UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to

Commission File Number 333-101399

MQ ASSOCIATES, INC.

(Exact name of company as specified in its charter)

Delaware		52-2148018
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3480 Preston Ridge Road Suite 600 Alpharetta, Georgia		30005
(Address of principal executive offices)		(Zip code)

Company’s telephone number, including area code: 770-300-0101

4300 North Point Parkway
Alpharetta, Georgia 30022

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether MQ Associates, Inc. (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 MQ Associates, Inc. was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

Indicate the number of shares outstanding of each of MQ Associates, Inc.’s classes of common stock, as of the latest practicable date.

At November 10, 2006, the number of shares outstanding of each of MQ Associates, Inc.’s classes of common equity were as follows: 72,100,000 shares of Class A common stock, $.001 par value per share, and 28,605,000 shares of common stock, $.001 par value per share.

MQ ASSOCIATES, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX

		Page Number
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005	4 - 5
	Consolidated Statements of Operations (unaudited) for each of the three and nine months ended September 30, 2006 and 2005	6
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2006 and 2005	7 - 8
	Notes to Consolidated Financial Statements (unaudited)	9 - 22
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23- 33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 5.	Other Information	35
Item 6.	Exhibits	36
	Signatures	37

Forward-Looking Statements

This report contains or may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, statements regarding our future growth and profitability, growth strategy and trends in the industry in which we operate. These forward-looking statements are based on our current expectations and are subject to a number of risks, uncertainties and assumptions. We can give no assurance that such forward-looking statements will prove to be correct. Among the most important factors that could cause actual results to differ significantly from those expressed or implied by such forward-looking statements are the results of the previously announced inquiry by the Securities and Exchange Commission (“SEC”) or any other future action taken by the SEC, general economic and business conditions, the effect of healthcare industry trends on third-party reimbursement rates and demand for our services, limitations and delays in reimbursement by third-party payors, changes in governmental regulations that affect our ability to do business, actions of our competitors, introduction of new technologies, risks associated with our acquisition strategy and integration costs, and the additional risk factors set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005 (“2005 10-K”), as well as in our other periodic reports filed with the SEC.

All forward-looking statements in this report apply only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in this report. We undertake no obligations to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MQ Associates, Inc. & Subsidiaries
Consolidated Balance Sheets
(in thousands)

	Sept. 30,			December 31,
	2006			2005
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	788		$	11,604
Patient receivables, net of allowances		27,372			27,784
Related party receivables		—			162
Other receivables		1,452			1,726
Prepaid expenses and other		2,563			2,363
Deferred income taxes		3,079			2,012
Total current assets		35,254			45,651
Property and equipment, net		77,078			86,151
Goodwill		34,304			35,335
Certificates of need		15,823			15,917
Other intangible assets, net		329			465
Debt issuance costs, net		10,352			12,122
Other		1,984			2,805
Total assets		$	175,124		$	198,446

The accompanying notes are an integral part of the consolidated financial statements.

MQ Associates, Inc. & Subsidiaries
Consolidated Balance Sheets (Continued)
(in thousands, except share data)

	Sept. 30,			December 31,
	2006			2005
	(unaudited)
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable	$	5,899			$	11,456
Accrued payroll and related taxes	7,772				6,257
Accrued interest	2,699				8,378
Accrued radiologist fees	3,955				3,845
Other liabilities	2,025				2,063
Other accrued expenses	6,700				8,122
Income taxes payable	428				212
Current portion of long-term debt	528				9,754
Current portion of obligations under capital leases	1,046				1,157
Total current liabilities	31,052				51,244
Long-term debt	336,674				325,305
Obligations under capital leases	735				1,489
Deferred income taxes	8,075				6,627
Other long-term liabilities	2,116				2,084
Total liabilities	378,652				386,749
Commitments and contingencies
Redeemable preferred stock
Series A Convertible, $.001 par value; nonvoting; 55,000,000 shares authorized, issued and outstanding	55,000				55,000
Series B Convertible, $.001 par value; nonvoting; 15,000,000 shares authorized, issued and outstanding	15,000				15,000
	70,000				70,000
Stockholders’ deficit
Class A Convertible common stock, $.001 par value; voting; 115,000,000 shares authorized; 72,100,000 issued and outstanding	72				72
Common stock, $.001 par value; voting; 195,000,000 shares authorized; 28,605,000 shares issued and outstanding	29				29
Additional paid-in capital	30				—
Accumulated deficit	(273,659		)		(258,404		)
Total stockholders’ deficit	(273,528		)		(258,303		)
Total liabilities and stockholders’ deficit	$	175,124			$	198,446

The accompanying notes are an integral part of the consolidated financial statements.

MQ Associates, Inc. & Subsidiaries
Consolidated Statements of Operations
(unaudited)
(in thousands)

	Three Months Ended Sept. 30,						Nine Months Ended Sept. 30,
	2006			2005			2006			2005
Net revenue from services	$	67,878		$	74,289		$	208,700		$	222,744
Costs and expenses:
Costs of services	29,929			33,551			94,137			102,507
Marketing, general and administrative expenses	23,091			27,386			72,439			80,482
(Gain) loss on disposal of assets	(2,255		)	—			(754		)	1,243
Depreciation and amortization	8,336			8,803			25,485			26,943
Income from operations	8,777			4,549			17,393			11,569
Interest expense	10,610			10,962			31,509			30,195
Interest income	(52		)	(53		)	(163		)	(167		)
Equity in earnings of unconsolidated joint ventures	(61		)	(58		)	(177		)	(182		)
Loss before income taxes	(1,720		)	(6,302		)	(13,776		)	(18,277		)
Provision for income taxes	530			815			1,479			2,363
Net loss	$	(2,250	)	$	(7,117	)	$	(15,255	)	$	(20,640	)

The accompanying notes are an integral part of the consolidated financial statements.

MQ Associates, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)

	Nine Months Ended Sept. 30,
	2006			2005
Cash flows from operating activities
Net loss	$	(15,255	)	$	(20,640	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	25,485			26,943
Accreted bond interest	9,288			8,249
Amortization of bond discount	232			206
Amortization of debt issuance costs	1,770			1,756
Bad debt expense	10,867			11,703
Compensation related to stock options	30			—
Deferred income taxes	381			964
Equity in earnings of unconsolidated joint ventures	(177		)	(182		)
Proceeds from unconsolidated joint ventures	223			383
(Gain) loss on disposal of assets	(754		)	1,243
Changes in operating assets and liabilities, net of acquisitions:
Patient receivables	(10,455		)	(8,787		)
Related party and other receivables	436			1,474
Prepaid expenses and other current assets	(200		)	(862		)
Other assets	732			655
Accounts payable	(5,557		)	(6,802		)
Accrued payroll and related taxes	1,515			2,259
Income taxes payable	216			(42		)
Other liabilities	(38		)	884
Other accrued expenses	(6,959		)	163
Net cash provided by operating activities	11,780			19,567
Cash flows used in investing activities
Purchase of property and equipment	(19,510		)	(9,400		)
Proceeds from sale of property and equipment	5,201			—
Acquisitions of businesses	—			(2,500		)
Non-acquisition intangibles	(47		)	(97		)
Net cash used in investing activities	$	(14,356	)	$	(11,997	)

The accompanying notes are an integral part of the consolidated financial statements.

MQ Associates, Inc. & Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(unaudited)
(in thousands)

	Nine Months Ended Sept. 30,
	2006			2005
Cash flows used in financing activities
Payments of obligations under capital leases	$	(865	)	$	(885	)
Sale of preferred stock	—			20,000
Proceeds from senior credit facility	10,000			28,613
Payments on senior credit facility	(10,000		)	(51,113		)
Payments on Tranche B term loan	(7,375		)	(450		)
Net cash provided used in financing activities	(8,240		)	(3,835		)
Net (decrease) increase in cash and cash equivalents	(10,816		)	3,735
Cash and cash equivalents, beginning of period	11,604			997
Cash and cash equivalents, end of period	$	788		$	4,732
Supplemental disclosure of cash flow information
Cash paid for interest	$	25,898		$	25,068
Cash paid for taxes, net	$	931		$	1,430

The accompanying notes are an integral part of the consolidated financial statements.

MQ Associates, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
(in thousands, except share data or as otherwise disclosed)

1. Business and Basis of Presentation

As of September 30, 2006, MQ Associates, Inc. (“MQA”), through MedQuest, Inc. (“MedQuest”), a wholly owned subsidiary of MQA, and MedQuest’s subsidiaries (collectively with MQA and MedQuest, the “Company”), operated 91 outpatient diagnostic imaging centers located in 13 states, primarily in the southeastern and southwestern United States. The outpatient diagnostic imaging centers provide medical imaging services to patients referred by physicians and bill governmental agencies, national and local insurance carriers, as well as individual patients who reside in the respective service areas. The Company operates in one reportable segment.

The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the consolidated financial statements do not include all information and notes required by generally accepted accounting principles for complete financial statements. The accompanying consolidated financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 10-K”). In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2006 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2006.

2. New Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109,” which clarifies the accounting for uncertainty in income taxes in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the measurement and financial statement recognition of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to have a material impact on the Company’s consolidated results of operations, financial position or liquidity.

In September 2006, the FASB issued Statement of Financial Standards No. 157 (“SFAS No. 157”), “Fair Value Measurements,” which clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures of fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 157 on its consolidated financial statements.

In September 2006, the SEC issued SAB No. 108 (“SAB No. 108”), “Considering the Effects of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements.” SAB No. 108 provides guidance on the consideration of effects of the prior year misstatement in quantifying current year misstatements for the purpose of a materiality assessment. The SEC staff believes registrants must quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in a material misstatement, when all relevant quantitative and qualitative factors are considered.

MQ Associates, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(unaudited)
(in thousands, except share data or as otherwise disclosed)

SAB No. 108 is effective for the first annual period ending after November 15, 2006 with early application encouraged. The Company plans to adopt SAB No. 108 at its fiscal year-end December 31, 2006. The Company does not believe the adoption of SAB No. 108 will have a material impact on its Consolidated Financial Statements.

3. Stock Option Plan

In December 2004, the FASB issued Statement of Financial Accounting Standard No. 123 (revised 2004), “Share Based Payment,” (“SFAS 123R”). SFAS 123R establishes the accounting for transactions in which an entity pays for employee services in share based payment transactions. SFAS 123R requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The fair value of employee share options and similar instruments is estimated using option-pricing models adjusted for the unique characteristics of those instruments. That cost is recognized over the vesting period during which an employee is required to provide service in exchange for the award. The Company adopted SFAS 123R effective January 1, 2006, using the modified-prospective transition method. Under this method, compensation cost is recognized for awards granted and for awards modified, repurchased or cancelled in the period after adoption. Compensation cost is also recognized for the unvested portion of awards granted prior to adoption during the period when vesting occurs. Prior year financial statements are not restated. The application of SFAS 123R resulted in the Company recognizing a charge of approximately $8 and $30 for compensation cost, net of taxes, for the three and nine months ended September 30, 2006, respectively, due to the estimated grant-date fair value of all awards.

For the three and nine months ended September 30, 2005, the Company accounted for its stock based compensation plan using the intrinsic value method prescribed in APB No. 25, “Accounting for Stock Issued to Employees” as allowed under SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”). Under the intrinsic value method, the Company did not recognize compensation expense for its stock-based awards to employees in the three and nine months ended September 30, 2005. The Company adopted the provisions of SFAS 123 which required disclosure of the pro forma effects on earnings and earnings per share as if SFAS 123 had been adopted.

The following table reflects pro forma net loss as if the Company had elected to adopt the fair value approach of SFAS No. 123:

	Three Months Ended September 30, 2005				Nine Months Ended September 30, 2005
Net loss:
As reported		$	(7,117	)		$	(20,640	)
Fair value based compensation cost, net of taxes		(12		)		(36		)
Pro forma net loss		$	(7,129	)		$	(20,676	)

4. Sale of Center

During the three months ended September 30, 2006, the Company sold its Albany center for $4,253 and recorded a gain on the sale of assets of $2,496.

MQ Associates, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(unaudited)
(in thousands, except share data or as otherwise disclosed)

5. Center closing costs

The Company provides for closed center liabilities based on the present value of the estimated remaining noncancellable lease payments after the closing date, net of estimated subtenant income. The Company estimates the net lease liabilities using a discount rate to calculate the present value of the remaining lease payments on closed centers. The closed center lease liabilities usually are paid over the remaining lease terms associated with the closed centers, which generally have remaining terms ranging from 0 to 8 years. Any adjustment to closed center liabilities related to changes in subtenant income or actual exit costs differing from original estimates would be made in the period in which the change becomes known.

The following table summarizes accrual activity during the nine months ended September 30, 2006, for the future lease obligations of centers closed in the normal course of business:

	Liability for Closed Centers
Balance at December 31, 2005		$	922
Additions for closed centers		290
Interest accreted		54
Early termination of leases		(465		)
Payments		(194		)
Balance at September 30, 2006		$	607

The Company recorded a charge to costs of services related to closed centers of $(23) and $290 for the three and nine months ended September 30, 2006, respectively, and $18 and $312 for the three and nine months ended September 30, 2005, respectively. In addition, interest expense related to closed centers was $20 and $54 for the three and nine months ended September 30, 2006, respectively. Furthermore, the Company recorded a loss on disposal of assets related to closed centers of $1,329 for the nine months ended September 30, 2006, and $1,090 for the nine months ended September 30, 2005. There were no centers closed during the three months ended September 30, 2006 and 2005. For the nine months ended September 30, 2006, the loss on disposal of assets related to closed centers included a charge of $1,031 related to goodwill.

6. Contingencies

From time to time, the Company, due to the nature of its business, is subject to litigation and/or regulatory actions, the resolution of which could result in a materially adverse impact upon the Company’s financial position and operating results. At September 30, 2006, the Company was not aware of any such proceedings, other than those disclosed below, that could result in a materially adverse financial impact.

SEC Inquiry

The staff of the SEC has commenced a formal inquiry concerning, among other things, the Company’s previous announcement that it expected to restate its financial statements for prior periods and its inability to timely file its Annual Report on Form 10-K for the year ended December 31, 2004 and its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2005 and June 30, 2005 (which, in each case, were subsequently filed). While the Company is continuing to cooperate with, and to provide requested

MQ Associates, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(unaudited)
(in thousands, except share data or as otherwise disclosed)

information and documents to the SEC, the Company cannot predict the outcome of the inquiry. Such inquiry could have a material adverse effect on the Company’s business, financial condition and results of operations.

Landlord Claim

In July 2005, Image Properties L.L.C. (“Image Properties”), an entity owned by the Company’s former Chief Executive Officer and former President, made a claim against the Company related to the reconciliation of certain expenses that Image Properties claims it paid on the Company’s behalf with respect to the facilities the Company leases from Image Properties. In August 2006, the Company settled the claim with Image Properties. In connection with the settlement, the Company terminated the existing leases for 15 of its centers with Image Properties, paid $206 for certain expenses related to those leases and entered into new leases for the 15 centers. In connection with the settlement, the Company had a one-time reversal of an accrual for $1,289 related to the claim.

7. Consolidating Financial Statements

The following tables present consolidating financial information as required as of September 30, 2006 and December 31, 2005 and for the three and nine months ended September 30, 2006 and 2005 for: (1) MQA (parent); (2) MedQuest (issuer); (3) the guarantors (on a combined basis, which represent all of MedQuest’s subsidiaries) of the $180.0 million aggregate principal amount of 117¤8% senior subordinated notes due 2012 of MedQuest (the “117¤8% Notes”) and (4) all eliminating adjustments. The consolidating financial statements presented reflect the legal entity compositions at the respective dates.

In August 2002, MedQuest issued the 117¤8% Notes to fund in part the Company’s recapitalization. The 117¤8% Notes bear interest at the rate of 117¤8% per annum that is payable semi-annually in cash on each February 15 and August 15. In February 2003, MedQuest registered an identical series of senior subordinated notes with the SEC and subsequently completed an exchange of all the unregistered $180.0 million aggregate principal amount of 117¤8% Notes for the registered 117¤8% Notes. The 117¤8% Notes are senior subordinated uncollateralized obligations of MedQuest, ranking junior in right of payment to all of its existing and future senior debt, and are guaranteed by MQA and each of MedQuest’s subsidiaries.

Separate financial statements of MedQuest, as issuer of the 117¤8% Notes, and the subsidiary guarantors are not presented because MedQuest and each subsidiary guarantor are 100% owned by MQA, all guarantees are full and unconditional, and all guarantees are joint and several.

The Company’s senior credit facility (the “Senior Credit Facility”), the indenture governing the 117¤8% Notes and the indenture governing the $136.0 million aggregate principal amount at maturity of 121¤4% senior discount notes due 2012 of MQA (the “121¤4% Notes”) impose certain restrictions on the Company, including restrictions on the Company’s ability to incur indebtedness, pay dividends, make investments, grant liens, sell assets and engage in certain other activities. In addition, the Senior Credit Facility requires the Company to maintain certain financial ratios. MedQuest’s indebtedness under the Senior Credit Facility is collateralized by substantially all of the Company’s assets, including inventory, accounts receivable, real and personal property, intellectual property and other intangibles, and is guaranteed by MQA and all of MedQuest’s subsidiaries.

MQ Associates, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
(in thousands, except share data or as otherwise disclosed)

Consolidating Balance Sheets September 30, 2006

	MQ Associates, Inc.				MedQuest, Inc.				Guarantor Subsidiaries				Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents		$	1,873			$	—			$	(1,085	)		$	—		$	788
Patient receivables, net of allowances										27,372							27,372
Related party receivables
Other receivables										1,452							1,452
Prepaid expenses and other										2,563							2,563
Deferred income taxes										3,079							3,079
Total current assets		1,873				—				33,381				—			35,254
Property and equipment, net										77,078							77,078
Goodwill										34,304							34,304
Certificates of need										15,823							15,823
Other intangible assets, net										329							329
Investment in subsidiaries		(37,530		)		(67,963		)						105,493			—
Debt issuance costs, net		2,397				7,955											10,352
Other										1,984							1,984
Total assets		$	(33,260	)		$	(60,008	)		$	162,899			$	105,493		$	175,124
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable		$	—			$	—			$	5,899			$	—		$	5,899
Accrued payroll and related taxes										7,772							7,772
Accrued interest						2,699											2,699
Accrued radiologist fees										3,955							3,955
Other liabilities										2,025							2,025
Other accrued expenses										6,700							6,700
Income taxes payable										428							428
Current portion of long-term debt						528											528
Current portion of obligations under capital leases										1,046							1,046
Total current liabilities		—				3,227				27,825				—			31,052
Intercompany payable		61,408				(253,519		)		192,111							—
Long-term debt		108,860				227,814											336,674
Obligations under capital leases										735							735
Deferred income taxes										8,075							8,075
Other long-term liabilities										2,116							2,116
Total liabilities		170,268				(22,478		)		230,862				—			378,652
Commitments and contingencies
Redeemable preferred stock
Series A Convertible, $.001 par value; nonvoting; 55,000,000 shares authorized, issued and outstanding		55,000															55,000
Series B Convertible, $.001 par value; nonvoting; 15,000,000 shares authorized, issued and outstanding		15,000															15,000
		70,000				—				—				—			70,000
Stockholders’ deficit
Class A Convertible common stock, $.001 par value; voting; 115,000,000 shares authorized; 72,100,000 issued and outstanding		72															72
Common stock, $.001 par value; voting; 195,000,000 shares authorized; 28,605,000 shares issued and outstanding		29															29
Additional paid-in capital		30															30
Accumulated deficit		(273,659		)		(37,530		)		(67,963		)		105,493			(273,659		)
Total stockholders’ deficit		(273,528		)		(37,530		)		(67,963		)		105,493			(273,528		)
Total liabilities and stockholders’ deficit		$	(33,260	)		$	(60,008	)		$	162,899			$	105,493		$	175,124

MQ Associates, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(unaudited)
(in thousands, except share data or as otherwise disclosed)

Consolidating Balance Sheets December 31, 2005

	MQ Associates, Inc.				MedQuest, Inc.				Guarantor Subsidiaries				Eliminations			Consolidated
ASSETS
Current assets
Cash and cash equivalents		$	2,204			$	—			$	9,400			$	—		$	11,604
Patient receivables, net of allowances										27,784							27,784
Related party receivables										162							162
Other receivables										1,726							1,726
Prepaid expenses and other										2,363							2,363
Deferred income taxes										2,012							2,012
Total current assets		2,204				—				43,447				—			45,651
Property and equipment, net										86,151							86,151
Goodwill										35,335							35,335
Certificates of need										15,917							15,917
Other intangible assets, net										465							465
Investment in subsidiaries		(31,876		)		(83,964		)						115,840			—
Debt issuance costs, net		2,705				9,417											12,122
Other										2,805							2,805
Total assets		$	(26,967	)		$	(74,547	)		$	184,120			$	115,840		$	198,446
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable		$	—			$	—			$	11,456			$	—		$	11,456
Accrued payroll and related taxes										6,257							6,257
Accrued interest		119				8,259											8,378
Accrued radiologist fees										3,845							3,845
Other liabilities										2,063							2,063
Other accrued expenses										8,122							8,122
Income taxes payable										212							212
Current portion of long-term debt						9,754											9,754
Current portion of obligations under capital leases										1,157							1,157
Total current liabilities		119				18,013				33,112				—			51,244
Intercompany payable		61,644				(286,416		)		224,772							—
Long-term debt		99,573				225,732											325,305
Obligations under capital leases										1,489							1,489
Deferred income taxes										6,627							6,627
Other long-term liabilities										2,084							2,084
Total liabilities		161,336				(42,671		)		268,084				—			386,749
Commitments and contingencies
Redeemable preferred stock
Series A Convertible, $.001 par value; nonvoting; 55,000,000 shares authorized, issued and outstanding		55,000															55,000
Series B Convertible, $.001 par value; nonvoting; 15,000,000 shares authorized, issued and outstanding		15,000															15,000
		70,000				—				—				—			70,000
Stockholders’ deficit
Class A Convertible common stock, $.001 par value; voting; 115,000,000 shares authorized; 72,100,000 issued and outstanding		72															72
Common stock, $.001 par value; voting; 195,000,000 shares authorized; 28,605,000 shares issued and outstanding		29															29
Additional paid-in capital		—
Accumulated deficit		(258,404		)		(31,876		)		(83,964		)		115,840			(258,404		)
Total stockholders’ deficit		(258,303		)		(31,876		)		(83,964		)		115,840			(258,303		)
Total liabilities and stockholders’ deficit		$	(26,967	)		$	(74,547	)		$	184,120			$	115,840		$	198,446

MQ Associates, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(unaudited)
(in thousands)

Consolidating Statements of Operations Three Months Ended September 30, 2006

	MQ Associates, Inc.				MedQuest, Inc.				Guarantor Subsidiaries				Eliminations				Consolidated
Net revenue from services		$	—			$	—			$	67,878			$	—			$	67,878
Costs and expenses:
Costs of services										29,929								29,929
Marketing, general and administrative expenses		12								23,079								23,091
(Gain) loss on disposal of assets										(2,255		)						(2,255		)
Depreciation and amortization										8,336								8,336
Income (loss) from operations		(12		)		—				8,789				—				8,777
Interest expense		3,292				7,272				46								10,610
Interest income		(11		)						(41		)						(52		)
Equity earnings of unconsolidated joint ventures										(61		)						(61		)
Income (loss) before provisions for income taxes and equity in earnings of consolidated subsidiaries		(3,293		)		(7,272		)		8,845				—				(1,720		)
Provision for income taxes										530								530
Income (loss) before equity in earnings of consolidated subsidiaries		(3,293		)		(7,272		)		8,315				—				(2,250		)
Equity in earnings of consolidated subsidiaries		1,043				8,315								(9,358		)		—
Net income (loss)		$	(2,250	)		$	1,043			$	8,315			$	(9,358	)		$	(2,250	)

MQ Associates, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(unaudited)
(in thousands)

Consolidating Statements of Operations Three Months Ended September 30, 2005

	MQ Associates, Inc.				MedQuest, Inc.				Guarantor Subsidiaries				Eliminations				Consolidated
Net revenue from services		$	—			$	—			$	74,289			$	—			$	74,289
Costs and expenses:
Costs of services										33,551								33,551
Marketing, general and administrative expenses		447								26,939								27,386
Depreciation and amortization										8,803								8,803
Income from operations		(447		)		—				4,996				—				4,549
Interest expense		3,074				7,888												10,962
Interest income										(53		)						(53		)
Equity earnings of unconsolidated joint ventures										(58		)						(58		)
Income (loss) before provisions for income taxes and equity in earnings of consolidated subsidiaries		(3,521		)		(7,888		)		5,107				—				(6,302		)
Provision for income taxes										815								815
Income (loss) before equity in earnings of consolidated subsidiaries		(3,521		)		(7,888		)		4,292				—				(7,117		)
Equity in earnings of consolidated subsidiaries		(3,596		)		4,292								(696		)		—
Net income (loss)		$	(7,117	)		$	(3,596	)		$	4,292			$	(696	)		$	(7,117	)

MQ Associates, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(unaudited)
(in thousands)

Consolidating Statements of Operations Nine Months Ended September 30, 2006

	MQ Associates, Inc.				MedQuest, Inc.				Guarantor Subsidiaries				Eliminations				Consolidated
Net revenue from services		$	—			$	—			$	208,700			$	—			$	208,700
Costs and expenses:
Costs of services										94,137								94,137
Marketing, general and administrative expenses		34								72,405								72,439
Gain on disposal of assets										(754		)						(754		)
Depreciation and amortization										25,485								25,485
Income (loss) from operations		(34		)		—				17,427				—				17,393
Interest expense		9,597				21,655				257								31,509
Interest income		(30		)						(133		)						(163		)
Equity earnings of unconsolidated joint ventures										(177		)						(177		)
Income (loss) before provisions for income taxes and equity in earnings of consolidated subsidiaries		(9,601		)		(21,655		)		17,480				—				(13,776		)
Provision for income taxes										1,479								1,479
Income (loss) before equity in earnings of consolidated subsidiaries		(9,601		)		(21,655		)		16,001				—				(15,255		)
Equity in earnings of consolidated subsidiaries		(5,654		)		16,001								(10,347		)		—
Net income (loss)		$	(15,255	)		$	(5,654	)		$	16,001			$	(10,347	)		$	(15,255	)

MQ Associates, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(unaudited)
(in thousands)

Consolidating Statements of Operations Nine Months Ended September 30, 2005

	MQ Associates, Inc.				MedQuest, Inc.				Guarantor Subsidiaries				Eliminations			Consolidated
Net revenue from services		$	—			$	—			$	222,744			$	—		$	222,744
Costs and expenses:
Costs of services										102,507							102,507
Marketing, general and administrative expenses		447								80,035							80,482
Loss on disposal of assets										1,243							1,243
Depreciation and amortization										26,943							26,943
Income from operations		(447		)		—				12,016				—			11,569
Interest expense		8,491				21,704											30,195
Interest income										(167		)					(167		)
Equity earnings of unconsolidated joint ventures										(182		)					(182		)
Income (loss) before provisions for income taxes and equity in earnings of consolidated subsidiaries		(8,938		)		(21,704		)		12,365				—			(18,277		)
Provision for income taxes										2,363							2,363
Income (loss) before equity in earnings of consolidated subsidiaries		(8,938		)		(21,704		)		10,002				—			(20,640		)
Equity in earnings of consolidated subsidiaries		(11,702		)		10,002								1,700			—
Net income (loss)		$	(20,640	)		$	(11,702	)		$	10,002			$	1,700		$	(20,640	)

MQ Associates, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(unaudited)
(in thousands)

Consolidating Statements of Cash Flows Nine Months Ended September 30, 2006

	MQ Associates, Inc.				MedQuest, Inc.				Guarantor Subsidiaries				Eliminations				Consolidated
Cash flows from operating activities
Net income (loss)		$	(15,255	)		$	(5,654	)		$	16,001			$	(10,347	)		$	(15,255	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization										25,485								25,485
Accreted bond interest		9,288																9,288
Amortization of bond discount						232												232
Amortization of debt issuance costs		308				1,462												1,770
Bad debt expense										10,867								10,867
Compensation related to stock options		30																30
Deferred income taxes										381								381
Equity in earnings of unconsolidated joint ventures										(177		)						(177		)
Proceeds from unconsolidated joint ventures										223								223
Gain on disposal of assets										(754		)						(754		)
Equity in earnings of consolidated subsidiary		5,654				(16,001		)						10,347				—
Changes in operating assets and liabilities:
Patient receivables										(10,455		)						(10,455		)
Intercompany payable						25,521				(25,521		)						—
Related party and other receivables										436								436
Prepaid expenses and other current assets										(200		)						(200		)
Other assets										732								732
Accounts payable										(5,557		)						(5,557		)
Accrued payroll and related taxes										1,515								1,515
Income taxes payable										216								216
Other liabilities										(38		)						(38		)
Other accrued expenses		(119		)		(5,560		)		(1,280		)						(6,959		)
Net cash (used in) provided by operating activities		(94		)		—				11,874				—				11,780
Cash flows used in investing activities
Purchase of property and equipment										(19,510		)						(19,510		)
Proceeds from sale or property and equipment										5,201								5,201
Acquisitions of businesses
Non-acquisition intangibles										(47		)						(47		)
Net cash used in investing activities		$	—			$	—			$	(14,356	)		$	—			$	(14,356	)

MQ Associates, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(unaudited)
(in thousands)

Consolidating Statements of Cash Flows Nine Months Ended September 30, 2006 (Continued)

	MQ Associates, Inc.				MedQuest, Inc.				Guarantor Subsidiaries				Eliminations				Consolidated
Cash flows used in financing activities
Payments of obligations under capital leases		$	—			$	—			$	(865	)		$	—			$	(865	)
Proceeds from senior credit facility										10,000								10,000
Payments on senior credit facility										(10,000		)						(10,000		)
Intercompany payable		(237		)						(7,138		)		7,375				—
Intercompany receivable						7,375								(7,375		)		—
Payment of Tranche B term loan						(7,375		)										(7,375		)
Net cash used in financing activities		(237		)		—				(8,003		)		—				(8,240		)
Net decrease in cash and cash equivalents		(331		)		—				(10,485		)		—				(10,816		)
Cash and cash equivalents, beginning of period		2,204								9,400								11,604
Cash and cash equivalents, end of period		$	1,873			$	—			$	(1,085	)		$	—			$	788
Supplemental disclosure of cash flow information
Cash paid for interest										$	25,898							$	25,898
Cash paid for taxes, net										$	931							$	931

MQ Associates, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(unaudited)
(in thousands)

Consolidating Statements of Cash Flows Nine Months Ended September 30, 2005

	MQ Associates, Inc.				MedQuest, Inc.				Guarantor Subsidiaries			Eliminations	Consolidated
Cash flows from operating activities
Net income (loss)		$	(20,640	)		$	(11,702	)		$	10,002

MQ ASSOCIATES INC 10-Q