**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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FORM 10-Q

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

**ForQuarter Ended:  June 30, 2004**

**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

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of July 31, 2004:

Common Stock, $.01 par value, 48,260,920 shares

 

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**ALLIANCE IMAGING,INC.FORM 10-QJune 30, 2004Index**
|                                         | **Page**                                                                                                                                          |
|-----------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| PART I—FINANCIAL  INFORMATION |                                                                                                                                              |
|                                    | Item 1—Financial  Statements:                                                                                                                |   |
|                                    | Condensed Consolidated  Balance Sheets  December 31, 2003 and June 30, 2004 (Unaudited)                                                 |   | 2 |   |
|                                    | Condensed Consolidated Statements  of Income and Other Comprehensive Income  Quarter and six months ended June 30, 2003 and 2004 (Unaudited) |   | 3 |   |
|                                    | Condensed Consolidated Statements  of Cash Flows  Six months ended June 30, 2003 and 2004 (Unaudited)                                        |   | 4 |   |
|                                    | Notes to Condensed Consolidated  Financial Statements (Unaudited)                                                                                 |   | 5 |   |
|                                    | Item  2—Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                          |   | 11 |   |
|                                    | Item  3—Quantitative and Qualitative Disclosures about Market Risk                                                                           |   | 18 |   |
|                                    | Item  4—Controls and Procedures                                                                                                              |   | 19 |   |
| PART II—OTHER  INFORMATION    |                                                                                                                                              |   |   |
|                                    | Item 1—Legal  Proceedings                                                                                                                    |   | 20 |   |
|                                    | Item  2—Changes in Securities and Use of Proceeds                                                                                            |   | 20 |   |
|                                    | Item  3—Defaults Upon Senior Securities                                                                                                      |   | 20 |   |
|                                    | Item  4—Submission of Matters to a Vote of Security Holders                                                                                  |   | 20 |   |
|                                    | Item 5—Other  Information                                                                                                                    |   | 20 |   |
|                                    | Item  6—Exhibits and Reports on Form 8-K                                                                                                |   | 20 |   |
| SIGNATURES                              |                                                                                                                                              | 24 |   |
|                                         |                                                                                                                                                   |  |  |  |  |

 

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**PART I—FINANCIAL INFORMATION**

**ITEM 1.**   FINANCIALSTATEMENTS

**ALLIANCE IMAGING, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)(in thousands)**
| ** **                                                   | ** ** | **December 31,  2003** | ** ** | **June 30,  2004** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| **ASSETS**                                                   |       |                        |       |                    |       |   |   |
| Current assets:                                              |       |                        |       |                    |       |   |   |
| Cash and cash equivalents                                    |       |                        | $          | 20,931                  |       |   | $ | 24,018 |   |
| Accounts receivable, net  of allowance for doubtful accounts |       |                        | 45,276     |                    |       | 49,395 |   |
| Deferred income taxes                                        |       |                        | 15,783     |                    |       | 15,783 |   |
| Prepaid expenses                                             |       |                        | 2,718      |                    |       | 3,670 |   |
| Other receivables                                            |       |                        | 2,975      |                    |       | 3,132 |   |
| Total current assets                                         |       |                        | 87,683     |                    |       | 95,998 |   |
| Equipment, at cost                                           |       |                        | 677,089    |                    |       | 706,350 |   |
| Less accumulated  depreciation                               |       |                        | (324,458   | )                       |       | (351,069 | ) |
| Equipment, net                                               |       |                        | 352,631    |                    |       | 355,281 |   |
| Goodwill                                                     |       |                        | 122,992    |                    |       | 122,992 |   |
| Other intangible assets,  net                                |       |                        | 30,953     |                    |       | 29,667 |   |
| Deferred financing costs,  net                               |       |                        | 12,313     |                    |       | 10,914 |   |
| Deposits and other assets                                    |       |                        | 21,604     |                    |       | 25,697 |   |
| Total assets                                                 |       |                        | $          | 628,176                 |       |   | $ | 640,549 |   |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**               |       |                        |       |                    |       |   |   |
| Current liabilities:                                         |       |                        |       |                    |       |   |   |
| Accounts payable                                             |       |                        | $          | 15,993                  |       |   | $ | 13,737 |   |
| Accrued compensation and  related expenses                   |       |                        | 9,832      |                    |       | 13,592 |   |
| Accrued interest payable                                     |       |                        | 7,076      |                    |       | 7,179 |   |
| Income taxes payable                                         |       |                        | 10,137     |                    |       | 5,103 |   |
| Other accrued liabilities                                    |       |                        | 19,660     |                    |       | 24,458 |   |
| Current portion of  long-term debt                           |       |                        | 4,927      |                    |       | 4,807 |   |
| Total current liabilities                                    |       |                        | 67,625     |                    |       | 68,876 |   |
| Long-term debt, net of  current portion                      |       |                        | 316,320    |                    |       | 303,602 |   |
| Senior subordinated notes                                    |       |                        | 260,000    |                    |       | 260,000 |   |
| Minority interests and  other liabilities                    |       |                        | 3,292      |                    |       | 3,631 |   |
| Deferred income taxes                                        |       |                        | 51,737     |                    |       | 58,562 |   |
| Total liabilities                                            |       |                        | 698,974    |                    |       | 694,671 |   |
| Commitments and  contingencies *(Note 11)*                   |       |                        |       |                    |       |   |   |
| Stockholders’ deficit:                                  |       |                        |       |                    |       |   |   |
| Common stock                                                 |       |                        | 480        |                    |       | 482 |   |
| Paid-in-capital deficit                                      |       |                        | (19,822    | )                       |       | (19,288 | ) |
| Accumulated other  comprehensive income                      |       |                        | —     |                    |       | (123 | ) |
| Accumulated deficit                                          |       |                        | (51,456    | )                       |       | (35,193 | ) |
| Total stockholders’  deficit                            |       |                        | (70,798    | )                       |       | (54,122 | ) |
| Total liabilities and stockholders’ deficit             |       |                        | $          | 628,176                 |       |   | $ | 640,549 |   |

 

See accompanying notes.

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**ALLIANCE IMAGING,INC.CONDENSED CONSOLIDATED STATEMENTS OF INCOMEAND OTHER COMPREHENSIVE INCOME(Unaudited)(in thousands, except per share amounts)**
| ** **                                          | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                          | ** ** | **2003**                              | ** ** | **2004**                                      | ** ** | **2003** | ** ** | **2004** | ** ** |
| Revenues                                            |       | $                                     | 105,333    |                                          | $          | 109,481 |   | $ | 208,068 |   | $ | 215,127 |   |
| Costs and  expenses:                                |       |                                  |       |                                          |       |   |   |   |   |
| Operating  expenses, excluding depreciation         |       | 48,893                                |       | 54,536                                        |       | 98,171 |   | 107,808 |   |
| Selling, general  and administrative expenses       |       | 12,183                                |       | 10,520                                        |       | 23,198 |   | 21,697 |   |
| Minority interest  expense                          |       | 639                                   |       | 647                                           |       | 1,133 |   | 1,432 |   |
| Employment  agreement costs                         |       | 1,654                                 |       | 1,210                                         |       | 1,654 |   | 1,515 |   |
| Severance and  related costs                        |       | 1,506                                 |       | —                                        |       | 1,716 |   | — |   |
| Non-cash  stock-based compensation                  |       | 418                                   |       | 98                                            |       | 836 |   | 196 |   |
| Depreciation  expense                               |       | 18,719                                |       | 19,789                                        |       | 36,604 |   | 40,634 |   |
| Amortization  expense                               |       | 677                                   |       | 879                                           |       | 1,353 |   | 1,755 |   |
| Interest expense,  net of interest income           |       | 11,131                                |       | 10,820                                        |       | 22,223 |   | 21,428 |   |
| Other (income)  and expense, net                    |       | (149                                  | )          | (161                                          | )          | (243 | ) | (127 | ) |
| Total costs and  expenses                           |       | 95,671                                |       | 98,338                                        |       | 186,645 |   | 196,338 |   |
| Income before income taxes                          |       | 9,662                                 |       | 11,143                                        |       | 21,423 |   | 18,789 |   |
| Income tax  expense (benefit)                       |       | 4,009                                 |       | (580                                          | )          | 8,890 |   | 2,526 |   |
| Net income                                          |       | $                                     | 5,653      |                                          | $          | 11,723 |   | $ | 12,533 |   | $ | 16,263 |   |
| Other  comprehensive income, net of tax:            |       |                                  |       |                                          |       |   |   |   |   |
| Net income                                          |       | $                                     | 5,653      |                                          | $          | 11,723 |   | $ | 12,533 |   | $ | 16,263 |   |
| Unrealized loss on hedging transaction              |       | —                                |       | (123                                          | )          | — |   | (123 | ) |
| Other comprehensive income, net of tax              |       | $                                     | 5,653      |                                          | $          | 11,600 |   | $ | 12,533 |   | $ | 16,140 |   |
| Earnings per  common share:                         |       |                                  |       |                                          |       |   |   |   |   |
| Basic                                               |       | $                                     | 0.12       |                                          | $          | 0.24 |   | $ | 0.26 |   | $ | 0.34 |   |
| Diluted                                             |       | $                                     | 0.12       |                                          | $          | 0.24 |   | $ | 0.26 |   | $ | 0.34 |   |
| Weighted-average  number of shares of common stock: |       |                                  |       |                                          |       |   |   |   |   |
| Basic                                               |       | 47,840                                |       | 48,193                                        |       | 47,787 |   | 48,081 |   |
| Diluted                                             |       | 48,498                                |       | 48,480                                        |       | 48,534 |   | 48,397 |   |

 

See accompanying notes.

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**ALLIANCE IMAGING,INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(in thousands)**
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2003**                                      | ** ** | **2004** | ** ** |
| **Operating activities:**                                                          |       |                                          |       |   |   |
| Net income                                                                         |       | $                                             | 12,533     |   | $ | 16,263 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |                                          |       |   |   |
| Provision for doubtful  accounts                                                   |       | 1,146                                         |       | 449 |   |
| Non-cash stock-based  compensation                                                 |       | 836                                           |       | 196 |   |
| Depreciation and  amortization                                                     |       | 37,957                                        |       | 42,389 |   |
| Amortization of deferred  financing costs                                          |       | 1,510                                         |       | 1,519 |   |
| Distributions less than  equity in undistributed income of investee                |       | (448                                          | )          | (815 | ) |
| Deferred income taxes                                                              |       | 6,860                                         |       | 6,907 |   |
| Gain on sale of equipment                                                          |       | (239                                          | )          | (128 | ) |
| Changes in operating assets and liabilities:                                       |       |                                          |       |   |   |
| Accounts receivable                                                                |       | (2,279                                        | )          | (4,568 | ) |
| Prepaid expenses                                                                   |       | (779                                          | )          | (952 | ) |
| Other receivables                                                                  |       | (653                                          | )          | (157 | ) |
| Other assets                                                                       |       | 87                                            |       | (1,341 | ) |
| Accounts payable                                                                   |       | (1,195                                        | )          | (2,256 | ) |
| Accrued compensation and  related expenses                                         |       | 2,374                                         |       | 3,760 |   |
| Accrued interest payable                                                           |       | (75                                           | )          | 103 |   |
| Income taxes payable                                                               |       | 86                                            |       | (5,034 | ) |
| Other accrued liabilities                                                          |       | 1,134                                         |       | 4,798 |   |
| Minority interests and  other liabilities                                          |       | 728                                           |       | (151 | ) |
| Net cash provided by  operating activities                                         |       | 59,583                                        |       | 60,982 |   |
| **Investing activities:**                                                          |       |                                          |       |   |   |
| Equipment purchases                                                                |       | (50,509                                       | )          | (43,846 | ) |
| Increase in deposits on  equipment                                                 |       | (1,338                                        | )          | (2,153 | ) |
| Acquisitions, net of cash  received                                                |       | (10,981                                       | )          | — |   |
| Proceeds from sale of  assets                                                      |       | 1,142                                         |       | 722 |   |
| Net cash used in  investing activities                                             |       | (61,686                                       | )          | (45,277 | ) |
| **Financing activities:**                                                          |       |                                          |       |   |   |
| Principal payments on  equipment debt                                              |       | (4,072                                        | )          | (3,206 | ) |
| Proceeds from equipment  debt                                                      |       | —                                        |       | 368 |   |
| Proceeds from revolving  loan facility                                             |       | 10,000                                        |       | — |   |
| Principal payments on  term loan facility                                          |       | (10,000                                       | )          | (10,000 | ) |
| Payments of debt issuance  costs                                                   |       | (120                                          | )          | (120 | ) |
| Proceeds from issuance of  common stock                                            |       | 348                                           |       | — |   |
| Proceeds from exercise of  employee stock options                                  |       | 134                                           |       | 340 |   |
| Net cash used in  financing activities                                             |       | (3,710                                        | )          | (12,618 | ) |
| Net (decrease) increase  in cash and cash equivalents                              |       | (5,813                                        | )          | 3,087 |   |
| Cash and cash  equivalents, beginning of period                                    |       | 31,413                                        |       | 20,931 |   |
| Cash and cash  equivalents, end of period                                          |       | $                                             | 25,600     |   | $ | 24,018 |   |
| **Supplemental  disclosure of cash flow information:**                             |       |                                          |       |   |   |
| Interest paid                                                                      |       | $                                             | 20,909     |   | $ | 19,859 |   |
| Income taxes paid, net of  refunds                                                 |       | 1,944                                         |       | 652 |   |
| **Supplemental  disclosure of non-cash investing and financing activities:**       |       |                                          |       |   |   |
| Net book value of assets  exchanged                                                |       | $                                             | 931        |   | $ | 223 |   |
| Capital lease obligations  assumed for the purchase of equipment                   |       | 5,813                                         |       | — |   |
| Capital lease obligations  transferred for the sale of equipment                   |       | (1,139                                        | )          | — |   |
| Other comprehensive loss from hedging transaction                                  |       | —                                        |       | (123 | ) |

 

See accompanying notes.

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**ALLIANCE IMAGING,INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSJune 30, 2004(Unaudited)(dollars in thousands, except per share amounts)**

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

**Basis of**** Presentation**—The accompanying unaudited condensedconsolidated financial statements have been prepared by Alliance Imaging, Inc.(the “Company”) in accordance with accounting principles generally accepted inthe United States of America and with the instructions to Form 10-Q and Article 10of Regulation S-X of the Securities and Exchange Commission. Accordingly, theydo not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements. In theopinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included. Operatingresults for the six-month period ended June 30, 2004 are not necessarilyindicative of the results that may be expected for the year ending December 31,2004. The accompanying unaudited condensed consolidated financial statementsshould be read in conjunction with the audited consolidated financialstatements and notes to the consolidated financial statements for the yearended December 31, 2003.

**Principlesof Consolidation**—The accompanying unaudited condensedconsolidated financial statements of the Company include the assets,liabilities, revenues and expenses of all majority-owned subsidiaries overwhich the Company exercises control, and for which control is other thantemporary. Intercompany transactions have been eliminated. Investments innon-consolidated affiliates are accounted for under the equity method.

**Use of Estimates**—Thepreparation of condensed consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the amountsreported in the condensed consolidated financial statements and accompanyingnotes. Actual results could differ from those estimates.

**2.   Stock-BasedCompensation**

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 in Note 7, allother employee stock-based awards were granted with an exercise price equal tothe market value of the underlying common stock on the date of grant and nocompensation cost is reflected in net income from operations for those awards.

Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS 148,requires presentation of pro forma information regarding net income andearnings per share determined as if the Company had 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 second quarter of 2003 andsecond quarter of 2004, respectively: risk-free interest rates of 2.99% and3.95%; no dividend yield; volatility factors of the expected market price ofthe Company’s common stock of 90.5% and 37.5%; and a weighted-average expectedlife of the options of 6.50 years in each quarter. The Company used thefollowing weighted-average assumptions for the first six months of 2003 and2004, respectively: risk-free interest rates of 3.24% 

5

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and 3.17%; no dividendyield; volatility factors of the expected market price of the Company’s commonstock of 77.6% and 57.2%; and a weighted-average expected life of the optionsof 6.50 years and 5.39 years. Theweighted-average fair value of options granted during the second quarter of2003 and 2004 is $2.95 and $1.81, respectively, and $3.35 and $1.98 in thefirst six months of 2003 and 2004, 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 employee stock optionshave characteristics 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. Had compensationcost for the Company’s stock option plan been determined based on the estimatedfair value at the grant dates for awards under the plan consistent with thefair value method of SFAS 123 utilizing the Black-Scholes option-pricing model,the Company’s net income and basic and diluted earnings per share for theperiods ended below would have approximated the pro forma amounts indicatedbelow:
| ** **                                                                                                           | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                           | ** ** | **2003**                              | ** ** | **2004**                                      | ** ** | **2003** | ** ** | **2004** | ** ** |
| Net income:                                                                                                          |       |                                  |       |                                          |       |   |   |   |   |
| As reported                                                                                                          |       | $                                     | 5,653      |                                          | $          | 11,723 |   | $ | 12,533 |   | $ | 16,263 |   |
| Add: Stock-based  compensation expense included in reported net income, net of related tax  effects             |       | 245                                   |       | 58                                            |       | 490 |   | 116 |   |
| Deduct: Stock-based  compensation expense determined under fair value based method, net of related  tax effects |       | (283                                  | )          | (298                                          | )          | (590 | ) | (616 | ) |
| Pro forma net income                                                                                                 |       | $                                     | 5,615      |                                          | $          | 11,483 |   | $ | 12,433 |   | $ | 15,763 |   |
| Basic earnings per  share:                                                                                           |       |                                  |       |                                          |       |   |   |   |   |
| As reported                                                                                                          |       | $                                     | 0.12       |                                          | $          | 0.24 |   | $ | 0.26 |   | $ | 0.34 |   |
| Pro forma                                                                                                            |       | 0.12                                  |       | 0.24                                          |       | 0.26 |   | 0.33 |   |
| Diluted earnings per  share:                                                                                         |       |                                  |       |                                          |       |   |   |   |   |
| As reported                                                                                                          |       | $                                     | 0.12       |                                          | $          | 0.24 |   | $ | 0.26 |   | $ | 0.34 |   |
| Pro forma                                                                                                            |       | 0.12                                  |       | 0.24                                          |       | 0.26 |   | 0.33 |   |

 

**3.   Recent Accounting Pronouncements**

**Accounting for CertainInstruments with Characteristics of Both Liabilities and Equity**—InMay 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS150, “Accounting for Certain Instruments with Characteristics of bothLiabilities and Equity,” which establishes standards for how an issuerclassifies and measures certain financial instruments with characteristics ofboth liabilities and equity. SFAS 150 requires that an issuer classify afinancial instrument that is within its scope, which may have previously beenreported as equity, as a liability (or an asset in some circumstances). This statementis effective for financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003. In October 2003, the FASB deferredimplementation of paragraphs 9 and 10 of SFAS 150 regarding parent companytreatment of minority interest for certain limited life entities and certainother mandatorily redeemable financial instruments. This deferral is for anindefinite period. The adoption of SFAS 150 did not have a material impact onthe Company’s financial position or results of operations.

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**Revenue Recognition**—InDecember 2003, the Securities and Exchange Commission released StaffAccounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” whichsupersedes SAB 101, “Revenue Recognition in Financial Statements.” SAB 104clarifies existing guidance regarding revenues for contracts which containmultiple deliverables to make it consistent with Emerging Issues Task Force (“EITF”)No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.”The adoption of SAB 104 did not have a material impact on the Company’s revenuerecognition policies, nor its financial position or results of operations.

**4.   Goodwilland Intangible Assets**

Changesin the carrying amount of goodwill are as follows:
| Balance at  December 31, 2003       |   | $      | 122,992 |   |
|------------------------------------------|--------|--------|---------|--------|
| Additions to  goodwill during the period |   | — |    |
| Balance at June 30,  2004           |   | $      | 122,992 |   |

 

Intangibleassets consisted of the following:
| ** **                                   | ** ** | **December 31, 2003** | ** ** | **June 30, 2004**   | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                   | ** ** | **Gross  Carrying  Amount**     | ** ** | **Accumulated  Amortization** | ** ** | **Intangible    Assets, net  ** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Intangible    Assets, net  ** | ** ** |
| Amortizing intangible  assets:               |       |                            |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Customer contracts                           |       | $                               | 40,426     |                          |       | $ | (12,480 | ) |   |   | $ | 27,946 |   |   | $ | 40,426 |   |   | $ | (14,004 | ) |   |   | $ | 26,422 |   |   |
| Other                                        |       | 2,890                           |       |                          | (1,536     | ) |   |   | 1,354 |   |   | 3,071 |   |   | (1,767 | ) |   |   | 1,304 |   |   |
| Total amortizing intangible assets           |       | $                               | 43,316     |                          |       | $ | (14,016 | ) |   |   | $ | 29,300 |   |   | $ | 43,497 |   |   | $ | (15,771 | ) |   |   | $ | 27,726 |   |   |
| Intangible assets not subjectto amortization |       |                            |       |                          |       |   |   |   | $ | 1,653 |   |   |   |   |   |   |   |   |   | $ | 1,941 |   |   |
| Total other  intangible assets               |       |                            |       |                          |       |   |   |   | $ | 30,953 |   |   |   |   |   |   |   |   |   | $ | 29,667 |   |   |

 

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 ten 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 unitsbased on discounted cash flows, market multiples, or appraised values asappropriate.

Amortization expense for intangible assets subject toamortization was $677 and $879 for the quarters ended June 30, 2003 and2004, respectively, and $1,353 and $1,755 for the six months ended June 30,2003 and 2004, respectively. The intangible assets not subject to amortizationrepresent certificate of needs and regulatory authority rights which do nothave predetermined useful lives.

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Estimatedannual amortization expense for each of the fiscal years ending December 31is presented below:
| 2004 |   | $     | 3,502  |   |
|------|--------|-------|--------|--------|
| 2005 |   | 3,477 |   |
| 2006 |   | 3,424 |   |
| 2007 |   | 3,208 |   |
| 2008 |   | 2,997 |   |

 

**5.   Other Accrued Liabilities**

Other accrued liabilitiesconsisted of the following:
| ** **                                   | ** ** | **December 31,  2003** | ** ** | **June 30,  2004** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Accrued systems rental and maintenance costs |       |                        | $          | 2,472                   |       |   | $ | 2,996 |   |
| Accrued site  rental fees                    |       |                        | 1,795      |                    |       | 1,754 |   |
| Accrued property  tax and sales tax payable  |       |                        | 7,125      |                    |       | 7,850 |   |
| Accrued equipment  payments                  |       |                        | 1,274      |                    |       | 2,721 |   |
| Accrued  self-insurance expense              |       |                        | 3,072      |                    |       | 4,108 |   |
| Other accrued expenses                       |       |                        | 3,922      |                    |       | 5,029 |   |
| Total other accrued  liabilities             |       |                        | $          | 19,660                  |       |   | $ | 24,458 |   |

 

**6.   Long-Term Debt**

Long-term debt consistedof the following:
| ** **                                 | ** ** | **December 31,  2003** | ** ** | **June 30,  2004** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Term loan facility                         |       |                        | $          | 307,125                 |       |   | $ | 297,125 |   |
| Senior  subordinated notes                 |       |                        | 260,000    |                    |       | 260,000 |   |
| Equipment debt                             |       |                        | 14,122     |                    |       | 11,284 |   |
| Long-term debt,  including current portion |       |                        | 581,247    |                    |       | 568,409 |   |
| Less current  portion                      |       |                        | 4,927      |                    |       | 4,807 |   |
| Long-term portion                          |       |                        | $          | 576,320                 |       |   | $ | 563,602 |   |

 

**7.   Non-Cash Stock-Based Compensation**

In November 2000, theCompany granted stock options to certain employees at exercise prices below thefair value of the Company’s common stock, of which 47,500 options areoutstanding at June 30, 2004. The exercise prices of these options and thefair value of the Company’s common stock on the grant date were $5.60 and $9.52per share, respectively. Compensation expense of $56 will be recognized on astraight-line basis over the remaining vesting period of the options. TheCompany recorded non-cash stock-based compensation of $18 in each of thequarters ended June 30, 2003 and 2004, respectively, and $36 in each ofthe first six months of 2003 and 2004, respectively, with an offset topaid-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 the performance options. On May 18,2004, the Company’s compensation committee authorized the Company to make asecond amendment to the option agreements under its 1999 Equity Plan to furtherreduce the performance targets for the outstanding performance options. Theseoptions vest on the eighth anniversary of the grant date if the option holderis still an employee, but the vesting accelerates if the Company meets theoperating performance targets specified in the option agreements. As a resultof the amendments, if 

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theCompany achieves the reduced performance targets but does not achieve theprevious performance targets, and an option holder terminates employment priorto the eighth anniversary of the option grant date, the Company would berequired to record a non-cash stock-based compensation charge equal to theamount by which the actual value of the shares subject to the performanceoption on the date of the respective amendment exceeded the option’s exerciseprice. Under the first amendment, management estimates that the Company couldincur an additional $100 to $500 in the aggregate of these non-cash stock-basedcompensation charges over the next 11⁄2 years. Under the second amendment,management estimates that the Company could incur an additional $100 to $200 inthe aggregate of these non-cash stock-based compensation charges over the nextfive years. These charges, however, may not be evenly distributed over each ofthese respective periods or over the four quarters in any one year, dependingupon the timing of employee turnover and the number of shares subject to theoptions held by departing employees.

Forthe quarters ended June 30, 2003 and 2004, the Company recorded $400 and$80, respectively, in non-cash stock-based compensation as a result of theseamendments. For the six months ended June 30, 2003 and 2004, the Companyrecorded $800 and $160, respectively, in non-cash stock-based compensation as aresult of these amendments.

**8.   Accumulated Other Comprehensive Income**

In the second quarter of2004, the Company entered into interest rate swap agreements, with notionalamounts of $56,813 and $46,813 at June 30, 2004 to hedge the future cashinterest payments associated with a portion of the Company’s variable rate bankdebt. These agreements mature in the second quarter of 2007. Under thesearrangements, the Company receives three-month London Interbank Offered Rate (“LIBOR”)and pays a fixed rate of 3.15% and 3.89%, respectively. The net effect of thehedges is to record interest expense at fixed rates of 5.53% and 6.27%,respectively, as the debt incurs interest based on three-month LIBOR plus 2.38%.The Company has designated these swaps as cash flow hedges of variable futurecash flows associated with its long-term debt. The Company recognized a loss,net of tax, of $123 based on the change in fair value of these instruments forthe quarter and six months ended June 30, 2004. The Company will continueto record subsequent changes in the fair value of the swaps through othercomprehensive income during the period these instruments are designated ashedges.

On the date the Companyenters into a derivative contract, management designates the derivative as ahedge of the identified exposure. The Company does not enter into derivativeinstruments that do not qualify as cash flow hedges as described in SFAS 133,“Accounting for Derivative Instruments and Hedging Activities.” 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, or (iii) if management determines thatdesignation of the derivative as a hedge instrument is no longer appropriate.

**9.   Income Taxes**

For the quarter and six months ended June 30,2003, the Company recorded a provision for income taxes of $4,009 and $8,890,respectively, or 41.5% of the Company’s pretax income. The Company’s effectivetax rate was higher than federal statutory rates primarily as a result of stateincome taxes. For the quarter ended June 30, 2004, the Company recorded anincome tax benefit of $580, or 5.2% of the 

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Company’spretax income. For the six months ended June 30, 2004, the Companyrecorded a provision for income taxes of $2,526, or 13.4% of the Company’spretax income. For the quarter and six months ended June 30, 2004, theCompany’s effective tax rate was lower than federal statutory rates due to thereversal of income tax reserves of $5,099 primarily related to the favorableoutcome of examinations of the Company’s 1998 and 1999 federal income taxreturns and a favorable final IRS determination letter related to the treatmentof an income item in a federal income tax return of one of the Company’ssubsidiaries.

**10.   Earnings Per Common Share**

Thefollowing table sets forth the computation of basic and diluted earnings pershare (amounts in thousands, except per share amounts):
| ** **                                                                         | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2003**                              | ** ** | **2004**                                      | ** ** | **2003** | ** ** | **2004** | ** ** |
| Numerator:                                                                         |       |                                  |       |                                          |       |   |   |   |   |
| Net income                                                                         |       | $                                     | 5,653      |                                          | $          | 11,723 |   | $ | 12,533 |   | $ | 16,263 |   |
| Denominator:                                                                       |       |                                  |       |                                          |       |   |   |   |   |
| Denominator for basic earnings per share  —weighted-average shares            |       | 47,840                                |       | 48,193                                        |       | 47,787 |   | 48,081 |   |
| Effect of dilutive securities:                                                     |       |                                  |       |                                          |       |   |   |   |   |
| Employee stock options                                                             |       | 658                                   |       | 287                                           |       | 747 |   | 316 |   |
| Denominator for diluted earnings per share  —adjusted weighted-average shares |       | 48,498                                |       | 48,480                                        |       | 48,534 |   | 48,397 |   |
| Earnings per common share:                                                         |       |                                  |       |                                          |       |   |   |   |   |
| Basic                                                                              |       | $                                     | 0.12       |                                          | $          | 0.24 |   | $ | 0.26 |   | $ | 0.34 |   |
| Diluted                                                                            |       | $                                     | 0.12       |                                          | $          | 0.24 |   | $ | 0.26 |   | $ | 0.34 |   |

 

**11.   Commitments and Contingencies**

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

The Company has appliedthe disclosure provisions of FASB Interpretation No. 45 (“FIN 45”), “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others,” to its agreements that contain guaranteeor indemnification clauses. These disclosure provisions expand those requiredby FASB Statement No. 5, “Accounting for Contingencies,” by requiring aguarantor to disclose certain type of guarantees, even if the likelihood ofrequiring the guarantor’s performance is remote. The following is a descriptionof an arrangement in which the Company is the guarantor.

The Company guarantees aportion of a loan on behalf of an unconsolidated investee under an agreementexecuted prior to 2002. The maximum potential future payment under thisfinancial guarantee is $356 at June 30, 2004. The Company has not recordedan obligation for this guarantee.

**12.   Related-Party Transactions**

The Company recordedmanagement fees payable to Kohlberg Kravis Roberts & Co. (“KKR”) of$163 and $325 for each of the quarters and six months ended June 30, 2003and 2004, respectively, and will continue to receive financial advisoryservices from KKR on an ongoing basis.

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

**Overview**

We are a leading nationalprovider of diagnostic imaging services. We provide imaging services primarilyto hospitals and other healthcare providers on a shared and full-time servicebasis, in addition to operating a growing number of free-standing imagingcenters. Our principal sources of revenue are derived from magnetic resonanceimaging (MRI) and positron emission tomography (PET) services. In the first sixmonths of 2004, MRI services and PET services generated 74% and 17% of ourrevenues, respectively. Our services normally include the use of our imagingsystems, technologists to operate the systems, equipment maintenance andupgrades and management of day-to-day operations. We had 482 diagnostic imagingsystems, including 361 MRI systems and 51 PET or PET/CT systems, and 1,358clients in 43 states at June 30, 2004.

Approximately 88% of ourrevenues for the first six months ended June 30, 2004 were generated byproviding services to hospitals and other healthcare providers, which we referto as wholesale revenues. Our wholesale revenues are typically generated fromcontracts that require our clients to pay us based on the number of scans weperform, although some pay us a flat fee for a period of time regardless of thenumber of scans we perform. These payments are due to us independent of ourclients’ receipt of reimbursement from third-party payors. We typically deliverour services for a set number of days per week through exclusive, long-termcontracts with hospitals and other healthcare providers. These contractsaverage approximately three years in length and often contain automatic renewalprovisions. We price our contracts based on the type of system used, the scanvolume, and the number of ancillary services provided. Our pricing is alsoinfluenced by competitive market pressures.

Approximately 12% of our revenues for the six monthsended June 30, 2004 were generated by providing services directly topatients from our sites located at or near hospital or other healthcareprovider facilities, which we refer to as retail revenues. Our revenues fromthese sites are 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.

We have recently seen an increase in the competitive climatein the MRI industry, resulting in an increase in activity by original equipmentmanufacturers, or OEM’s, selling systems directly to certain of our clients. Typically,OEM’s target our higher scan volume clients. This has caused an increase in thenumber of our higher scan volume clients deciding not to renew their contracts.We replace these higher volume scan clients typically with lower volume clients.As a result, we expect our 2004 MRI revenues to decline compared to 2003 levelsand we believe that MRI revenues from our shared service operations willcontinue to decline in future years.

The principal components of our operating costs,excluding depreciation, are compensation paid to technologists and drivers,system maintenance costs, medical supplies, system transportation andtechnologists’ travel costs. Because a majority of these expenses are fixed,increased revenues as a result of higher scan volumes per system significantlyimproves our margins while lower scan volumes result in lower margins.

The principal components of our selling, general andadministrative expenses are sales force compensation, marketing costs,corporate overhead costs, provision for doubtful accounts, and equity interestearnings in unconsolidated partnerships.

Forthe six months ended June 30, 2004, we recorded $0.2 million in non-cashstock-based compensation primarily as a result of amending certain stock optionagreements in June 2001 and May 2004 to reduce performance targetsand granting options in November 2000 to purchase our common 

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stock at an exercise price below its fair value. Theseoptions vest on the eighth anniversary of the grant date if the option holderis still our employee, but the vesting accelerates if we meet the operatingperformance targets specified in the option agreements. On June 20, 2001,our compensation committee authorized us to enter into amended optionagreements to reduce the performance targets for the performance options. On May 18,2004, our compensation committee authorized us to enter into a second amendmentto the option agreements to further reduce the performance targets for theoutstanding performance options. As a result, if we achieve the reducedperformance targets but do not achieve the previous performance targets, and anoption holder terminates employment prior to the eighth anniversary of theoption grant date, we would be required to record a non-cash stock-basedcompensation charge equal to the amount by which the actual value of the sharessubject to the performance option on the date of the respective amendmentexceeded the option’s exercise price. Under the first amendment, we estimatethat we could incur an additional $0.1 million to $0.5 million in the aggregateof non-cash stock-based compensation charges over the next 11⁄2 years. Under thesecond amendment, we estimate that we could incur an additional $0.1 million to$0.2 million in the aggregate of non-cash stock-based compensation charges overthe next five years. These charges, however, may not be evenly distributed overeach of these respective periods or over the four quarters in any one year,depending upon the timing of employee turnover and the number of shares subjectto the options held by departing employees.

**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, the results of which are fewer patient scans during theperiod. Fourth quarter revenue is affected primarily by holiday and client andpatient vacation schedules and inclement weather, the results of which arefewer patient scans during the period. The variability in margins is higherthan the variability in revenues due to the fixed nature of our costs.

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**Results of Operations**

Thefollowing table shows our condensed consolidated statements of income as apercentage of revenues:
| ** **                                    | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                    | ** ** | **2003**                              | ** ** | **2004**                                      | ** ** | **2003** | ** ** | **2004** | ** ** |
| Revenues                                      |       | 100.0                                 | %          | 100.0                                         | %          | 100.0 | % | 100.0 | % |
| Costs and expenses:                           |       |                                  |       |                                          |       |   |   |   |   |
| Operating  expenses, excluding depreciation   |       | 46.4                                  |       | 49.8                                          |       | 47.2 |   | 50.1 |   |
| Selling, general  and administrative expenses |       | 11.6                                  |       | 9.6                                           |       | 11.1 |   | 10.1 |   |
| Minority interest  expense                    |       | 0.6                                   |       | 0.6                                           |       | 0.5 |   | 0.7 |   |
| Employment  agreement costs                   |       | 1.6                                   |       | 1.1                                           |       | 0.8 |   | 0.7 |   |
| Severance and  related costs                  |       | 1.4                                   |       | —                                        |       | 0.8 |   | — |   |
| Non-cash  stock-based compensation            |       | 0.4                                   |       | 0.1                                           |       | 0.4 |   | 0.1 |   |
| Depreciation  expense                         |       | 17.7                                  |       | 18.0                                          |       | 17.6 |   | 18.8 |   |
| Amortization  expense                         |       | 0.6                                   |       | 0.8                                           |       | 0.7 |   | 0.8 |   |
| Interest expense,  net of interest income     |       | 10.6                                  |       | 9.9                                           |       | 10.7 |   | 10.0 |   |
| Other (income)  and expense, net              |       | (0.1                                  | )          | (0.1                                          | )          | (0.1 | ) | (0.1 | ) |
| Total costs and expenses                      |       | 90.8                                  |       | 89.8                                          |       | 89.7 |   | 91.2 |   |
| Income before income taxes                    |       | 9.2                                   |       | 10.2                                          |       | 10.3 |   | 8.8 |   |
| Income tax  expense (benefit)                 |       | 3.8                                   |       | (0.5                                          | )          | 4.3 |   | 1.2 |   |
| Net income                                    |       | 5.4                                   | %          | 10.7                                          | %          | 6.0 | % | 7.6 | % |

 

Thetable below provides scan-based MRI statistical information:
| ** **                               | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                               | ** ** | **2003**                              | ** ** | **2004**                                      | ** ** | **2003** | ** ** | **2004** | ** ** |
| MRI scan-based                           |       |                                  |       |                                          |       |   |   |   |   |
| Average number of scan-based MRI systems |       | 307.5                                 |       | 293.9                                         |       | 308.2 |   | 295.0 |   |
| Scans per system per day                 |       | 9.5                                   |       | 9.7                                           |       | 9.5 |   | 9.6 |   |
| Total number of MRI scans                |       | 209,700                               |       | 207,400                                       |       | 417,300 |   | 409,400 |   |
| Price per scan                           |       | $                                     | 363.7      |                                          | $          | 353.7 |   | $ | 364.7 |   | $ | 354.0 |   |
|                                          |            |                                       |            |                                               |            |  |  |  |  |  |  |  |  |

 

**Following are the components of revenue:**
| ** **                    | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                    | ** ** | **2003**                              | ** ** | **2004**                                      | ** ** | **2003** | ** ** | **2004** | ** ** |
| Scan-based MRI                |       | $                                     | 76.2       |                                          | $          | 73.4 |   | $ | 152.2 |   | $ | 144.9 |   |
| PET                           |       | 13.5                                  |       | 19.5                                          |       | 25.4 |   | 37.2 |   |
| Non-scan based  MRI and other |       | 15.6                                  |       | 16.6                                          |       | 30.5 |   | 33.0 |   |
| Total                         |       | $                                     | 105.3      |                                          | $          | 109.5 |   | $ | 208.1 |   | $ | 215.1 |   |

 

***Quarter Ended June 30, 2004 Compared to QuarterEnded June 30, 2003***

Revenue increased $4.2 million, or 3.9%, to$109.5 million in the second quarter of 2004 compared to $105.3 million inthe second quarter of 2003 primarily due to higher PET revenue, higher non scan-basedrevenue and other revenue, offset by lower scan-based MRI revenue. PET revenuein the second quarter 

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of 2004 increased $6.0million, or 44.7%, compared to the second quarter of 2003, primarily due to anincrease in the number of PET systems in service. Non scan-based MRI revenueand other revenue in the second quarter of 2004 increased $1.0 million, or6.6%, primarily due to higher short-term MRI rental revenue and highermanagement contract revenue due to growth in unconsolidated joint ventures. Scan-basedMRI revenue in the second quarter of 2004 decreased $2.8 million, or 3.8%,compared to the second quarter of 2003, primarily as a result of a 1.1%decrease in our MRI scan volume, a 2.7% decrease in the average MRI price perscan and a decrease in the average number of scan-based systems in operation. Theaverage price per MRI scan decreased to $353.7 per scan in the second quarterof 2004 compared to $363.7 per scan in the second quarter of 2003. The averagenumber of scan-based MRI systems decreased to 293.9 in the second quarter of2004 from 307.5 in the second quarter of 2003.

We had 361 MRI systems at June 30, 2004 comparedto 362 MRI systems at June 30, 2003. We had 51 PET or PET/CT systems at June 30,2004 compared to 35 PET systems at June 30, 2003.

Operating expenses, excluding depreciation, increased$5.6 million, or 11.5%, to $54.5 million in the second quarter of2004 compared to $48.9 million in the second quarter of 2003. Compensation and related employee expensesincreased $2.7 million, or 11.1%, primarily as a result of an increase intechnologists’ wage rates and the number of employees necessary to support newsystems in operation. Medical supplies increased $0.7 million, or 17.5%,primarily as a result of an increase in the number of PET or PET/CT systems inoperation, which use a radiopharmaceutical as a component of the scan. Maintenancecosts increased $0.6 million, or 6.5%, primarily due to an increase in theaverage repair cost per system and an increase in the number of systems inservice. Outside medical services increased $0.4 million, or 24.9%, primarilyas a result of an increase in outside radiologists services associated with PET.Licenses, taxes and fees expense increased $0.4 million, or 54.5%, primarilydue to an increase in property taxes. Management contract expense increased$0.4 million, or 21.0%, primarily as a result of an increase in expensesrelated to growth in unconsolidated joint ventures. All other operatingexpenses, excluding depreciation, increased $0.4 million, or 6.5%. Operatingexpenses, excluding depreciation, as a percentage of revenue, increased to 49.8%in the second quarter of 2004 from 46.4% in the second quarter of 2003 as aresult of the factors described above.

Selling, general andadministrative expenses decreased $1.7 million, or 13.7%, to $10.5 million inthe second quarter of 2004 compared to $12.2 million in the second quarter of2003. Compensation and related employee expenses increased $0.6 million, or7.5%, primarily due to increases in sales and marketing costs. This increasewas offset by a decrease in the provision for doubtful accounts of $0.9million, or 99.4%, primarily as a result of the collection of higher thannormal amounts of aged accounts receivable in the second quarter of 2004. Theprovision for doubtful accounts decreased 0.8% in the second quarter of 2004 toapproximately zero percent of revenue compared to 0.8% of revenue in the secondquarter of 2003. All other selling, general and administrative expensesdecreased $1.4 million, or 39.8%, primarily due to an increase in equityinterest earnings from unconsolidated joint ventures. Selling, general and administrative expensesas a percentage of revenue were 9.6% and 11.6% in the second quarter of 2004and 2003, respectively.

Minority interest expense remained relatively constantin both the second quarters of 2004 and 2003 at $0.6 million, or 0.6% ofrevenue.

We recorded employment agreementexpenses of $1.2 million in the second quarter of 2004 related to an employmentagreement with our former chief financial officer and payments under anamendment to an employment agreement with our former chairman of the board. Werecorded employment agreement expenses of $1.7 million in the second quarter of2003 related to payments under an amendment to an employment agreement with ourformer chairman of the board. We expect to incur approximately $1.0 million ofcosts over the remaining 11-month term of the amended employmentagreement with our 

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formerchairman of the board. We do not expect to incur any further costs relating tothe employment agreement with our former chief financial officer.

We recorded severance andrelated costs of $1.5 million in the second quarter of 2003 primarily relatedto severance and settlement payments made as a result of reductions-in-force.

We recorded non-cash stock-basedcompensation of $0.1 and $0.4 million in the second quarter of 2004 and 2003,respectively, as a result of amending certain stock option agreements in June 2001and May 2004 to reduce performance targets and granting options in November 2000to purchase our common stock at an exercise price below its fair value.

Depreciation expense increased $1.1 million, or5.7%, to $19.8 million in the second quarter of 2004 compared to$18.7 million in the second quarter of 2003, primarily due to an increasein the number of PET or PET/CT systems, which have a shorter depreciable lifethan MRIs, as well as the change in estimate of new MRI system useful livesfrom eight years to seven years in the third quarter of 2003.

Amortization expense increased $0.2 million, or 29.8%,to $0.9 million in the second quarter of 2004 compared to$0.7 million in the second quarter of 2003.

Interest expense, net, decreased$0.3 million, or 2.8%, to $10.8 million in the second quarter of 2004 comparedto $11.1 million in the second quarter of 2003, primarily due to lower averagedebt balances.

In the second quarter of 2004,we recorded an income tax benefit of $0.6 million, which was 5.2% of our pretaxincome. This effective tax rate was lower than statutory rates primarily due tothe reversal of income tax reservesof $5.1 million primarily related to the favorable outcome of examinations ofour 1998 and 1999 federal income tax returns and a favorable final IRSdetermination letter related to the treatment of an income item in a federalincome tax return of one of our subsidiaries. The provision for income taxes in the second quarter of 2003 was $4.0million, resulting in an effective tax rate of 41.5%. This effective tax ratewas higher than statutory rates primarily as a result of state income taxes.

Ournet income was $11.7 million, or $0.24 per share on a diluted basis, in thesecond quarter of 2004 compared to $5.7 million, or $0.12 per share on adiluted basis, in the second quarter of 2003.

***Six Months Ended June 30, 2004 Compared to June 30,2003***

Revenue increased$7.0 million, or 3.4%, to $215.1 million in the first six months of2004 compared to $208.1 million in the first six months of 2003,primarily due to higher PET revenue and higher non scan-based MRI revenueand other revenue, offset by lower scan-based MRI revenue. PET revenue in thefirst six months of 2004 increased $11.8million, or 46.5%, compared to the first six months of 2003 primarily as aresult an increase in the number of PET systems in service. Non scan-based MRIrevenue and other revenue in the first six months of 2004 increased $2.5million, or 8.2%, primarily due to higher short-term MRI rental revenue andhigher management contract revenue due to growth in unconsolidated jointventures. Scan-based MRI revenue in the first six months of 2004 decreased $7.3million, or 4.8%, primarily as a result of a 1.9% decrease in our MRI scanvolume, a 2.9% decrease in the average MRI price per scan and a decrease in theaverage number of scan-based systems in operation. The average price per MRIscan decreased to $354.0 per scan in the first six months of 2004 compared to$364.7 per scan in the first six months of 2003. The average number ofscan-based MRI systems decreased to 295.0 in the first six months of 2004 from308.2 in the first six months of 2003.

We had 361 MRI systems at June 30, 2004 comparedto 362 MRI systems at June 30, 2003. We had 51 PET or PET/CT systems at June 30,2004 compared to 35 PET systems at June 30, 2003.

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Operating expenses, excluding depreciation, increased$9.6 million, or 9.8%, to $107.8 million in the first six months of2004 compared to $98.2 million in the first six months of 2003. Compensation and related employee expensesincreased $4.2 million, or 8.4%, primarily as a result of an increase intechnologists’ wage rates and the number of employees necessary to support newsystems in operation. Medical supplies increased $1.5 million, or 21.3%,primarily as a result of an increase in the number of PET systems in operation,which use a radiopharmaceutical as a component of the scan. Maintenance costsincreased $1.6 million, or 8.4%, primarily due to an increase in the averagerepair cost per system and an increase in the number of systems in service. Outsidemedical services increased $1.2 million, or 34.7%, primarily as a result of anincrease in outside radiologists services associated with PET. Managementcontract expenses increased $1.2 million, or 35.3%, primarily as a result of anincrease in expenses related to growth in unconsolidated joint ventures. Allother operating expenses, excluding depreciation, decreased $0.1 million, or0.4%. Operating expenses, excluding depreciation, as a percentage of revenue,increased to 50.1% in the first six months of 2004 from 47.2% in the first sixmonths of 2003 as a result of the factors described above.

Selling, general andadministrative expenses decreased $1.5 million, or 6.5%, to $21.7 million inthe first six months of 2004 compared to $23.2 million in the first six monthsof 2003. Compensation and related employee expenses increased $1.1 million, or7.0%, primarily due to increases in sales and marketing costs. Thisincrease was offset by a decrease in the provision for doubtful accounts of$0.7 million, or 60.8%, primarily as a result of the collection of higher thannormal amounts of aged accounts receivable in the first six months of 2004. Theprovision for doubtful accounts decreased as a percentage of revenue to 0.2% inthe first six months of 2004 compared to 0.6% in the corresponding period of2003. All other selling, general and administrative expenses decreased $1.9million, or 29.1%, primarily due to an increase in equity interest earningsfrom unconsolidated joint ventures. Selling, general and administrativeexpenses as a percentage of revenue were 10.1% and 11.1% in the first sixmonths of 2004 and 2003, respectively.

Minority interest expense increased $0.3 million, or26.4%, to $1.4 million in the first six months of 2004 compared to $1.1 millionin the first six months of 2003.

We recorded employment agreementexpenses of $1.5 million in the first six months of 2004 related to anemployment agreement with our former chief financial officer and payments underan amendment to an employment agreement with our former chairman of the board. Werecorded employment agreement expenses of $1.7 million in the first six monthsof 2003 related to payments under an amendment to an employment agreement withour former chairman of the board. We expect to incur approximately $1.0 millionof costs over the remaining 11-month term of the amended employmentagreement with our former chairman of the board. We do not expect to incur anyfurther costs relating to the employment agreement with our former chieffinancial officer.

We recorded severance andrelated costs of zero and $1.7 million in the first six months of 2004 and2003, respectively, primarily related to severance and settlement payments madeas a result of reductions-in-force.

We recorded non-cash stock-basedcompensation of $0.2 and $0.8 million in the first six months of 2004 and 2003,respectively, as a result of amending certain stock option agreements in June 2001and May 2004 to reduce performance targets and granting options in November 2000to purchase our common stock at an exercise price below its fair value.

Depreciation expense increased $4.0 million, or11.0%, to $40.6 million in the first six months of 2004 compared to$36.6 million in the first six months of 2003, principally due to anincrease in the number of PET or PET/CT systems, which have a shorterdepreciable life than MRIs, as well as the change in estimate of new MRI systemuseful lives from eight years to seven years in the third quarter of 2003.

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Amortization expense increased $0.4 million, or 29.7%,to $1.8 million in the second quarter of 2004 compared to$1.4 million in the first six months of 2003.

Interest expense, net, decreased$0.8 million, or 3.6%, to $21.4 million in the first six months of 2004 comparedto $22.2 million in the first six months of 2003, primarily due to loweraverage debt balances.

In the first six months of 2004,we recorded a provision for income taxes of $2.5 million, which was 13.4% ofour pretax income. This effective tax rate was lower than statutory ratesprimarily due to the reversal ofincome tax reserves of $5.1 million primarily related to the favorable outcomeof examinations of our 1998 and 1999 federal income tax returns and a favorablefinal IRS determination letter related to the treatment of an income item in afederal income tax return of one of our subsidiaries. The provision for income taxes in the first sixmonths of 2003 was $8.9 million, resulting in an effective tax rate of 41.5%. Thiseffective tax rate was higher than statutory rates primarily as a result ofstate income taxes.

Ournet income was $16.3 million, or $0.34 per share on a diluted basis, in thefirst six months of 2004 compared to $12.5 million, or $0.26 per share on adiluted basis, in the first six months of 2003.

**Liquidity and Capital Resources**

Our primary source of liquidity is cash provided byoperating activities. Cash provided from operating activities totaled $61.0million and $59.6 million in the first six months of 2004 and 2003,respectively. Our ability to generate cash flow is affected by numerousfactors, including demand for MRI and PET scans, the price we can charge ourclients for providing our services and the costs to us of providing theseservices. In addition, as of June 30, 2004, we had $146.2 million ofavailable borrowings under our revolving line of credit.

Our primary use ofcapital resources is to fund capital expenditures. We incur capitalexpenditures for the purposes of:

·       purchasing new systems;

·       replacing less advancedsystems with new systems;

·       providing upgrades of ourMRI systems and upgrading our corporate infrastructure for future growth; and

·       purchasing systems upontermination of operating leases.

Capital expenditures totaled $43.8 million and $50.5million in the first six months of 2004 and 2003, respectively. During thefirst six months of 2004, we purchased 11 MRI systems, eight PET/CT systems,two CT systems and one SPECT system, including replacement systems. Ourdecision to purchase a new system is typically predicated on obtaining new orextending existing client contracts and the development of fixed-site centers,which serve as the basis of demand for the new system. We expect to purchaseadditional systems in 2004 and to finance substantially all of these purchaseswith our available cash, cash provided by operating activities, our revolvingline of credit and equipment leases. We expect capital expenditures to totalapproximately $80 million to $85 million in 2004.

Webelieve that, based on current levels of operations, our cash provided byoperating activities, together with other available sources of liquidity,including borrowings available under our revolving loan facility, will besufficient over the next one to two years to fund anticipated capital expendituresand make required payments of principal and interest on our debt.

**Recent Accounting Pronouncements**

In May 2003, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards No. 150,“Accounting for Certain Instruments with Characteristics of Both 

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Liabilitiesand Equity” (“SFAS 150”), which establishes standards for how an issuerclassifies and measures certain financial instruments with characteristics ofboth liabilities and equity. SFAS 150 requires that an issuer classify afinancial instrument that is within its scope, which may have previously beenreported as equity, as a liability (or an asset in some circumstances). Thisstatement is effective for financial instruments entered into or modified afterMay 31, 2003, and otherwise is effective at the beginning of the firstinterim period beginning after June 15, 2003. In October 2003, theFASB deferred implementation of paragraphs 9 and 10 of SFAS 150 regardingparent company treatment of minority interest for certain limited life entitiesand certain other mandatorily redeemable financial instruments. This deferralis for an indefinite period. The adoption of SFAS 150 did not have amaterial impact on our financial position or results of operations.

In December 2003, theSecurities and Exchange Commission released Staff Accounting Bulletin (“SAB”) No. 104,“Revenue Recognition”, which supersedes SAB 101, “Revenue Recognition inFinancial Statements.” SAB 104 clarifies existing guidance regarding revenuesfor contracts which contain multiple deliverables to make it consistent withEmerging Issues Task Force (“EITF”) No. 00-21, “Accounting forRevenue Arrangements with Multiple Deliverables.” The adoption of SAB 104did not have a material impact on our revenue recognition policies, nor ourfinancial 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 actual outcomesand 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, and otherrisks and uncertainties, including those enumerated and described under “RiskFactors” in our Form 10-K, as filed with the Securities and ExchangeCommission, for the fiscal year ended December 31, 2003. The foregoingshould not be construed as an exhaustive list of all factors which could causeactual results to differ materially from those expressed in forward-lookingstatements made by us.

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

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

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 credit agreementapproximates fair value as these borrowings have variable rates that reflectcurrently available terms and conditions for similar debt. To 

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decreasethe risk associated with interest rate increases, we entered into interest rateswap agreements for a portion of this variable rate debt. These swaps aredesignated as cash flow hedges of variable future cash flows associated withour long-term debt.

These swap agreements havenotional amounts of $56.8 million and $46.8 million at June 30,2004. Under the terms of these agreements, we receive three-month LIBOR and paya fixed rate of 3.15% and 3.89%, respectively. The net effect of the hedges isto record interest expense at fixed rates of 5.53% and 6.27%, respectively, asthe debt incurs interest based on three-month LIBOR plus 2.38%. The swapagreements mature in the second quarter of 2007.

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

The outstanding interestrate swaps expose us to credit risk in the event that the counterparties to theagreements do not or cannot meet their obligations. The notional amount is usedto measure interest to be paid or received and does not represent the amount ofexposure to credit loss. The loss would be limited to the amount that wouldhave been received, if any, over the remaining life of the swap agreements. Thecounterparties to the swaps are major financial institutions and we expect thecounterparties to be able to perform their obligations under the swaps. We usederivative financial instruments for hedging purposes only and not for tradingor 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 disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our Exchange Act reports is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management necessarily was required to apply itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures. Also, we have investments in certain unconsolidated entities. Aswe do not control or manage these entities, our disclosure controls andprocedures with respect to such entities are necessarily substantially morelimited than those we maintain with respect to our consolidated subsidiaries. Theseunconsolidated entities are not considered material to our consolidatedfinancial position or results of operations.

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

There has been no changein our internal controls over financial reporting during our most recent fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, our internal controls over financial reporting.

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**PART II—OTHER INFORMATION**

**ITEM 1.**   LEGAL PROCEEDINGS

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

**ITEM 2.**   CHANGES IN SECURITIES AND USEOF PROCEEDS

Not applicable.

**ITEM 3.**   DEFAULTS UPON SENIOR SECURITIES

Not applicable.

**ITEM 4.**   SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS

(a)          The Annual Meeting ofStockholders of Alliance Imaging, Inc. was held on May 25, 2004.

(b)         The following nomineeswere elected as Class III Directors for a three-year term expiring at the2007 Annual Meeting: Michael W. Michelson, James C. Momtazee and Edward L.Samek. The Class I Directors, James H. Greene Jr. and Anthony B. Helfet,whose terms expire at the 2006 Annual Meeting, and the Class II Directors,Neil F. Dimick, Henry R. Kravis and Paul S. Viviano, whose terms expire atthe 2005 Annual Meeting, continue to serve on our Board of Directors.

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

**Proposal and VoteTabulation**
| ** **                                                                                                                                | ** ** | **Votes Cast** | ** ** | ** **  | ** ** | **Broker**  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------|------------|-------------|------------|
| ** **                                                                                                                                | ** ** | **For**             | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-votes** | ** ** |
| Approval of the appointment of Deloitte &  Touche LLP as independent auditors for the fiscal year ending December 31,  2004 |       | 46,846,881          |       | 639,877     |       | 1,200       |       |   | — |   |   |
|                                                                                                                                           |            |                     |            |             |            |             |            |  |  |  |  |

 

**Election of Directors**
| **Director**         | ** ** | ** ** | ** ** | **Votes Received** | ** ** | **Votes Withheld** | ** ** |
|----------------------|------------|------------|------------|-------------------------|------------|-------------------------|------------|
| Michael W. Michelson |       |       | 45,093,083 |                    |       |                    | 2,394,875  |   |   |
| James C. Momtazee    |       |       | 45,073,333 |                    |       |                    | 2,414,625  |   |   |
| Edward L. Samek      |       |       | 47,327,573 |                    |       |                    | 160,385    |   |   |

 

**ITEM 5.**   OTHER INFORMATION

On July 1, 2004, weannounced that R. Brian Hanson will become our executive vice president andchief financial officer effective July 26, 2004.

**ITEM 6.**   EXHIBITS AND REPORTS ON FORM 8-K

(a)           Exhibits
| Exhibit No. | ** ** | ** ** | **Description** | ** **                                                         |
|------------------|------------|------------|-----------------|--------------------------------------------------------------------|
|             | 3.1        |       |            | Amended and Restated  Certificate of Incorporation of Alliance.(7) |
|                  |            |            |                 |                                                                    |  |  |

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|        | 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)                                                                                                                                          |
|   | 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)                                                                                                     |
|   | 10.13 |   |   | Amended and Restated  Employment Agreement dated June 6, 1994 between Alliance and Terry A.  Andrues.(5)                                                                                                     |
|   | 10.14 |   |   | Amended and Restated  Employment Agreement dated as of June 6, 1994 between Alliance and  Cheryl A. Ford.(5)                                                                                                 |
|   | 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)                                                                                                 |

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|        | 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)                                                                                                                                   |
|   | 10.22 |   |   | Agreement and Plan of  Merger dated as of September 13, 1999 between Alliance and View  Acquisition Corporation, as amended.(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) |
|   | 10.28 |   |   | Amendment to Amended and  Restated Employment Agreement, dated as of May 9, 2003, between Alliance  and Cheryl A. Ford.(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)            |
|   | 21.1  |   |   | List of subsidiaries.(11)                                                                                                                                                        |
|   | 31    |   |   | Certifications of Chief  Executive Officer and Chief Financial Officer pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.(13)                                      |
|   | 32    |   |   | Certifications of Chief  Executive Officer and Chief Financial Officer pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.(13)                                      |

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(1)   Incorporatedby reference 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.

(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.

(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.

(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.

(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.

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(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.

(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.

(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.

(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.

(13)   Filed herewith

(b)          Reports on Form 8-Kin the second quarter of 2004:

On May 6, 2004, we filed a Form 8-Kcontaining a press release issued on May 5, 2004, which sets forth ourresults of operations for the quarter ended March 31, 2004.

On July 6, 2004, we filed a Form 8-Kcontaining a press release issued on July 1, 2004, announcing that R.Brian Hanson will become our executive vice president and chief financialofficer effective July 26, 2004.

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                     | **Alliance Imaging, Inc.** |
|---------------------|----------------------------|
| August 9, 2004 | By:                        | /s/ Paul S. Viviano |   |
|                |                       |   | Paul S. Viviano |
|                |                       | * * | *President and Chief Executive Officer* |
|                |                       | * * | *(Principal Executive Officer)* |
| August 9, 2004 | By:                        | /s/ R. Brian Hanson |   |
|                |                       |   | R. Brian Hanson |
|                |                       | * * | *Executive Vice President and* |
|                |                       | * * | *Chief Financial Officer* |
|                |                       | * * | *(Principal Financial Officer)* |
| August 9, 2004 | By:                        | /s/ Howard K. Aihara |   |
|                |                       |   | Howard K. Aihara |
|                |                       | * * | *Vice President and Corporate Controller* |
|                |                       | * * | *(Principal Accounting Officer)* |
|                     |                            |  |  |  |

 

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