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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File Number: 1-16609

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

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

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

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 31, 2003:

Common Stock, $.01 par value, 47,958,987 shares

ALLIANCE IMAGING, INC.
FORM 10-Q
September 30, 2003
Index

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLIANCE IMAGING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands)

See accompanying notes.

2

ALLIANCE IMAGING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share amounts)

See accompanying notes.

3

ALLIANCE IMAGING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

See accompanying notes.

4

ALLIANCE IMAGING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2003

(Unaudited)

(dollars in thousands, except per share amounts)

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

        Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared by Alliance Imaging, Inc. (the "Company") in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements for the year ended December 31, 2002.

        Principles of Consolidation—The accompanying unaudited condensed consolidated financial statements of the Company include the assets, liabilities, revenues and expenses of all majority owned subsidiaries over which the Company exercises control, and for which control is other than temporary. Intercompany transactions have been eliminated. Investments in non-consolidated affiliates are accounted for under the equity method.

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

2. Recent Accounting Pronouncements

        Accounting for Costs Associated with Exit or Disposal Activities—In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force Issue 94-3 ("EITF 94-3"), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The Company adopted the provisions of SFAS 146 for exit or disposal activities initiated after December 31, 2002 which did not have a material effect on the Company's consolidated financial position or results of operations.

        Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on required disclosures by a guarantor in its financial statements about obligations under certain guarantees that it has issued and clarifies the need for a guarantor to recognize, at the inception of certain guarantees, a liability for the

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fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 while the provisions of the disclosure requirements are effective for financial statements of interim or annual reports ending after December 15, 2002. The Company adopted the disclosure provisions of FIN 45 during the fourth quarter of fiscal 2002 and the recognition provisions on January 1, 2003. The adoption of FIN 45 did not have a material effect on the Company's consolidated financial position or results of operations.

        Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123—In December 2002, the FASB Issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123." This statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of SFAS No. 148 were adopted on December 31, 2002.

        The Company accounts for stock based compensation awards using the intrinsic value method prescribed under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related interpretations. Other than the awards discussed in Note 7, all other employee stock-based awards were granted with an exercise price equal to the market value of the underlying common stock on the date of grant and no compensation cost is reflected in net income from operations for those awards.

        SFAS 123 requires presentation of pro forma information regarding net income and earnings per share determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that statement. The fair value for these options was estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the third quarter of 2003: risk-free interest rates of 3.43%; no dividend yield; volatility factors of the expected market price of the Company's common stock of 86.3%; and a weighted average expected life of the options of 6.50 years. The Company granted no stock options in the third quarter of 2002. The Company used the following weighted average assumptions for the first nine months of 2002 and 2003, respectively: risk-free interest rates of 4.44% and 3.25%; no dividend yield; volatility factors of the expected market price of the Company's common stock of 71.9% and 78.0%; and a weighted average expected life of the options of 6.50 years in each year. The weighted average fair value of options granted during the third quarter of 2002 and 2003 is zero and $2.66, respectively, and $7.35 and $3.32 in the first nine months of 2002 and 2003, respectively.

        The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different

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from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

        For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' expected vesting period. Had compensation cost for the Company's stock option plan been determined based on the estimated fair value at the grant dates for awards under the plan consistent with the fair value method of SFAS No. 123 utilizing the Black-Scholes option-pricing model, the Company's net income and basic and diluted earnings per share for the quarters and nine months ended September 30, would have approximated the pro forma amounts indicated below:

        Consolidation of Variable Interest Entities—In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which addresses consolidation by a business of variable interest entities in which it is the primary beneficiary. FIN 46 is effective immediately for certain disclosure requirements and variable interest entities created after January 31, 2003, and in fiscal 2004 for all other variable interest entities. The Company expects that the provisions of FIN 46 will not have a material effect on its consolidated financial position or results of operations upon adoption since the Company currently has no variable interest entities.

        Amendment of Statement 133 on Derivative Instruments and Hedging Activities—In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies existing accounting pronouncements and addresses financial accounting and reporting for derivative or other hybrid instruments. This statement requires that contracts with comparable characteristics be accounted for similarly. This statement is effective for

7

contracts entered into or modified after June 30, 2003. The Company believes the adoption of SFAS No. 149 will not have a material effect on the Company's consolidated financial position or results of operations since the Company currently has no derivative instruments.

        Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity—In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity," which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company believes the adoption of SFAS No. 150 will not have a material effect on its consolidated financial position or results of operations since the Company currently has no instruments that meet this definition.

3. Impairment Charge

        The Company has recently seen an increase in the competitive climate in the MRI industry, resulting in an increase in activity by original equipment manufacturers selling systems directly to certain of the Company's clients. This has caused an increase in the number of the Company's clients deciding not to renew its contracts, and as a result, the Company's MRI revenues have declined. These events triggered an acceleration of the review of the recoverability of the carrying value of certain equipment, goodwill, and other intangible assets according to the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets") ("SFAS 144") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Due to the factors noted above, in the third quarter of 2003 the Company recognized a non-cash impairment charge totaling $73,225 associated with goodwill and other intangible assets and certain equipment in accordance with the provisions of SFAS 142 and 144, and an impairment of an investment in a joint venture, the components of which are described in more detail below.

        As described in Note 4, the Company recorded an impairment charge of $41,916 under SFAS 142 related to goodwill and an impairment charge of $802 under SFAS 144 related to certain customer contract intangible assets.

        The Company evaluated the recoverability of the carrying amount of certain long-lived assets, specifically its 1.0 Tesla and 0.2 Tesla MRI systems, as a result of the decline in client demand for these systems. An impairment is assessed when the undiscounted expected future cash flows derived from the asset is less than its carrying amount. The Company used its best judgment based upon the most current facts and circumstances when applying these impairment rules. Based upon the analysis performed on the 1.0 Tesla and 0.2 Tesla MRI systems, an impairment charge of $22,793 was recognized to reduce certain of these assets to their fair market value as of September 30, 2003. The Company revised its estimate of residual values on all of its MRI equipment from 20% to 10%. In

8

addition, the Company also changed its estimate of useful lives of 1.5 Tesla MRI systems from 8 years to 7 years. Both of these changes in estimates will be recognized on a prospective basis.

        In the third quarter of 2003, the Company recognized a $7,714 impairment charge relating to an other than temporary decline in the fair value of the Company's investment in a joint venture. The Company concluded that its investment was other than temporarily impaired because the Company's carrying value of the investment exceeded the calculated fair value of the investment and the prospects for recovery are considered weak. The fair value of the investment was based upon the Company's best estimate of the expected discounted future cash flows of the joint venture.

4. Goodwill and Other Intangible Assets

        Changes in the carrying amount of goodwill are as follows:

        Intangible assets consisted of the following:

        The Company reviews the recoverability of the carrying value of goodwill on an annual basis or more frequently when an event occurs or circumstances change to indicate an impairment of these assets has possibly occurred. Goodwill is allocated to the Company's various reporting units which represent the Company's ten geographical regions. The Company compares the fair value of the reporting unit to its carrying amount to determine if there is potential impairment. The implied fair value for goodwill is determined based on the fair value of assets and liabilities of the respective reporting units based on discounted cash flows, market multiples, or appraised values as appropriate.

9

        Based on the factors and valuation performed in accordance in SFAS 142 described in Note 3, the Company recognized a goodwill impairment charge of $41,916 in three of its reporting units.

        In the third quarter of 2003, because of the indications of impairment described in Note 3, in accordance with SFAS 144 certain intangible assets acquired in May 1998 were determined to be impaired, and the Company recorded a charge of $802 to two of its reporting units in order to record these assets at fair market value.

        Based upon the SFAS 144 study performed, the Company changed its estimate for the amortization period of customer contracts from a weighted average useful life of 19 years to 15 years. This change in estimate will be recognized on a prospective basis. Other intangible assets subject to amortization were determined to have a weighted average useful life of six years. Amortization expense for intangible assets subject to amortization was $564 and $676 for the quarters ended September 30, 2002 and 2003, respectively, and $1,697 and $2,029 for the nine months ended September 30, 2002 and 2003, respectively. The intangible assets not subject to amortization represent certificates of need and regulatory authority rights which do not have predetermined useful lives.

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

5. Other Accrued Liabilities

        Other accrued liabilities consisted of the following:

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6. Long-Term Debt

        Long-term debt consisted of the following:

7. Non-Cash Stock-Based Compensation

        In November 2000, the Company granted stock options to certain employees at exercise prices below the fair value of the Company's common stock, of which 78,000 options are outstanding at September 30, 2003. The exercise prices of these options and the fair value of the Company's common stock on the grant date were $5.60 and $9.52 per share, respectively. Compensation expense of $1,097 is being recognized on a straight-line basis over the vesting period of the options. The Company recorded non-cash stock-based compensation of $18 in each of the quarters ended September 30, 2002 and 2003, and $282 and $54 in the first nine months of 2002 and 2003, respectively, with an offset to additional paid-in deficit.

        On June 20, 2001, the Company's compensation committee authorized the Company to amend the option agreements granted under its 1999 Equity Plan on November 2, 1999 to reduce the performance targets for the performance options. One-half of these options granted under the 1999 Equity Plan are "performance options." These options vest on the eighth anniversary of the grant date if the option holder is still an employee, but the vesting accelerates if the Company meets the operating performance targets specified in the option agreements. As a result of the amendment, if the Company achieves the reduced performance targets but does not achieve the original performance targets, and an option holder terminates employment prior to the eighth anniversary of the option grant date, the Company would be required to record a non-cash stock-based compensation charge equal to the amount by which the actual value of the shares subject to the performance option on the date of the amendment exceeded the option's exercise price. Management estimates that the Company could incur an additional $1,100 to $2,600 in the aggregate of these non-cash stock-based compensation charges over the next 2¹/4 years. These charges, however, may not be evenly distributed over each of those 2¹/4 years or over the four quarters in any one year, depending upon the timing of employee turnover and the number of shares subject to the options held by departing employees. For each of the quarters and nine months ended September 30, 2002 and 2003, the Company recorded $400 and $1,200, respectively, in non-cash stock-based compensation as a result of the amendment.

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8. Income Taxes

        For the third quarter and nine months ended September 30, 2003, the Company recorded an income tax benefit of $11,292 and $2,402, or 18.2% and 5.9%, of the Company's pretax loss, respectively. The Company recorded a lower than statutory income tax benefit because a portion of the impairment charges discussed in Note 3 related to non-deductible goodwill.

9. Earnings Per Common Share

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

10. Commitments and Contingencies

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

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

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        The Company guarantees a portion of a loan on behalf of an unconsolidated investee under an agreement executed prior to 2002. The maximum potential future payment under this financial guarantee is $429 at September 30, 2003. The Company has not recorded an obligation for this guarantee.

11. Related-Party Transactions

        The Company paid to Kohlberg Kravis Roberts & Co. ("KKR") management fees of $163 and $488 for each of the quarters and nine months ended September 30, 2002 and 2003, respectively, and will continue to receive financial advisory services from KKR on an ongoing basis.

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

Overview

        We are a leading national provider of diagnostic imaging services, with 78% of our revenues for the first nine months of 2003 derived from magnetic resonance imaging, or MRI. We provide imaging services primarily to hospitals and other healthcare providers on a shared and full-time service basis, in addition to operating a growing number of free-standing imaging centers. Our services normally include the use of our imaging systems, technologists to operate the systems, equipment maintenance and upgrades and management of day-to-day operations. We had 468 diagnostic imaging systems, including 365 MRI systems, and 1,339 clients in 45 states at September 30, 2003.

        Approximately 88% of our revenues for the first nine months of 2003 were generated by providing services to hospitals and other healthcare providers, which we refer to as wholesale revenues. Our wholesale revenues are typically generated from contracts that require our clients to pay us based on the number of scans we perform, although some pay us a flat fee for a period of time regardless of the number of scans we perform. These payments are due to us independent of our clients' receipt of reimbursement from third-party payors. We typically deliver our services for a set number of days per week through exclusive, long-term contracts with hospitals and other healthcare providers. These contracts, which are usually two to three years in length, are typically non-cancelable by our clients and often contain renewal provisions. Certain of these contracts, however, can be canceled if the client purchases its own in-house system. We price our contracts based on the type of system used, the scan volume, and the number of ancillary services provided. Our pricing is also influenced by competitive market pressures.

        Approximately 12% of our revenues for the nine months ended September 30, 2003 were generated by providing services directly to patients from our sites located at or near hospital or other healthcare provider facilities, which we refer to as retail revenues. Our revenues from these sites are generated from direct billings to patients or their third-party payors, which are recorded net of contractual discounts and other arrangements for providing services at discounted prices. We typically charge a higher price per scan under retail billing than we do under wholesale billing.

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

        The principal components of our selling, general and administrative expenses are sales force compensation, marketing costs, corporate overhead costs, provision for doubtful accounts, and minority interest expense.

        We have recently seen an increase in the competitive climate in the MRI industry, resulting in an increase in activity by original equipment manufacturers selling systems directly to certain of our clients. This has caused an increase in the number of our clients deciding not to renew their contracts, and as a result, our MRI revenues have declined. These events triggered an acceleration of the review of the recoverability of the carrying value of certain equipment, goodwill, and other intangible assets according to the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets") ("SFAS 144") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Due to the factors noted above, in the third quarter of 2003 we recognized a non-cash impairment charge totaling $73.2 million associated with goodwill and other intangible assets and certain equipment in accordance with the provisions of SFAS 142 and 144, and an impairment of an investment in a joint venture, the components of which are described in more detail below.

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        Because of the factors noted above, in the third quarter of 2003, we engaged an independent appraiser to evaluate potential impairment of identified intangible assets in accordance with SFAS 144. Based upon this study, we determined that certain intangible assets acquired in May 1998 were impaired, and recorded a charge of $0.8 million to two of our reporting units in order to properly record these assets at fair market value.

        We also evaluated the recoverability of the carrying amount of certain long-lived assets, specifically our 1.0 Tesla and 0.2 Tesla MRI systems, as a result of the decline in client demand for these systems in accordance with SFAS 144. An impairment is assessed when the undiscounted expected future cash flow derived from the asset is less than its carrying amount. We used our best judgment based upon the most current facts and circumstances when applying these impairment rules. Based upon the analysis performed on the 1.0 Tesla and 0.2 Tesla MRI systems, an impairment loss of $22.8 million was recognized to reduce certain of these impaired assets to their fair market value as of September 30, 2003. We revised our estimate of residual values on all of our MRI equipment from 20% to 10%. In addition, we also changed our estimate of useful lives of 1.5 Tesla MRI systems from 8 years to 7 years. Both of these changes in estimates will be recognized on a prospective basis.

        In addition, we reviewed the recoverability of the carrying value of goodwill based on our judgment that an event had occurred or circumstances had changed to indicate an impairment of these assets had possibly occurred in accordance with SFAS 142. Goodwill is allocated to our various reporting units which represent our ten geographical regions. We compare the fair value of the reporting unit to our carrying amount to determine if there is potential impairment. The implied fair value for goodwill is determined based on the fair value of assets and liabilities of the respective reporting units based on discounted cash flows, market multiples, or appraised values as appropriate. In the third quarter of 2003, based upon a study prepared by an independent appraiser, we recognized a goodwill impairment charge of $41.9 million in three of our reporting units.

        We further recognized a $7.7 million impairment charge relating to an other than temporary decline in the fair value of our investment in a joint venture. We concluded that our investment was other than temporarily impaired because our carrying value of the investment exceeded the calculated fair value of the investment and the prospects for recovery are considered weak. The fair value of the investment was based upon our best estimate of the expected discounted future cash flows of the joint venture.

        For the nine months ended September 30, 2003, we recorded $1.3 million in non-cash stock-based compensation primarily as a result of amending certain stock option agreements in June 2001 to reduce performance targets and granting options in November 2000 to purchase our common stock at an exercise price below its fair value. One-half of the options granted under our 1999 Equity Plan are "performance options." These options vest on the eighth anniversary of the grant date if the option holder is still our employee, but the vesting accelerates if we meet the operating performance targets specified in the option agreements. On June 20, 2001, our compensation committee authorized us to enter into amended option agreements to reduce the performance targets for the performance options. As a result, if we achieve the reduced performance targets but do not achieve the original performance targets, and an option holder terminates employment prior to the eighth anniversary of the option grant date, we would be required to record a non-cash stock-based compensation charge equal to the amount by which the actual value of the shares subject to the performance option on the date of the amendment exceeded the option's exercise price. We estimate that we will incur an additional $1 million to $3 million in the aggregate of non-cash stock-based compensation charges over the next 2¹/4 years as a result of amending option agreements to reduce performance targets. These charges, however, may not be evenly distributed over each of those 2¹/4 years or over the four quarters in any one year, depending upon the timing of employee turnover and the number of shares subject to the options held by departing employees.

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Seasonality

        We experience seasonality in the revenues and margins generated for our services. First and fourth quarter revenues are typically lower than those from the second and third quarters. First quarter revenue is affected primarily by fewer calendar days and inclement weather, the results of which are fewer patient scans during the period. Fourth quarter revenue is affected primarily by holiday and client and patient vacation schedules and inclement weather, the results of which are fewer patient scans during the period. The variability in margins is higher than the variability in revenues due to the fixed nature of our costs.

Results of Operations

Quarter Ended September 30, 2003 Compared to Quarter Ended September 30, 2002

        Revenue decreased $0.2 million, or 0.2%, to $105.7 million in the third quarter of 2003 compared to $105.9 million in the third quarter of 2002 primarily due to lower scan-based MRI revenue and lower non-scan based revenue and other revenue, offset by higher positron emission tomography, or PET, revenue. Scan-based MRI revenue in the third quarter of 2003 decreased $5.7 million, or 7.0%, compared to the third quarter of 2002 primarily as a result of a 4.7% decrease in our MRI scan volume. We attribute this decrease to a decline in average daily scan volume per MRI and a decrease in the average price per MRI scan, partially offset by an increase in the average number of additional scan-based systems in operation. The average daily scan volume per MRI system decreased to 9.5 in the third quarter of 2003 from 9.9 in the third quarter of 2002 primarily as a result of some higher volume clients choosing not to renew their contracts and our providing more days of service to existing clients than their growth in scan volume. The average price per MRI scan decreased 2.4% to $357.6 per scan in the third quarter of 2003 compared to $366.4 per scan in the third quarter of 2002. Non-scan based MRI revenue and other revenue in the third quarter of 2003 decreased $1.7 million, or 9.9%, primarily due to lower short-term MRI rental revenue. PET revenue in the third quarter of 2003 increased $7.1 million, or 88.3%, compared to the third quarter of 2002 primarily due to an increase in the number of PET systems in service.

        We had 365 MRI systems at September 30, 2003 compared to 353 MRI systems at September 30, 2002. We had 38 PET and PET/CT systems at September 30, 2003 compared to 22 PET systems at September 30, 2002. These increases were primarily a result of planned system additions to satisfy client demand.

        Operating expenses, excluding depreciation, increased $2.7 million, or 5.8%, to $49.7 million in the third quarter of 2003 compared to $47.0 million in the third quarter of 2002. Maintenance related costs increased $1.1 million, or 12.5%, primarily due to an increase in the average repair cost per system and an increase in the number of systems in service. Compensation and related employee expenses increased $0.8 million, or 3.4%, primarily as a result of an increase in technologists' wage rates and the number of employees necessary to support new systems in operation. Medical supplies increased $0.8 million, or 27.2%, 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. Management contract expenses increased $0.6 million, or 33.2%, primarily as a result of an increase in expenses related to a new joint venture. Insurance expense increased $0.4 million, or 68.1%, primarily due to an increase in insurance premiums. Outside medical services increased $0.3 million, or 16.1%, primarily as a result of an increase in outside radiologists services associated with PET. Equipment rental expense decreased $1.6 million, or 72.2%, resulting from a lower number of leased MRI systems and transportation units in operation. All other operating expenses, excluding depreciation, increased $0.3 million, or 7.3%, primarily due to the increase in the number of systems in service. Operating expenses, excluding depreciation, as a percentage of revenue, increased to 47.1% in the third quarter of 2003 from 44.4% in the third quarter of 2002 as a result of the factors described above.

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        Selling, general and administrative expenses increased $0.7 million, or 6.1%, to $12.2 million in the third quarter of 2003 compared to $11.5 million in the third quarter of 2002. Professional services expenses increased $1.4 million, or 171.4%, in the third quarter of 2003 compared to the third quarter of 2002 primarily due to management consulting fees and legal costs associated with the negotiation with collective bargaining representatives over the terms and conditions of employment of drivers in our Mid-Atlantic and New England Regions. This increase was offset by a decrease in compensation and related employee expenses of $0.9 million, or 13.5%, primarily due to a reduction in bonus costs. All other selling, general and administrative expenses increased $0.2 million, or 6.7%. The provision for doubtful accounts decreased as a percentage of revenue to 0.8% in the third quarter of 2003 compared to 0.9% in the third quarter of 2002. Selling, general and administrative expenses as a percentage of revenue were 11.5% and 10.8% in the third quarter of 2003 and 2002, respectively.

        We recorded employment agreement expenses of $0.5 million in the third quarter of 2003 related to payments under an amendment to an employment agreement with our former chairman of the board. We expect to incur approximately $2 million of costs over the remaining 20 month term of the amended employment agreement.

        We recorded severance and related costs of $0.1 million in the third quarter of 2003 primarily related to severance and settlement payments made as a result of continued reductions-in-force. We expect to incur severance and related costs in future quarters as we continue to review and adjust our resource needs.

        We recorded non-cash stock-based compensation of $0.4 million in the third quarter of both 2003 and 2002, primarily as a result of amending certain stock option agreements in June 2001 to reduce performance targets.

        We recorded non-cash impairment charges of $73.2 million in the third quarter of 2003, related to the write down of certain MRI equipment, goodwill and other intangible assets under the provisions of SFAS 142 and SFAS 144 as these assets carried book values which exceeded their fair value, and an other than temporary decline in the fair value of our investment in a joint venture.

        Depreciation expense increased $2.3 million, or 13.3%, to $20.0 million in the third quarter of 2003 compared to $17.6 million in the third quarter of 2002, principally due to a higher amount of depreciable assets associated with MRI system additions and upgrades, as well as an increase in the number of PET systems, which have a shorter depreciable life than MRIs.

        Amortization expense increased $0.1 million, or 19.9%, to $0.7 million in the third quarter of 2003 compared to $0.6 million in the third quarter of 2002.

        Interest expense, net, decreased $0.9 million, or 7.7%, to $10.9 million in the third quarter of 2003 compared to $11.8 million in the third quarter of 2002, primarily due to lower average debt balances and lower average interest rates.

        In the third quarter of 2003, we recorded an income tax benefit of $11.3 million, which was 18.2% of our pretax loss. We recorded a lower than statutory income tax benefit because a portion of the impairment charges related to non-deductible goodwill. The provision for income taxes in the third quarter of 2002 was $7.1 million, resulting in an effective tax rate of 41.5%. This effective tax rate was higher than statutory rates primarily as a result of state income taxes.

        Our net loss was $(50.7) million, or $(1.06) per share, in the third quarter of 2003 compared to net income of $10.0 million, or $0.20 per share on a diluted basis, in the third quarter of 2002.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002

        Revenue increased $5.2 million, or 1.7%, to $313.7 million in the first nine months of 2003 compared to $308.5 million in the first nine months of 2002 primarily due to higher PET revenue,

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offset by lower scan-based MRI revenue and lower non-scan based MRI revenue and other revenue. PET revenue in the first nine months of 2003 increased $20.3 million, or 101%, compared to the first nine months of 2002 primarily as a result an increase in the number of PET systems in service. Scan-based MRI revenue in the first nine months of 2003 decreased $14.7 million, or 6.1%, primarily as a result of a 5.0% decrease in our MRI scan volume. We attribute this decrease to a decline in average daily scan volume per MRI and a decrease in the average price per MRI scan, partially offset by an increase in the average number of additional scan-based systems in operation. The average daily scan volume per MRI system decreased to 9.5 in the first nine months of 2003 from 9.9 in the first nine months of 2002 primarily as a result of some higher volume clients choosing not to renew their contracts and our providing more days of service to existing clients than their growth in scan volume. The average price per MRI scan decreased 1.1% to $362.3 per scan in the first nine months of 2003 compared to $366.4 per scan in the corresponding period of 2002 primarily as a result of price reductions granted to certain clients upon renewal of their contracts and competitive pricing pressures. Non-scan based MRI revenue and other revenue in the first nine months of 2003 decreased $0.3 million, or 0.7%, primarily due to lower short-term MRI rental revenue.

        We had 365 MRI systems at September 30, 2003 compared to 353 MRI systems at September 30, 2002. We had 38 PET and PET/CT systems at September 30, 2003 compared to 22 PET systems at September 30, 2002. These increases were primarily a result of planned system additions to satisfy client demand.

        Operating expenses, excluding depreciation, increased $12.0 million, or 8.9%, to $147.9 million in the first nine months of 2003 compared to $135.9 million in the first nine months of 2002. Compensation and related employee expenses increased $4.0 million, or 5.7%, primarily as a result of an increase in technologists' wage rates and the number of employees necessary to support new systems in operation. Medical supplies increased $3.0 million, or 37.8%, 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 related costs increased $2.4 million, or 9.0%, primarily due to an increase in the average repair cost per system and an increase in the number of systems in service. Equipment rental expense decreased $2.1 million, or 41.7%, resulting from a lower number of leased MRI systems and transportation units in operation. Outside medical services increased $1.2 million, or 29.7%, primarily as a result of an increase in outside radiologists services associated with PET. Insurance expense increased $1.2 million, or 70.5%, primarily due to an increase in insurance premiums. Management contract expenses increased $0.6 million, or 11.6%, primarily as a result of an increase in expenses related to a new joint venture. Fuel expenses increased $0.5 million, or 18.5%, primarily due to higher diesel fuel prices in the first nine months of 2003. Equipment rental expense decreased $2.1 million, or 41.7%, resulting from a lower number of leased MRI systems and transportation units in operation. All other operating expenses, excluding depreciation, increased $1.2 million, or 10.2%, primarily due to the increase in the number of systems in service. Operating expenses, excluding depreciation, as a percentage of revenue, increased to 47.1% in the first nine months of 2003 from 44.0% in the first nine months of 2002 as a result of the factors described above.

        Selling, general and administrative expenses increased $1.9 million, or 5.6%, to $36.5 million in the first nine months of 2003 compared to $34.6 million in the first nine months of 2002. Professional services expenses increased $2.4 million, or 125% in the first nine months of 2003 compared to the first nine months of 2002 primarily due to management consulting fees and legal costs associated with the negotiation with collective bargaining representatives over the terms and conditions of employment of drivers in our Mid-Atlantic and New England Regions. Compensation and related employee expenses increased $0.7 million, or 3.2%, primarily due to increases in executive management, retail scheduling and billing, and sales and marketing, partially offset by a decrease in bonus costs. These increases were offset by a decrease in the provision for doubtful accounts of $1.9 million, or 48.3%, primarily as a result of an improvement in collections of older accounts receivable. The provision for doubtful

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accounts decreased as a percentage of revenue to 0.6% in the first nine months of 2003 compared to 1.3% in the corresponding period of 2002. All other selling, general and administrative expenses increased $0.8 million, or 9.8%. Selling, general and administrative expenses as a percentage of revenue were 11.6% and 11.2% in the first nine months of 2003 and 2002, respectively.

        We recorded employment agreement expenses of $2.1 million in the first nine months of 2003 related to payments under an amendment to an employment agreement with our former chairman of the board. We expect to incur approximately $2 million of costs over the remaining 20 months of the amended employment agreement.

        We recorded severance and related costs of $1.9 million in the first nine months of 2003 primarily related to severance and settlement payments made as a result of a reductions-in-force. We expect to incur severance and related costs in future quarters as we continue to review and adjust our resource needs.

        We recorded non-cash stock-based compensation of $1.3 million and $1.5 million in the first nine months of 2003 and 2002, respectively, primarily as a result of amending certain stock option agreements in June 2001 to reduce performance targets.

        We recorded non-cash impairment charges of $73.2 million in the first nine months of 2003, related to the write down of certain MRI equipment, goodwill and other intangible assets under the provisions of SFAS 142 and SFAS 144 as these assets carried book values which exceeded their fair value, and an other than temporary decline in the fair value of our investment in a joint venture.

        Depreciation expense increased $4.9 million, or 9.4%, to $56.6 million in the first nine months of 2003 compared to $51.7 million in the first nine months of 2002, principally due to a higher amount of depreciable assets associated with MRI system additions and upgrades, as well as an increase in the number of PET systems which have a shorter depreciable life than MRIs.

        Amortization expense increased $0.3 million, or 19.6%, to $2.0 million in the first nine months of 2003 compared to $1.7 million in the first nine months of 2002.

        Interest expense, net, decreased $3.0 million, or 8.4%, to $33.1 million in the first nine months of 2003 compared to $36.1 million in the first nine months of 2002, primarily due to lower average debt balances and lower average interest rates.

        In the first nine months of 2003, we recorded an income tax benefit of $2.4 million, which was 5.9% of our pretax loss. We recorded a lower than statutory income tax benefit because a portion of the impairment charges related to non-deductible goodwill. The provision for income taxes in the first nine months of 2002 was $19.5 million, resulting in an effective tax rate of 41.5%. This effective tax rate was higher than statutory rates primarily as a result of state income taxes.

        Our net loss was $(38.1) million, or $(0.80) per share in the first nine months of 2003 compared to net income of $27.5 million, or $0.55 per share on a diluted basis, in the first nine months of 2002.

Liquidity and Capital Resources

        Our primary source of liquidity is cash provided by operating activities. Cash provided from operating activities totaled $96.5 million and $97.8 million in the first nine months of 2003 and 2002, respectively. Our ability to generate cash flow is affected by numerous factors, including demand for our diagnostic imaging services, the price we can charge our clients for providing diagnostic imaging services, and the costs to us of providing these services. In addition, as of September 30, 2003, we had $147.2 million of available borrowings under our revolving line of credit.

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

•

purchasing new systems;



•

replacing less advanced systems with new systems;



•

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



•

purchasing systems upon termination of operating leases.

        Capital expenditures totaled $69.6 million and $50.3 million in the first nine months of 2003 and 2002, respectively. During the first nine months of 2003, we purchased 25 MRI systems, 10 PET or PET/CT systems, and five CT systems, including replacement systems. Our decision to purchase a new system is typically predicated on obtaining new or extending existing client contracts, which serve as the basis of demand for the new system. We expect to purchase additional systems in 2003 and to finance substantially all of these purchases with our available cash, cash provided by operating activities and our revolving line of credit. We expect capital expenditures to total approximately $85 million to $90 million in 2003.

        We believe that, based on current levels of operations and anticipated growth, our cash provided by operating activities, together with other available sources of liquidity, including amounts available under our revolving loan facility, will be sufficient over the next year to fund anticipated capital expenditures and make required payments of principal and interest on our debt, including payments due under our credit agreement.

Recent Accounting Pronouncements

        In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force Issue 94-3 ("EITF 94-3"), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. We adopted the provisions of SFAS 146 for exit or disposal activities initiated after December 31, 2002 which did not have a material effect on our consolidated financial position or results of operations.

        In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on required disclosures by a guarantor in its financial statements about obligations under certain guarantees that it has issued and clarifies the need for a guarantor to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 while the provisions of the disclosure requirements are effective for financial statements of interim or annual reports ending after December 15, 2002. We adopted the disclosure provisions of FIN 45 during the fourth quarter of fiscal 2002 and the recognition provisions on January 1, 2003. The adoption of FIN 45 did not have a material effect on our consolidated financial position or results of operations.

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        In December 2002, the FASB Issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123." This statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of SFAS No. 148 were adopted on December 31, 2002.

        In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which addresses consolidation by a business of variable interest entities in which it is the primary beneficiary. FIN 46 is effective immediately for certain disclosure requirements and variable interest entities created after January 31, 2003, and in fiscal 2004 for all other variable interest entities. We expect that the provisions of FIN 46 will not have a material effect on its consolidated financial position or results of operations upon adoption since we currently have no variable interest entities.

        In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies existing accounting pronouncements and addresses financial accounting and reporting for derivative or other hybrid instruments. This statement requires that contracts with comparable characteristics be accounted for similarly. This statement is effective for contracts entered into or modified after June 30, 2003. We believe the adoption of SFAS No. 149 will not have a material effect on our consolidated financial position or results of operations since we currently have no derivative instruments.

        In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity," which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We believe the adoption of SFAS No. 150 will not have a material effect on our consolidated financial position or results of operations since we currently have no instruments that meet this definition.

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

        Certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, particularly in the section entitled "Liquidity and Capital Resources," and elsewhere in this quarterly report on Form 10-Q, are "forward-looking statements," within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements which address activities, events or developments that we expect or anticipate will or may occur in the future, including such things as results of operations and financial condition, capital expenditures, the consummation of acquisitions and financing transactions and the effect of such transactions on our business and our plans and objectives for future operations and expansion are examples of forward-looking statements. In some cases you can identify these statements by forward-looking words like "may," "will," "should," "expect," "anticipate," "believe," "estimate," "predict," "continue" or similar words. These forward-looking statements are subject to risks and uncertainties which could cause actual outcomes and results to differ materially from our expectations, forecasts and assumptions. These risks and uncertainties include factors affecting our leverage, including fluctuations in interest rates, our ability to incur financing, the effect of operating and financial restrictions in our debt instruments, the accuracy of our estimates regarding our capital requirements, the effect of intense levels of competition in our industry, changes in the healthcare regulatory environment, our ability to keep pace with

21

technological developments within our industry, and other risks and uncertainties, including those enumerated and described under "Risk Factors" in our Form 10-K, as filed with the Securities and Exchange Commission, for the fiscal year ended December 31, 2002. The foregoing should not be construed as an exhaustive list of all factors which could cause actual results to differ materially from those expressed in forward-looking statements made by us.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

        Our interest income is sensitive to changes in the general level of interest rates in the United States, particularly because the majority of our investments are in cash equivalents. The recorded carrying amounts of cash and cash equivalents approximate fair value due to their short-term maturities.

ITEM 4. CONTROLS AND PROCEDURES

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

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

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

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

        Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        Not applicable.

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

        Not applicable.

ITEM 5. OTHER INFORMATION

        On November 3, 2003, Richard N. Zehner, our Chairman of the Board and founder, resigned his position as Chairman of the Board. Our Board of Directors appointed Paul S. Viviano, a member of the Board, as Chairman of the Board in addition to his duties as President and Chief Executive Officer. Mr. Viviano joined us in January 2003 as our President and Chief Operating Officer and has been serving as our Chief Executive Officer and President since April 7, 2003.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

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(1)

Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-2, No. 333-33817.



(2)

Incorporated by reference 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 by reference 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 by reference to exhibits filed in response to Item 6, "Exhibits" of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.



(5)

Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-4, No. 333-60682, as amended.



(6)

Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-1, No. 333-64322, as amended.



(7)

Incorporated by reference to exhibits filed in response to Item 6, "Exhibits" of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.



(8)

Incorporated by reference to exhibits filed in response to Item 6, "Exhibits" of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.



(9)

Incorporated by reference 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 to exhibits filed in response to Item 6, "Exhibits" of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.



(11)

Filed herewith

(b)

Reports on Form 8-K in the third quarter of 2003:

On August 14, 2003, pursuant to Securities and Exchange Commission Release No. 33-8216, we filed a Form 8-K containing a press release issued on August 12, 2003, which sets forth our results of operations for the quarter and nine months ended June 30, 2003.

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SIGNATURES

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

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