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

For the nine month period ended March 31, 2009, we reported net income of $1.1 million on revenues of $29.3 million as compared to net loss of $6.7 million on revenues of $27.4 million for the nine month period ended March 31, 2008.

For the three month period ended March 31, 2009, we reported net income of $730,000 on revenues of $11.3 million as compared to net loss of $2.7 million on revenues of $8.1 million for the three month period ended March 31, 2008.

Overall, our revenues increased 7.0% from $27.4 million for the first nine months of fiscal 2008 to $29.3 million for the first nine months of fiscal 2009. Most significantly, revenues from product sales increased 33.9%, from $8.9 million for the first nine months of fiscal 2008 to $12.0 million for the first nine months of fiscal 2009. This sharp increase resulted from the Company's increased production activity in the filling of orders for our MRI scanners.

Due to the increase in our revenues and a reduction of cost and expenses, our operating loss for the nine months ended March 31, 2009 was reduced as compared to the nine months ended March 31, 2008 (a $386,000 operating loss for the first nine months of fiscal 2009 as compared to a $10.7 million operating loss for the first nine months of fiscal 2008). The decrease in the operating loss was principally due to a decrease of 22.1% in our total costs and expenses, from $38.1 million for the first nine months of fiscal 2008 to $29.7 million for the first nine months of fiscal 2009. In order to reduce our net losses and demands on our cash and other liquid reserves, we instituted an aggressive program of cost cutting at the end of fiscal 2008 and the beginning of fiscal 2009. Costs and expenses were reduced in most categories but most significantly in our selling general and administrative expenses. Overall, there was a reduction of our selling, general and administrative expenses of 36%, from $15.5 million in the first nine months of fiscal 2008 to $10.0 million in the first nine months of fiscal 2009, resulting directly from our cost cutting program.

In addition to the success of our cost cutting program in improving our operating performance, we also realized a gain on the sale in September 2008 of our 92.3% interest in a consolidated entity. We received proceeds of approximately $2.3 million and recognized a gain of approximately $1.4 million, which also improved our liquidity. The entity was engaged in the business of managing a MRI facility. The principal reason, however, for our net income for the first nine months of fiscal 2009 of $1.1 million as compared to our net loss for the first nine months of fiscal 2008 of $6.7 million, was due to the improvement in our operations.

We also are monitoring the performance of our existing users in order to establish teams to assist underperforming customers improve their scan volume. In addition, we have held seminars to assist customers and the MRI Facilities managed by HMCA in their marketing efforts and are in the process of developing a web site to assist our customers in their marketing efforts.

We implemented an aggressive program of cost cutting measures at the end of fiscal 2008 and the beginning of fiscal 2009. These measures include consolidating HMCA's office space with Fonar's office space, reductions in the size of our workforce, compensation and benefits, as well as across the board reduction of expenses.

Forward Looking Statements

Certain statements made in this Quarterly Report on Form 10-Q are "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans and objectives of Management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving the expansion of business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statement included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

Results of Operations

We operate in two industry segments: the manufacture and servicing of medical (MRI) equipment, our traditional business which is conducted directly by Fonar, and diagnostic facilities management services, which is conducted through Fonar's wholly-owned subsidiary, Health Management Corporation of America, which we also refer to as HMCA.

Trends in the third quarter of fiscal 2009 include an increase in product sales revenues, a decrease in service and repair fees, and management fees, as well as a decrease in our total costs and expenses, in particular in our selling, general and administrative expenses. We will continue to focus on our marketing efforts to improve sales performance in fiscal 2009. In addition, we will monitor our cost cutting program and will continue to reduce costs as necessary.

For the three month period ended March 31, 2009, as compared to the three month period ended March 31, 2008, overall revenues from MRI product sales increased 162% ($6.2 million compared to $2.3 million).

For the nine month period ended March 31, 2009, as compared to the nine month period ended March 31, 2008, overall revenues from MRI product sales increased 33.9% ($12.0 million compared to $8.9 million).

Service revenues for the three month period ended March 31, 2009, as compared to the three month period ended March 31, 2008 decreased by 5.9% ($2.6 million compared to $2.8 million). Unrelated party service and repair fees decreased by 8.9% ($2.3 million compared to $2.5 million) and related party service and repair fees increased by 22.6% ($331,000 compared to $270,000). The reason for the decrease in unrelated party service and repair fees was attributable to several customers discontinuing operations because of economic conditions. We anticipate that there will be increases in service revenues as warranties on installed scanners expire over time.

Service revenues for the nine month period ended March 31, 2009, as compared to the nine month period ended March 31, 2008 decreased by 4.0% ($7.9 million compared to $8.2 million). Unrelated party service and repair fees decreased by 6.8% ($6.9 million compared to $7.4 million) and related party service and repair fees increased by 22.9% ($966,000 compared to $786,000).

There were approximately $3.4 million in foreign revenues for the first nine months of fiscal 2009 as compared to approximately $628,000 in foreign revenues for the first nine months of fiscal 2008, representing an increase in foreign revenues of 434%. The Company is making a concerted effort to increase foreign sales, most recently through its foreign distributors.

Overall, for the first nine months of fiscal 2009, revenues for the medical equipment segment increased by 18.0% to $21.6 million from $18.3 million for the first nine months of fiscal 2008. The revenues generated by HMCA decreased, by 15.3%, to $7.7 million for the first nine months of fiscal 2009 as compared to $9.1 million for the first nine months of fiscal 2008.

We recognize MRI scanner sales revenues on the "percentage of completion" basis, which means the revenues are recognized as the scanner is manufactured. Revenues recognized in a particular quarter do not necessarily reflect new orders or progress payments made by customers in that quarter. We build the scanner as the customer meets certain benchmarks in its site preparation in order to minimize the time lag between incurring costs of manufacturing and our receipt of the cash progress payments from the customer which are due upon delivery. Consequently, there can be a disparity between the revenues recognized in a fiscal period and the number of product sales. Generally, the recognized revenue results from revenues from a scanner sale are recognized in a fiscal quarter or quarters following the quarter in which the sale was made.

Costs related to product sales increased by 48.6% from $2.2 million in the third quarter of fiscal 2008 to $3.3 million in the third quarter of 2009, reflecting an increase in product sales revenues. The increase in costs by 48.6% was substantially less than the corresponding increase in MRI product sales revenues of 162%, however, primarily because we were able to both procure parts and components at lower costs and use parts and components in inventory having a lower cost basis. Costs related to providing service decreased by 22.1% from $1.3 million in the third quarter of fiscal 2008 to $1.0 million in fiscal 2009. The increase in product sales revenues resulted primarily from the Company's progress in filling its backlog of orders.

Notwithstanding the increase in revenues from MRI product sales, costs related to product sales decreased by 11.4% from $8.6 million in the first nine months of fiscal 2008 to $7.6 million in the first nine months of 2009 because of our lower cost basis for parts and components. Costs related to providing service decreased by 21.7% from $3.9 million in the first nine months of fiscal 2008 to $3.1 million in fiscal 2009.

Costs related to providing service and repairs decreased by 22.1% for the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008 and by 21.7% for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. We believe that an important factor in keeping service costs down is our ability to monitor the performance of customers' scanners from our facilities in Melville, New York, on a daily basis and to detect and repair any irregularities before more serious problems result. We also believe the low cost of providing service reflects the high quality of our products.

Overall, the operating results for our medical equipment segment improved to an operating income of $207,000 for the first nine months of fiscal 2009 as compared to an operating loss of $9.9 million for the first nine months of fiscal 2008. This improvement resulted from an increase in product sales revenues and decreases in costs related to sales, research and development and, most significantly, selling, general and administrative expenses. The decrease in costs related to sales resulted from our ability to procure parts and components at lower costs and to use parts and components in inventory having a lower cost basis. The decrease in research and development expenditures, and selling, general and administrative expenses, resulted from our program of cost cutting measures, which included consolidating HMCA's office space with Fonar's office space, reductions in the size of our workforce, compensation and benefits, as well as an across the board reduction of expenses.

HMCA revenues decreased in the third quarter of fiscal 2009 by 15.7% to $2.5 million from $2.9 million for the third quarter of fiscal 2008, and by 15.3% to $7.7 million for the first nine months of fiscal 2009 from $9.1 million for the first nine months of fiscal 2008, primarily because of the sale of its 92.3% interest in a previously consolidated entity in September 2008. We now manage ten sites, nine of which are equipped with FONAR UPRIGHT(R) MRI scanners. HMCA experienced an operating loss of $593,000 for the first nine months of fiscal 2009 compared to operating loss of $759,000 for the first nine months of fiscal 2008.

HMCA cost of revenues decreased to $1.7 million for the third quarter of fiscal 2009 as compared to $2.1 million for the third quarter of fiscal 2008. HMCA cost of revenues for the first nine months of fiscal 2009 decreased to $5.4 million as compared to $6.1 million for the first nine months of fiscal 2008. The decrease in HMCA's cost of revenues was primarily the result of managing one less scanning center as a result of the sale of HMCA's 92.3% interest in a previously consolidated entity in September, 2008.

HMCA entered into an agreement in September, 2007 with Integrity Healthcare Management, Inc. ("Integrity"), which is a wholly-owned subsidiary of Health Diagnostics, LLC. Under the terms of the agreement, Integrity supervised and directed HMCA and the management of the facilities including the performance of billing and collections services. The existing management agreements between the facilities and HMCA remained in place. Integrity was entitled to compensation of an annual fee equal to one-half of the increase in the consolidated cash flow of HMCA and the facilities over the period from July 1, 2006 through June 30, 2007. This agreement was terminated as of the end of June 2008.

Commencing upon the termination of this agreement, we hired Health Diagnostics, LLC, the parent company of Integrity, to perform all billing and collection procedures for HMCA's clients on HMCA's behalf. HMCA agreed to pay 6% of all adjusted deposits for these services. This agreement was terminated as of April 30, 2009, as HMCA sought to cut expenses and exercise direct control of the billing and collection of its clients' accounts.

The increase in our total net revenues of 39.5% from $8.1 million in the third quarter of fiscal 2008 to $11.3 million in the third quarter of fiscal 2009, was accompanied by a decrease of 2.8% in total costs and expenses from $10.8 million in the third quarter of fiscal 2008 compared to $10.5 million in the third quarter of fiscal 2009. As a result, our income (loss) from operations changed from a loss of $2.7 million in the third quarter of fiscal 2008 to an operating profit of $762,000 in the third quarter of fiscal 2009.

For the first nine months of fiscal 2009 the consolidated revenues increased by 7.0% to $29.3 from $27.4 million for the first nine months of fiscal 2008 while the total costs and expenses decreased by 22.1% to $29.7 million for the first nine months of fiscal 2009 from $38.1 million for the first nine months of fiscal 2008. Our operating loss decreased from $10.7 million in the first nine months of fiscal 2008 to $386,000 in the first nine months of fiscal 2009.

Selling, general and administrative expenses decreased by 36.0% to $10.0 million in the first nine months of fiscal 2009 from $15.5 million in the first nine months of fiscal 2008, largely as a result of our aggressive cost cutting measures. There was no compensatory element of stock issuances, which is included in selling, general and administrative expenses, in the first nine months of fiscal 2009 or 2008.

Research and development expenses decreased by 27% to $2.7 million for the first nine months of fiscal 2009 as compared to $3.7 million for the first nine months of fiscal 2008.

Interest expense in the first nine months of fiscal 2009 decreased by 46.7% to $193,000 from $362,000 for the first nine months of fiscal 2008 because of the repayment of existing debt.

Inventories increased by 16.5% to $3.8 million at March 31, 2009 as compared to $3.3 million at June 30, 2008 representing the purchase of raw materials and components in our inventory to fill orders.

Management fee and medical receivables decreased by 20.3% to $6.1 million at March 31, 2009 from $7.6 million at June 30, 2008, primarily due to collections on the Company's management fee receivables and the sale of a 92.3% interest of a consolidated entity in September 2008, which included the receivables of such entity.

The overall trends reflected in the results of operations for the first nine months of fiscal 2009 are an increase in revenues from product sales, as compared to the first nine months of fiscal 2008 ($12.0 million for the first nine months of fiscal 2009 as compared to $8.9 million for the first nine months of fiscal 2008), and an increase in MRI equipment segment revenues relative to HMCA revenues ($21.6 million or 73.8% from the MRI equipment segment as compared to $7.7 million or 26.2% from HMCA, for the first nine months of fiscal 2009, as compared to $18.3 million or 66.8% from the MRI equipment segment and $9.1 million or 33.2%, from HMCA, for the first nine months of fiscal 2008). In addition, unrelated party sales constituted 100% of our medical equipment product sales for the first nine months of fiscal 2009 at $12.0 million and for the first nine months of fiscal 2008 at $8.9 million.

We are committed to continuing the improvement in our operating results we experienced in the first nine months in fiscal 2009. Nevertheless, factors beyond our control, such as the timing and rate of market growth which depend on economic conditions, including the availability of credit, payor reimbursement rates and policies, and unexpected expenditures or the timing of such expenditures, make it impossible to forecast future operating results. We believe we are pursuing the correct policies which should prove successful in improving the Company's operating results.

Our FONAR UPRIGHT(R) MRI, and Fonar-360(TM) MRI scanners, together with our works-in-progress, are intended to significantly improve our competitive position.

Our FONAR UPRIGHT(R) MRI scanner, which operates at 6000 gauss (.6 Tesla) field strength, allows patients to be scanned while standing, sitting, reclining and in multiple flexion and extension positions. It is common in visualizing the spine that abnormalities are visualized in some positions and not others. This enables surgical corrections that heretofore would be unaddressable for lack of visualizing the symptom causing the pathology. A floor-recessed elevator brings the patient to the height appropriate for the targeted image region. A custom-built adjustable bed will allow patients to sit or lie on their backs, sides or stomachs at any angle. Full-range-of-motion studies of the joints in virtually any direction are possible and another promising feature for sports injuries.

Recently, this capability of the FONAR UPRIGHT(R) technology has demonstrated its key value on patients with the Arnold-Chiari syndrome, which is believed to affect 200,000 to 500,000 Americans. In this syndrome, brain stem compression and subsequent severe neurological symptoms occur in these patients, when because of weakness in the support tissues within the skull, the brain stem descends and is compressed at the base of the skull in the foramen magnum, which is the circular bony opening at the base of the skull where the spinal cord exits the skull. Conventional lie-down MRI scanners cannot make an adequate evaluation of the pathology since the patient's pathology is most visible and the symptoms most acute when the patient is scanned in the upright weight-bearing position.

The UPRIGHT(R) MRI has also demonstrated its value for patients suffering from scoliosis. Scoliosis patients have been typically subjected to routine x-ray exams for years and must be imaged upright for an adequate evaluation of their scoliosis. Because the patient must be standing for the exam, an x-ray machine has been the only modality that could provide that service. The UPRIGHT(R) MRI is the only MRI scanner which allows the patient to stand during the MRI exam. Fonar has developed a new RF receiver and scanning protocol that for the first time allows scoliosis patients to obtain diagnostic pictures of their spines without the risks of x- rays. A recent study by the National 'Cancer Institute (2000) of 5,466 women with scoliosis reported a 70% increase in breast cancer resulting from 24.7 chest x-rays these patients received on the average in the course of their scoliosis treatment. The UPRIGHT(R) MRI examination of scoliosis enables the needed imaging evaluation of the degree of spine scoliosis without exposing the patient to the risk of breast cancer from x-radiation. Currently scoliosis affects more than 3,000,000 American women.

In addition, the University of California, Los Angeles (UCLA) reported their results of their study of 1,302 patients utilizing the FONAR UPRIGHT(R) Multi-Position(TM) MRI at the 22nd Annual Meeting of the North American Spine Society on October 23, 2007. The UCLA study showed the superior ability of the Dynamic(TM) FONAR UPRIGHT(R) MRI to detect spine pathology, including spondylolisthesis, disc herniations and disc degneration, as compared to visualizations of the spine produced by traditional single position static MRIs.

The UCLA study by MRI of 1,302 back pain patients when they were UPRIGHT(R) and examined in a full range of flexion and extension positions made possible by FONAR's new UPRIGHT(R) technology established that significant "misses" of pathology were occurring with static single position MRI imaging. At L4-5, the vertebral level responsible for 49.8% of lumbar disc herniations, 35.1% of the spondylolistheses (vertebral instabilities) visualized by Dynamic(TM) Multi-Position(TM) MRI were being missed by static single position MRI (510 patients). Since this vertebral segment is responsible for the majority of all disc herniations, the finding may reveal a significant cause of failed back surgeries. The UCLA study further showed the "miss-rate" of vertebral instabilities by static only MRI was even higher, 38.7%, at the L3-4 vertebral segment. Additionally the UCLA study showed that MRI examinations of the cervical spine that did not perform extension images of the neck "missed" disc bulges 23.75% of the time (163 patients).

The UCLA study further reported that they were able to quantitatively measure the dimensions of the central spinal canal with the "highest accuracy" using the FONAR UPRIGHT(R) Multi-Position(TM) MRI thereby enabling the extent of spinal canal stenosis that existed in patients to be measured. Spinal canal stenosis gives rise to the symptom complex intermittent neurogenic claudication manifest as debilitating pain in the back and lower extremities, weakness and difficulties in ambulation and leg paresthesias. Spinal canal stenosis is a spinal compression syndrome separate and distinct from the more common nerve compression syndrome of the spinal nerves as they exit the vertebral column through the bony neural foramen.

The FONAR UPRIGHT(R) MRI can also be useful for MRI directed emergency neuro-surgical procedures as the surgeon would have unhindered access to the patient's head when the patient is supine with no restrictions in the vertical direction. This easy-entry, mid-field-strength scanner could prove ideal for trauma centers where a quick MRI-screening within the first critical hour of treatment will greatly improve patients' chances for survival and optimize the extent of recovery.

The Fonar 360(TM) is an enlarged room sized magnet in which the floor, ceiling and walls of the scan room are part of the magnet frame. This is made possible by Fonar's patented Iron-Frame(TM) technology which allows the Company's engineers to control, contour and direct the magnet's lines of flux in the patient gap where wanted and almost none outside of the steel of the magnet where not wanted. Consequently, this scanner allows surgeons and other interventional physicians to walk inside the magnet and achieve 360 degree access to the patient to perform interventional procedures.

The Fonar 360(TM) is presently marketed as a diagnostic scanner and is sometimes referred to as the Open Sky(TM) MRI. In its Open Sky(TM) version, the Fonar 360(TM) serves as an open patient friendly scanner which allows 360 degree surgical access to the patient on the scanner bed. To optimize the patient-friendly character of the Open Sky(TM) MRI, the walls, floor, ceiling and magnet poles are decorated with landscape murals. The patient gap is twenty inches and the magnetic field strength, like that of the FONAR UPRIGHT(R), is
0.6 Tesla.

In the future, we expect the Fonar 360(TM) to function as an interventional MRI. The enlarged room sized magnet and 360o access to the patient afforded by the Fonar 360(TM) permits surgeons to walk into the magnet and perform surgical interventions on the patient under direct MR image guidance. Most importantly the exceptional quality of the MRI image and its capacity to exhibit tissue detail on the image, can then be obtained real time during the procedure to guide the interventionalist. Thus surgical instruments, needles, catheters, endoscopes and the like could be introduced directly into the human body and guided directly to a malignant lesion using the MRI image. The number of inoperable lesions could be significantly reduced by the availability of this new FONAR technology. Most importantly treatment can be carried directly to the target tissue.

The first Fonar 360(TM) MRI scanner, installed at the Oxford- Nuffield Orthopedic Center in Oxford, United Kingdom, is now carrying a full diagnostic imaging caseload. In addition, however, development of the works in progress Fonar 360(TM) MRI image guided interventional technology is actively progressing. Fonar software engineers have completed and installed their 2nd generation tracking software at Oxford-Nuffield which is designed to enable the surgeons to insert needles into the patient and accurately advance them, under direct visual image guidance, to the target tissue, such as a tumor, so that therapeutic agents can be injected.

The Company expects marked demand for its most commanding MRI products, the FONAR UPRIGHT(R) MRI and the Fonar 360(TM) because of their exceptional features in patient diagnosis and treatment. These scanners additionally provide improved image quality and higher imaging speed because of their higher field strength of .6 Tesla. The geometry of the FONAR UPRIGHT(R) MRI as compared to a single coil, or multiple coils on only one axis and its transverse magnetic field enables the use of two detector rf coils operating in quadrature which increases the FONAR UPRIGHT(R) MRI signal to noise ratio by 40%, providing a signal to noise ratio equal to a .84T recumbent only MRI scanner.

Liquidity and Capital Resources

Cash, cash equivalents and marketable securities decreased from $2.4 million at June 30, 2008 to $1.6 million at March 31, 2009. Marketable securities approximated $18,000 as of March 31, 2009, as compared to $1.1 million at June 30, 2008.

Cash used in operating activities for the first nine months of fiscal 2009 was $5.7 million. Cash used in operating activities was attributable to a decrease in customer advances of $5.6 million, a decrease in billings in excess of costs and estimated earnings on uncompleted contracts of $641,000 and an increase in accounts, management fee and medical receivables of $1.1 million offset by a decrease in notes receivable of $385,000 and the net income of $1.1 million.

Cash provided by investing activities for the first nine months of fiscal 2009 was $6.1
million. The principal source of cash from investing activities during the first nine months of fiscal 2009 consisted of proceeds from the sale of a consolidated subsidiary of $2.3 million, proceeds of $2.0 million from the . . .