’s has resulted inovercapacity of systems in the marketplace, especially related to medicalgroups adding imaging capacity within their practice setting. This has causedan increase in the number of our higher scan volume clients deciding not torenew their contracts. We replace these higher volume scan clients typicallywith lower volume clients. During 2005, our MRI revenues modestly declinedcompared to 2004 levels and we believe that MRI revenues will continue tomodestly decline in future years.

**Seasonality**

We experience seasonalityin the revenues and margins generated for our services. First and fourthquarter revenues are typically lower than those from the second and thirdquarters. First quarter revenue is affected primarily by fewer calendar daysand inclement weather, typically resulting in fewer patients being scanned duringthe period. Fourth quarter revenue is affected primarily by holiday and clientand patient vacation schedules and inclement weather, also resulting in fewerscans during the period. The variability in margins is higher than thevariability in revenues due to the fixed nature of our costs.

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**Transactions**

Effective September 1,2005, we acquired certain assets associated with nine multi-modality fixed-sitediagnostic imaging centers.The multi-modality fixed-site diagnostic imagingcenters include one MRI system, six CT systems, and 29 other modality systems.The purchase price consisted of $7.7 million in cash and $0.5 million inassumed liabilities. As a result of this acquisition we recorded goodwill andintangible assets of $2.2 million and $2.4 million, respectively. Theacquisition was financed using our internally generated funds. The acquisitionalso includes $0.2 million of contingent payment due to the shareholders of thecenters if certain performance targets are met over a three year period. Whenthe contingency is resolved and consideration is distributable, we will recordthe fair value of the consideration as additional purchase price to goodwill. Adjustmentsto goodwill may occur in future periods as a result of changes in the originalvaluation of assets and liabilities acquired. The acquisition is expected togenerate approximately $6.0 million in annualized revenue. The third quarterended September 30, 2005 includes one month of operations from thisacquisition. We have not included pro forma information as this acquisition didnot have a material impact on our consolidated financial position or results ofoperations.

**Results of Operations**

Thefollowing table shows our condensed consolidated statements of income as apercentage of revenues:

| ** **                                                                                        | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **  2004  **           | ** ** | **  2005  **                    | ** ** | **  2004  ** | ** ** | **  2005  ** | ** ** |
| Revenues                                                                                          |       |                                       | 100.0      | %                                                   |       |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| Costs and  expenses:                                                                              |       |                                       |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenues,  excluding depreciation and amortization                                        |       |                                       | 50.0       |                                                |       |   | 52.6 |   |   |   | 50.0 |   |   |   | 51.1 |   |   |
| Selling, general  and administrative expenses                                                     |       |                                       | 10.5       |                                                |       |   | 11.1 |   |   |   | 10.9 |   |   |   | 11.6 |   |   |
| Employment  agreement costs                                                                       |       |                                       | 0.2        |                                                |       |   | — |   |   |   | 0.5 |   |   |   | 0.1 |   |   |
| Severance and  related costs                                                                      |       |                                       | 0.6        |                                                |       |   | — |   |   |   | 0.2 |   |   |   | — |   |   |
| Depreciation  expense                                                                             |       |                                       | 18.1       |                                                |       |   | 19.2 |   |   |   | 18.6 |   |   |   | 19.1 |   |   |
| Amortization  expense                                                                             |       |                                       | 0.8        |                                                |       |   | 0.9 |   |   |   | 0.8 |   |   |   | 0.9 |   |   |
| Interest expense,  net of interest income                                                         |       |                                       | 10.2       |                                                |       |   | 8.6 |   |   |   | 10.1 |   |   |   | 8.6 |   |   |
| Other (income)  and expense, net                                                                  |       |                                       | (0.4       | )                                                   |       |   | — |   |   |   | (0.2 | ) |   |   | (0.1 | ) |   |
| Total costs and expenses                                                                          |       |                                       | 90.0       |                                                |       |   | 92.4 |   |   |   | 90.9 |   |   |   | 91.3 |   |   |
| Income before income taxes, minority interest  expense and earnings from unconsolidated investees |       |                                       | 10.0       |                                                |       |   | 7.6 |   |   |   | 9.1 |   |   |   | 8.7 |   |   |
| Income tax  expense                                                                               |       |                                       | 4.3        |                                                |       |   | 3.3 |   |   |   | 2.3 |   |   |   | 3.7 |   |   |
| Minority interest  expense                                                                        |       |                                       | 0.5        |                                                |       |   | 0.5 |   |   |   | 0.6 |   |   |   | 0.5 |   |   |
| Earnings from  unconsolidated investees                                                           |       |                                       | (1.1       | )                                                   |       |   | (0.9 | ) |   |   | (0.9 | ) |   |   | (0.9 | ) |   |
| Net income                                                                                        |       |                                       | 6.3        | %                                                   |       |   | 4.7 | % |   |   | 7.1 | % |   |   | 5.4 | % |   |

 

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Thetable below provides MRI statistical information:

| ** **                                    | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                   | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2005** | ** ** |
| MRI statistics                                |       |                                       |       |                                                |       |   |   |   |   |
| Average number of total systems               |       | 336.3                                      |       | 328.3                                               |       | 340.6 |   | 332.3 |   |
| Average number of scan-based systems          |       | 291.7                                      |       | 280.6                                               |       | 293.9 |   | 282.5 |   |
| Scans per system per day (scan-based systems) |       | 9.73                                       |       | 9.53                                                |       | 9.65 |   | 9.53 |   |
| Total number scan-based MRI scans             |       | 204,318                                    |       | 188,731                                             |       | 613,766 |   | 575,251 |   |
| Price per scan                                |       | $                                          | 360.26     |                                                | $          | 350.80 |   | $ | 356.09 |   | $ | 353.77 |   |
|                                               |            |                                            |            |                                                     |            |  |  |  |  |  |  |  |  |

 

Thetable below provides PET and PET/CT statistical information:

| ** **                           | ** ** | **Quarter Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **2004**                                   | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2005** | ** ** |
| PET and PET/CT  statistics           |       |                                       |       |                                                |       |   |   |   |   |
| Average number of systems            |       | 49.9                                       |       | 52.2                                                |       | 47.9 |   | 51.6 |   |
| Scans per system per day             |       | 4.87                                       |       | 5.45                                                |       | 4.96 |   | 5.34 |   |
| Total number of PET and PET/CT scans |       | 14,363                                     |       | 17,342                                              |       | 42,101 |   | 50,150 |   |
| Price per scan                       |       | $                                          | 1,406      |                                                | $          | 1,320 |   | $ | 1,359 |   | $ | 1,339 |   |
|                                      |            |                                            |            |                                                     |            |  |  |  |  |  |  |  |  |

 

Followingare the components of revenue (in millions):

| ** **                         | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **September 30,** | ** ** | **September 30,**          | ** ** |
| ** **                         | ** ** | **2004**               | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2005** | ** ** |
| Total MRI revenue                  |       | $                      | 79.9       |                            | $          | 72.7 |   |   | $ | 238.2 |   |   |   | $ | 223.6 |   |   |
| PET and PET/CT  revenue            |       | 20.2                   |       | 23.0                            |       |   | 57.4 |   |   |   | 67.5 |   |   |
| Other modalites  and other revenue |       | 9.7                    |       | 10.5                            |       |   | 29.3 |   |   |   | 29.5 |   |   |
| Total                              |       | $                      | 109.8      |                            | $          | 106.2 |   |   | $ | 324.9 |   |   |   | $ | 320.6 |   |   |

 

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***Quarter Ended September 30, 2005 Compared toQuarter Ended September 30, 2004***

Revenue decreased $3.6 million, or 3.2%, to $106.2million in the third quarter of 2005 compared to $109.8 million in the thirdquarter of 2004 as a result of lower MRI revenue, partially offset by higherPET and PET/CT revenue and higher other modalities and other revenue. MRIrevenue in the third quarter of 2005 decreased $7.2 million, or 9.0%, comparedto the third quarter of 2004. Of the total $7.2 million decrease in MRI revenue,scan-based MRI revenue decreased $7.4 million, or 10.1%, to $66.2 million inthe third quarter of 2005, from $73.6 million in the third quarter of 2004,primarily as a result of a 7.6% decrease in our scan-based MRI scan volume.Scan-based MRI scan volume decreased to 188,731 scans in the third quarter of2005 from 204,318 scans in the third quarter of 2004, primarily due to adecrease in the average number of scan-based systems in service due tolower client demand. Scan-based systems in service decreased to 280.6 systemsin the third quarter of 2005 from 291.7 systems in the third quarter of 2004 toadjust to modestly declining MRI scan volumes and to increase the efficiency ofour MRI systems. Average scans per system per day also decreased by 2.1% to9.53 in the third quarter of 2005 from 9.73 in the third quarter of 2004.Average price per MRI scan also decreased by 2.6% to $350.80 per scan in thethird quarter of 2005 compared to $360.26 per scan in the third quarter of2004. Non-scan based MRI revenue increased by $0.2 million or 3.0% to $6.5million in the third quarter of 2005 from $6.3 million in the third quarter of2004. PET and PET/CT revenue in the third quarter of 2005 increased $2.8million, or 14.0%, compared to the third quarter of 2004. Total PET and PET/CTscan volumes increased 20.7% to 17,342 scans in the third quarter of 2005 from14,363 scans in the third quarter of 2004, primarily as a result of an increasein the average number of PET and PET/CT systems in operation. The average numberof PET and PET/CT systems in service increased to 52.2 systems in thethird quarter of 2005 from 49.9 systems in the third quarter of 2004. Scans persystem per day also increased 11.6%, to 5.45 scans per system per day in thethird quarter of 2005, from 4.87 in the third quarter of 2004. These increaseswere offset by a decrease in the average price per PET and PET/CT scan of 6.1%to $1,320 per scan in the third quarter of 2005 compared to $1,406 per scan inthe third quarter of 2004. Other modalities and other revenue increased $0.8million, or 8.5%, to $10.5 million in the third quarter of 2005 compared to$9.7 million in the third quarter of 2004 primarily due to an increase inmanagement contract revenue from our management agreements and reimbursement ofexpenses from unconsolidated investees partially offset by a decrease in CTrevenue.

We had 350 MRI systems at September 30, 2005compared to 362 MRI systems at September 30, 2004. We had 58 PET andPET/CT systems at September 30, 2005 compared to 53 PET and PET/CT systemsat September 30, 2004. We operated 72 fixed-sites at September 30,2005, which includes 9 fixed-sites acquired through our third quarteracquisition, compared to 51 fixed sites at September 30, 2004.

Cost of revenues, excluding depreciation andamortization, increased $1.1 million, or 2.0%, to $55.9 million inthe third quarter of 2005 compared to $54.8 million in the third quarterof 2004. Fuel expense increased $0.4 million, or 30.3%, as a result of higherdiesel fuel costs in 2005 versus 2004. Equipment rental expense increased $0.3million, or 32.7% primarily due to a higher number of MRI rental systems inuse. Management contract expenses increased $0.3 million, or 13.2%, primarilyas a result of an increase in expenses incurred on behalf of unconsolidatedinvestees. Outside medical services increased $0.3 million, or 17.0%, primarilydue to an increase in the number of leased technologists utilized toaccommodate for the increase in systems acquired in our third quarter acquisition.Compensation and related employee expenses decreased $0.3 million, or 1.2%,primarily due to lower average headcount in the third quarter of 2005 comparedto the third quarter of 2004, which was primarily a result of a decrease in theaverage number of MRI systems in use. This decrease in payroll costs waspartially offset by an increase in mileage reimbursement rates, technologists’wage rates, and an increase in payroll costs necessary to support the increasein the average number of PET and PET/CT systems in operation. PET and PET/CTtechnologists generally have a higher hourly rate than MRI technologists. Thedecrease in compensation and related expenses was also partially offset by anincrease in recruiting 

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costs. All other cost ofrevenues, excluding depreciation and amortization, increased $0.1 million, or0.4%. Cost of revenues, as a percentage of revenue, increased to 52.6% in thethird quarter of 2005 from 50.0% in the third quarter of 2004 as a result ofthe factors described above.

Selling, general and administrative expenses increased$0.1 million, or 1.7%, to $11.7 million in the third quarter of 2005 comparedto $11.6 million in the third quarter of 2004. The provision for doubtfulaccounts increased $0.7 million in the third quarter of 2005 to $0.6 millioncompared to ($0.1) million in the third quarter of 2004, primarily as a resultof the collection of higher than normal amounts of aged accounts receivable inthe third quarter of 2004. The provision for doubtful accounts was 0.5% of revenuein the third quarter of 2005 compared to (0.1%) of revenue in the third quarterof 2004. Professional services increased $0.3 million, or 229.9%, primarily duean increase in legal and investor relations costs. The increases were partiallyoffset by a decrease in compensation and related employee expenses of $0.8million, or 8.5%, primarily due to a decrease in fees paid to consultants totemporarily backfill positions in the information technology, businessdevelopment and finance departments as well as a decrease in managementincentive compensation. All other selling, general and administrative expensesdecreased $0.1 million, or 2.7%, in the third quarter of 2005 compared tothe third quarter of 2004. Selling, general and administrative expenses as apercentage of revenue were 11.1% and 10.5% in the third quarter of 2005 and2004, respectively.

We recorded employment agreement costs of $0.3 millionin the third quarter of 2004 related to payments under an amendment to anemployment agreement with our former chairman of the board. We do not expect toincur any further costs relating to the employment agreement with our formerchairman of the board. We did not incur any employment agreement costs in thethird quarter of 2005.

We recorded severance and related costs of $0.6million in the third quarter of 2004 primarily for severance costs associatedwith reductions-in-force due to our consolidation of operating in 10 geographicregions to 5 geographic regions and a further consolidation of our retail billingand scheduling functions. We did not incur any severance and related costs inthe third quarter of 2005.

Depreciation expense increased $0.6 million, or 2.8%,to $20.4 million in the third quarter of 2005 compared to $19.8 million in thethird quarter of 2004.

Amortization expense for both the third quarter of2005 and 2004 totaled $0.9 million.

Interest expense, net, decreased $2.1 million, or18.5%, to $9.1 million in the third quarter of 2005 compared to $11.2 millionin the third quarter of 2004. This decrease was primarily a result of loweraverage interest rates on our senior subordinated notes which were refinancedin December 2004 and lower average debt balances in the third quarter of2005 versus the third quarter of 2004.

Income tax expense was $3.5 million in the third quarterof 2005, resulting in an effective tax rate of 41.1%. Our effective tax rateswere higher than statutory rates in the third quarter of 2005 primarily due tostate income taxes. For the quarter ended September 30,2004, we recorded income tax expense of $4.7 million, which was 40.3% of ourpretax income. This effective tax rate was higher than federal statutory ratesprimarily due to state income taxes.

Minority interest expenseincreased $0.1 million, or 5.0%, to $0.6 million in the third quarterof 2005 compared to $0.5 million in the third quarter of 2004.

Earnings from unconsolidated investees decreased by$0.1 million, or 13.0%, to $1.0 million in the third quarter of 2005 comparedto $1.1 million in the third quarter of 2004, primarily due to net losses in2005 from newly formed unconsolidated investees.

Our net income was$5.0 million, or $0.10 per share on a diluted basis, in the third quarterof 2005 compared to $7.0 million, or $0.14 per share on a diluted basis,in the third quarter of 2004.

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***Nine Months Ended September 30, 2005 Compared toNine Months Ended September 30, 2004***

Revenue decreased $4.3 million, or 1.3%, to $320.6million in the first nine months of 2005 compared to $324.9 million in the firstnine months of 2004 as a result of lower MRI revenue, partially offset byhigher PET and PET/CT revenue and higher other modalities and other revenue.MRI revenue in the first nine months of 2005 decreased $14.6 million, or 6.1%,compared to the first nine months of 2004. Of the total $14.6 million decreasein MRI revenue, scan-based MRI revenue decreased $15.0 million, or 6.9%, to$203.5 million in the first nine months of 2005, from $218.5 million in thefirst nine months of 2004, primarily as a result of a 6.3% decrease in ourscan-based MRI scan volume. Scan-based MRI scan volume decreased to 575,251scans in the first nine months of 2005 from 613,766 scans in the first ninemonths of 2004, primarily due to a decrease in the average number of scan-basedsystems in service due to lower client demand. Scan-based systems in servicedecreased to 282.5 systems in the first nine months of 2005 from 293.9 systemsin the first nine months of 2004 to adjust to modestly declining scan volumesand to increase the efficiency of our MRI systems. Average scans per system perday also decreased by 1.2% to 9.53 in the first nine months of 2005 from 9.65in the first nine months of 2004. The average price per MRI scan decreased by0.7% to $353.77 per scan in the first nine months of 2005 compared to $356.09per scan in the first nine months of 2004. These decreases were partiallyoffset by a $0.4 million increase in non-scan based MRI revenue. PET and PET/CTrevenue in the first nine months of 2005 increased $10.1 million, or 17.7%,compared to the first nine months of 2004. Total PET and PET/CT scan volumesincreased 19.1% to 50,150 scans in the first nine months of 2005 from 42,101scans in the first nine months of 2004, primarily as a result of an increase inthe average number of PET and PET/CT systems in operation. The average numberof PET and PET/CT systems in service increased to 51.6 systems in thefirst nine months of 2005 from 47.9 systems in the first nine months of 2004.Scans per system per day also increased 7.7%, to 5.34 scans per system per dayin the first nine months of 2005, from 4.96 in the first nine months of 2004.These increases were offset by a slight decrease in the average price per PETand PET/CT scan of 1.5% to $1,339 per scan in the first nine months of 2005compared to $1,359 per scan in the first nine months of 2004. Other modalitiesand other revenue increased $0.2 million, or 1.3%, to $29.5 million in thefirst nine months of 2005 compared to $29.3 million in the first nine months of2004 primarily due to an increase in management contract revenue for ourmanagement agreements and reimbursement of expenses from unconsolidatedinvestees partially offset by a decrease in CT revenue.

We had 350 MRI systems at September 30, 2005compared to 362 MRI systems at September 30, 2004. We had 58 PET andPET/CT systems at September 30, 2005 compared to 53 PET and PET/CT systemsat September 30, 2004. We operated 72 fixed-sites at September 30,2005, which includes 9 fixed-sites acquired through our third quarteracquisition, compared to 51 fixed sites at September 30, 2004.

Cost of revenues, excluding depreciation andamortization, increased $1.1 million, or 0.7%, to $163.7 million in the firstnine months of 2005 from $162.6 million in the first nine months of 2004.Management contract expenses increased $1.5 million, or 21.2%, primarily as aresult of an increase in expenses incurred on behalf of unconsolidatedinvestees. Equipment rental expense increased $1.2 million, or 50.8%, primarilydue to a higher number of MRI rental systems in use. Maintenance and relatedcosts increased $0.5 million, or 1.5%, primarily due to an increase in theaverage service cost per system, offset by a decrease in cryogen expense as aresult of a decrease in MRI systems in service and cryogen sourcing discounts.Compensation and related employee expenses decreased $1.5 million, or1.8%, primarily due to lower average headcount in the first nine months of 2005compared to the first nine months of 2004, which was primarily a result of adecrease in the average number of MRI systems in use. This decrease in payrollcosts was partially offset by an increase in mileage reimbursement rates,technologists’ wage rates, and an increase in payroll costs necessary tosupport the increase in the average number of PET and PET/CT systems inoperation. PET and PET/CT technologists generally have a higher hourly ratethan MRI technologists. The decrease in compensation and related expenses wasalso partially offset by an increase in recruiting costs. Medical suppliesdecreased $0.8 million, or 6.0%, primarily due to a decrease in film 

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expense related to lowerMRI scan volume and an increase in demand for digital images, as well as filmpurchasing sourcing discounts. Medical supplies also decreased due to areduction in per unit PET and PET/CT radiopharmaceutical costs, partiallyoffset by the increase in volume of radiopharmaceutical purchased due to anincrease in PET and PET/CT scans. All other cost of revenues, excludingdepreciation and amortization, increased $0.2 million, or 0.9%. Cost ofrevenues, as a percentage of revenue, increased to 51.1% in the first ninemonths of 2005 from 50.1% in the first nine months of 2004 as a result of thefactors described above.

Selling, general and administrative expenses increased$1.6 million, or 4.6%, to $37.1 million in the first nine months of 2005compared to $35.5 million in the first nine months of 2004. The provision fordoubtful accounts increased $1.7 million, or 532.6%, in the first nine monthsof 2005 compared to the first nine months of 2004, primarily as a result of thecollection of higher than normal amounts of aged accounts receivable in thefirst nine months of 2004. The provision for doubtful accounts was 0.6% ofrevenue in the first nine months of 2005 compared to 0.1% of revenue in thefirst nine months of 2004. Professional services increased $0.6 million, or67.4%, primarily due to professional service costs associated with our Form S-3shelf registration statement as well as an increase in legal and investorrelations costs. Compensation and related employee expenses decreased $0.4million, or 1.4%, primarily due to a decrease in management incentivecompensation. This decrease was partially offset by an increase in recruitingcosts primarily to further develop the sales, business development, humanresources and finance infrastructure and an increase in costs associated withnational management meetings. All other selling, general and administrativeexpenses decreased $0.3 million, or 4.9%, in the first nine months of 2005compared to the first nine months of 2004. Selling, general and administrativeexpenses as a percentage of revenue were 11.6% and 10.9% in the first ninemonths of 2005 and 2004, respectively.

We recorded employment agreement costs of $0.4 millionin the first nine months of 2005 related to payments under an amendment to anemployment agreement with our former chairman of the board. We recordedemployment agreement expenses of $1.8 million in the first nine months of 2004related to an employment agreement with our former chief financial officer andpayments under an amendment to an employment agreement with our former chairmanof the board. We do not expect to incur any further costs relating to theemployment agreement with our former chairman of the board.

We recorded severance and related costs of $0.6million in the first nine months of 2004 primarily for severance costsassociated with reductions-in-force due to our consolidation of operating in 10geographic regions to 5 geographic regions and a further consolidation of ourretail billing and scheduling functions.

Depreciation expense increased $0.8 million, or 1.4%,to $61.3 million in the first nine months of 2005 compared to $60.5 million inthe first nine months of 2004.

Amortization expense increased $0.1 million, or 3.0%,to $2.7 million in the first nine months of 2005 compared to $2.6 million inthe first nine months of 2004.

Interest expense, net, decreased $4.9 million, or15.1%, to $27.7 million in the first nine months of 2005 compared to $32.6million in the first nine months of 2004. This decrease was primarily a resultof lower average interest rates on our senior subordinated notes which wererefinanced in December 2004 as well as lower average debt balances in thefirst nine months of 2005 versus the first nine months of 2004.

Income tax expense was $11.8 million in the firstnine months of 2005, resulting in an effective tax rate of 40.5%. Our effectivetax rates were higher than statutory rates for the first nine months of 2005primarily as a result of state income taxes. In the first nine months of 2004,we recorded a provision for income taxes of $7.2 million, which was 23.7% ofour pretax income. This effective tax rate was lower than statutory ratesprimarily due to the reversal of income tax reserves of $5.1 million primarilyrelated to the favorable outcome of examinations of our 1998 and 1999 federalincome tax returns and a favorable final 

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IRS determination letterrelated to the treatment of an income item in a federal income tax return ofone of our subsidiaries.

Minority interest expense decreased $0.5 million,or 23.0%, to $1.5 million in the first nine months of 2005 compared to$2.0 million in the first nine months of 2004.

Earnings from unconsolidated investees decreased by$0.6 million, or 18.3%, to $2.6 million in the first nine months of 2005compared to $3.2 million in the first nine months of 2004, primarily due to netlosses in 2005 from newly formed unconsolidated investees.

Our net income was$17.3 million, or $0.34 per share on a diluted basis, in the first ninemonths of 2005 compared to $23.2 million, or $0.48 per share on a dilutedbasis, in the first nine months of 2004.

**Liquidity and Capital Resources**

Our primary source of liquidity is cash provided byoperating activities. We generated $93.0 million and $107.1 million of cashflow from operating activities in the first nine months of 2005 and 2004,respectively. Our ability to generate cash flow is affected by numerous factors,including demand for MRI and PET and PET/CT scans, the price we can charge ourclients for providing our services and the costs to us of providing thoseservices. Our ability to generate cash flow from operating activities is alsodependent upon the collections of our accounts receivable. Provision fordoubtful accounts increased by $1.7 million in the first nine months of 2005compared to the first nine months of 2004. The number of days of revenueoutstanding for our accounts receivable was 48 days and 43 days as of September 30,2005 and 2004, respectively. In addition, as of September 30, 2005, we had$64.4 million available borrowings under our revolving line of credit.

Our primary use ofcapital resources is to fund capital expenditures. We used cash of $53.2million and $59.1 million for investing activities in the first nine months of2005 and 2004, respectively. Investing activities in the first nine months of2005 includes $7.7 million used for the third quarter acquisition of certainassets associated with nine multi-modality fixed-site diagnostic imagingcenters. We incur capital expenditures for the purposes of:

·       purchasingnew systems;

·       replacingless advanced systems with new systems; and

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

Capital expenditures totaled $46.5 million and $69.0million in the first nine months of 2005 and 2004, respectively. During thefirst nine months of 2005, excluding systems acquired through our third quarteracquisition, we purchased 13 MRI systems, 10 PET or PET/CT systems, 3 CTsystems and three other systems. We traded-in or sold 46 total systems for thenine months ended September 30, 2005. Our decision to purchase a newsystem is typically predicated on obtaining new or extending existing clientcontracts, which serve as the basis of demand for the new system. We expect topurchase additional systems in 2005 and finance substantially all of thesepurchases with our available cash, cash from operating activities, ourrevolving line of credit, and equipment leases. Based upon the client demanddescribed above, which dictates the type of equipment purchased, we expectcapital expenditures to total approximately $70 to $75 million in 2005.

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

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**Recent Accounting Pronouncements**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standard No. 153,“Exchanges of Nonmonetary Assets” (“SFAS 153”), which is an amendment ofAccounting Principals Board Opinion No. 29, “Accounting for NonmonetaryTransactions,” (“APB 29”). This statement addresses the measurement ofexchanges of nonmonetary assets, and eliminates the exception from fair valuemeasurement for nonmonetary exchanges of similar productive assets as definedin paragraph 21(b) of APB 29, and replaces it with an exceptionfor exchanges that do not have commercial substance. This statement specifiesthat a nonmonetary exchange has commercial substance if the future cash flowsof the entity are expected to change significantly as a result of the exchange.SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscalperiods beginning after June 15, 2005. The adoption of SFAS 153 didnot have a material impact on our consolidated financial position or results ofoperations.

In December 2004, the FASB issued SFAS 123(R) (revisedDecember 2004), “Share-Based Payment” (“SFAS 123(R)”), which is arevision of SFAS 123 and supersedes APB No. 25. This statementrequires that the fair value at the grant date resulting from all share-basedpayment transactions be recognized in the financial statements. Further,SFAS 123(R) requires entities to apply a fair-value based measurementmethod in accounting for these transactions. This value is recorded over thevesting period. This statement is effective for the first fiscal year beginningafter June 15, 2005. We are currently evaluating the provisions ofSFAS 123(R) and the impact on our consolidated financial position andresults of operations. We will adopt SFAS123(R) for the fiscal yearbeginning January 1, 2006.

In March 2005, the FASB issued FASBInterpretation No. 47, “Accounting for Conditional Asset RetirementObligations” (“FIN 47”), an interpretation of SFAS 143, “Accountingfor Conditional Asset Retirement Obligations.” This interpretation clarifiesthat an entity is required to recognize a liability for the fair value of aconditional asset retirement obligation when incurred if the liability’s fairvalue can be reasonably estimated. This interpretation also clarifies when anentity would have sufficient information to reasonably estimate the fair valueof an asset retirement obligation. This statement is effective for the firstfiscal year beginning after December 15, 2005. We believe the adoption ofFIN 47 will not have a material impact on our consolidated financialposition or results of operations.

In May 2005, the FASB issued SFAS 154, “Accountingfor Changes and Error Corrections” (“SFAS 154”), which is a replacement ofAPB Opinion No. 20, “Accounting Changes,” and SFAS 3, “ReportingAccounting Changes in Interim Financial Statements.” This statement changes therequirements for the accounting for and reporting of all voluntary changes inaccounting principle and in the instance that a pronouncement does not includespecific transition provisions. This statement requires retrospectiveapplication to prior periods’ financial statements of changes in accountingprinciple, unless it is impracticable to determine either the period-specificeffects or the cumulative effect of the change. SFAS 154 is effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. We believe the adoption of SFAS 154 will not havea material impact on our consolidated financial position or results ofoperations.

In June 2005, the FASB issued Emerging IssuesTask Force Issue No. 04-05, “Determining Whether a General Partner,or the General Partners as a Group, Controls a Limited Partnership or SimilarEntity When the Limited Partners Have Certain Rights”(“EITF 04-05”).EITF 04-05 clarifies how general partners in a limited partnershipshould determine whether they control a limited partnership. A general partnerof a limited partnership is presumed to control the limited partnership unlessthe limited partners have substantive kick-out rights or participating rights.For general partners of all new limited partnerships formed and for existinglimited partnerships for which the partnership agreements are modified,EITF 04-05 is effective after June 29, 2005. For generalpartners in all other limited partnerships, EITF 04-05 is effectivefor the first period in fiscal years beginning after December 15, 2005. Webelieve 

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the adoption of EITF 04-05will not have a material impact on our consolidated financial position orresults of operations.

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

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

Certain statementscontained in Management’s Discussion and Analysis of Financial Condition andResults of Operations, particularly in the section entitled “Liquidity andCapital Resources”, and elsewhere in this quarterly report on Form 10-Q,are “forward-looking statements,” within the meaning of the safe harborprovisions of the Private Securities Litigation Reform Act of 1995. Statementswhich address activities, events or developments that we expect or anticipatewill or may occur in the future, including such things as results of operationsand financial condition, capital expenditures, the consummation of acquisitionsand financing transactions and the effect of such transactions on our businessand our plans and objectives for future operations and expansion are examplesof forward-looking statements. In some cases you can identify these statementsby forward-looking words like “may”, “will”, “should”, “expect”, “anticipate”, “believe”,“estimate” “predict”, “continue” or similar words. These forward-lookingstatements are subject to risks and uncertainties which could cause actualoutcomes and results to differ materially from our expectations, forecasts andassumptions. These risks and uncertainties include factors affecting ourleverage, including fluctuations in interest rates, the risk that the counter-partiesto our interest rate swap agreements fail to satisfy their obligations underthese agreements, our ability to incur financing, the effect of operating andfinancial restrictions in our debt instruments, the accuracy of our estimatesregarding our capital requirements, the effect of intense levels of competitionin our industry, changes in the healthcare regulatory environment, our abilityto keep pace with technological developments within our industry, the growthrate of MRI industry-wide scan volumes, the disruptive effect of hurricanes andother natural disasters, and other risks and uncertainties, including thoseenumerated and described under “Risk Factors” in our Form 10-K/A, asfiled with the Securities and Exchange Commission, for the fiscal year ended December 31,2004. The foregoing should not be construed as an exhaustive list of allfactors which could cause actual results to differ materially from thoseexpressed in forward-looking statements made by us.

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

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

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

The swap agreements have notional amounts of $56.8million, $46.8 million and $48.4 million at September 30, 2005. Under theterms of these agreements, we receive three-month LIBOR and pay a fixed 

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rate of 3.15%, 3.89%, and3.69%, respectively. The net effect of the hedges is to record interest expenseat fixed rates of 5.40%, 6.14% and 5.94% respectively, as the debt incursinterest based on three-month LIBOR plus 2.25%. For the quarter and nine monthsended September 30, 2005 we recorded a net settlement amount on the swapagreements of $0.1 million and $0.8 million, respectively. For the quarterended September 30, 2004 we recorded a net settlement amount on the swapagreements of $0.6 million. We did not record any net settlement amount onthese swap agreements prior to the quarter ended September 30, 2004. Theswap agreements mature during 2007.

We have also entered into multiple interest ratecollar agreements which have a total notional amount of $178.0 million. Underthe terms of these agreements, we have purchased a cap on the interest rate of4.00% and have sold a floor of 2.25%. For the quarter and nine months ended September 30,2005, we did not record any net settlement on these collar agreements. Thecollar agreements mature at various dates between January 2007 and January 2008.

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

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

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

**ITEM 4.**                CONTROLSAND PROCEDURES

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

As required by SEC Rule 13a-15(b), wecarried out an evaluation, under the supervision and with the participation ofour management, including our Chief Executive Officer and interim ChiefFinancial Officer, of the effectiveness of the design and operation of ourdisclosure controls and procedures as of the end of the quarter covered by thisreport. Based on the foregoing, our Chief Executive Officer and interim 

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Chief Financial Officerconcluded that our disclosure controls and procedures were effective at thereasonable assurance level.

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

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**PART II—OTHER INFORMATION**

**ITEM 1.**                LEGALPROCEEDINGS

On May 5, 2005, Alliance Imaging, Inc. wasserved with a complaint filed in Alameda County Superior Court alleging wageclaims on behalf of a putative class of an estimated 350 former and currentCalifornia employees of Alliance Imaging. In Linda S. Jones, et al. v. AllianceImaging, Inc., et al., the plaintiffs allege violations of California’swage, meal period, and break time laws and regulations. Plaintiffs seekrecovery of unspecified economic damages, statutory penalties, punitivedamages, attorneys’ fees and costs of suit. Alliance Imaging responded to thecomplaint on August 26, 2005, and the parties are currently takingdiscovery to develop facts relevant to the named plaintiffs’ expected motion forcertification of one or more classes. No date for the filing or hearing of sucha motion has been set. We are currently evaluating the allegations of thecomplaint and are unable to predict the likely timing or outcome of thislawsuit.

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

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

Not applicable.

**ITEM 3.**                DEFAULTSUPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

**ITEM 5.**                OTHERINFORMATION

Not applicable.

**ITEM 6.**                EXHIBITS

(a)   Exhibits
| Exhibit   No. | ** ** | **Description**                                                                                                                                                                                                                                                                       |
|---------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1           |       | Amended and  Restated Certificate of Incorporation of Alliance.(7)                                                                                                                                                                                                                    |
| 3.2           |       | Amended and  Restated By-laws of Alliance.(7)                                                                                                                                                                                                                                         |
| 4.1           |       | Indenture dated  as of April 10, 2001 by and between the Registrant and the Bank of New  York with respect to $260 million aggregate principal amount of 103¤8%  Senior Subordinated Notes due 2011.(5)                                                                     |
| 4.2           |       | Credit Agreement  dated as of November 2, 1999, as amended.(5)                                                                                                                                                                                                                   |
| 4.3           |       | Specimen  certificate for shares of common stock, $.01 par value, of Alliance.(7)                                                                                                                                                                                                     |
| 4.4           |       | Second Amendment  dated as of June 10, 2002 to Credit Agreement.(8)                                                                                                                                                                                                              |
| 4.5           |       | Indenture dated  as of December 29, 2004 by and between the Registrant and the Bank of  New York with respect to $150 million aggregate principal amount of 71¤4%  Senior Subordinated Notes due 2012 and 71¤4%  Series B Senior Subordinated Notes due 2012.(13) |
| 4.6           |       | Supplemental  Indenture dated as of December 14, 2004 by and between Registrant and  the Bank of New York with respect to 103¤8%  Senior Subordinated Notes due 2011.(13)                                                                                                   |
| 4.7           |       | Third Amendment  dated as of December 29, 2004 to Credit Agreement.(13)                                                                                                                                                                                                          |

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| 10.1  |   | The 1999 Equity  Plan for Employees of Alliance and Subsidiaries including the forms of option  agreements used thereunder, as amended.(5)                                       |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2  |   | The Alliance 1997  Stock Option Plan, including form of option agreement used thereunder, as  amended.(5)                                                                        |
| 10.3  |   | The Three Rivers  Holding Corp. 1997 Stock Option Plan, as amended.(5)                                                                                                           |
| 10.4  |   | Alliance  Directors’ Deferred Compensation Plan, as amended.(6)                                                                                                             |
| 10.5  |   | 2003 Incentive Plan(9)                                                                                                                                                           |
| 10.6  |   | Employment  Agreement dated as of July 23, 1997 between Alliance and Richard N.  Zehner.(1)                                                                                 |
| 10.7  |   | Agreement Not to  Compete dated as of July 23, 1999 between Alliance and Richard N.  Zehner.(1)                                                                             |
| 10.8  |   | Amendment to  Employment Agreement dated as of July 23, 1997 between Alliance and  Richard N. Zehner.(2)                                                                    |
| 10.9  |   | Amendment to  Employment Agreement dated as of December 31, 1997 between Alliance and  Richard N. Zehner.(3)                                                                |
| 10.10 |   | Second Amendment  to Employment Agreement dated as of February 5, 1998 between Alliance  and Richard N. Zehner.(3)                                                          |
| 10.11 |   | Employment  Agreement dated as of January 19, 1998 between Alliance and Kenneth S.  Ord.(4)                                                                                 |
| 10.12 |   | Agreement Not to  Compete dated as of January 19, 1998 between Alliance and Kenneth S.  Ord.(4)                                                                             |
| 10.15 |   | Employment  Agreement dated as of April 29, 1998 between Alliance and Russell D.  Phillips, Jr.(3)                                                                     |
| 10.16 |   | Agreement Not to  Compete dated as of April 29, 1998 between Alliance and Russell D.  Phillips, Jr.(3)                                                                 |
| 10.17 |   | Employment  Agreement dated as of January 1, 2003 between Alliance and Paul S.  Viviano.(9)                                                                                 |
| 10.18 |   | Agreement Not to  Compete dated as of January 1, 2003 between Alliance and Paul S.  Viviano.(9)                                                                             |
| 10.19 |   | Stock  Subscription Agreement dated as of January 2, 2003 between Alliance and  Paul S. Viviano.(9)                                                                         |
| 10.20 |   | Stock  Subscription Agreement dated as of February 3, 2003 between Alliance and  Paul S. Viviano.(9)                                                                        |
| 10.21 |   | Form of  Stockholder’s Agreement.(5)                                                                                                                                   |
| 10.23 |   | Registration  Rights Agreement dated as of November 2, 1999.(5)                                                                                                             |
| 10.24 |   | Management  Agreement, dated as of November 2, 1999, between Alliance and Kohlberg  Kravis Roberts & Co., LLP.(5)                                                  |
| 10.25 |   | Amendment  No. 1 to Management Agreement, effective as of January 1, 2000,  between Alliance and Kohlberg Kravis Roberts & Co., LLP.(5)                       |
| 10.26 |   | Form of  Indemnification Agreement.(6)                                                                                                                                      |
| 10.27 |   | Amendment to  Employment Agreement, Non-Qualified Stock Option Agreement and Non-Compete  Agreement, dated as of May 21, 2003, between Alliance and Richard N.  Zehner.(10) |
| 10.29 |   | Amendment to  Employment Agreement and Stockholders’ Agreement, dated March 29, 2004  by and between Alliance, Viewer Holdings, LLC and Kenneth S. Ord.(12)            |
| 10.30 |   | Amended and  Restated Employment Agreement dated as of May 9, 2005 between Alliance  and Paul S. Viviano.(15)                                                               |

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| 10.31 |   | Agreement Not to  Compete dated as of May 9, 2005 between Alliance and Paul S.  Viviano.(15)                                      |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|
| 10.32 |   | Employment  Agreement dated as of May 9, 2005 between Alliance and Andrew P.  Hayek.(15)                                          |
| 10.33 |   | Agreement Not to  Compete dated as of May 9, 2005 between Alliance and Andrew P.  Hayek.(15)                                           |
| 21.1  |   | List of  subsidiaries.(14)                                                                                                                  |
| 31    |   | Certifications of  Chief Executive Officer and Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.(16) |
| 32    |   | Certifications of  Chief Executive Officer and Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.(16) |

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(16)   Filed herewith

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**SIGNATURES**

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

|                       | **ALLIANCE IMAGING, INC.** |
|-----------------------|----------------------------|
| November 9, 2005 | By:                        | /s/ PAUL S. VIVIANO |
|                  |                       | Paul S. Viviano |
| * *              | * *                   | *Chairman of the Board and Chief Executive Officer  (Principal Executive Officer)* |
| November 9, 2005 | By:                        | /s/ HOWARD K. AIHARA |
|                  |                       | Howard K. Aihara |
| * *              | * *                   | *Interim Chief Financial Officer and Vice  President and Corporate Controller (Principal Financial and Accounting  Officer)* |

 

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