Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private Securities Litigation Reform Act of 1995

This quarterly report contains forward-looking statements that involve risks and uncertainties. The statements contained in this quarterly report that are not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, without limitation, statements relating to future economic conditions in general and statements about our future:

• strategy and business prospects,

• development and expansion of services, and the size, growth, and leadership of the potential markets for these services,

• development of new customer relationships and products,

• sales, earnings, income, expenses, operating results, tax rates, operating and gross profit margins, valuations, receivables, reserves, liquidity, investment income, currency rates, stock option exercises, capital resource needs, customers, and competition,

• ability to obtain and protect our intellectual property and proprietary rights, and,

• acquisition, transaction costs, and adjustments.

All of these forward-looking statements are based on information available to us on the date of this quarterly report. Our actual results could differ materially from those discussed in this quarterly report. The forward-looking statements contained in this quarterly report, and other written and oral forward-looking statements made by us from time to time, are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Part II Item 1A of this report entitled "Risk Factors."

Overview

NightHawk Radiology Holdings, Inc. is leading the transformation of the practice of radiology by providing high-quality, cost-effective solutions to radiology groups and hospitals throughout the United States. We provide the most complete suite of solutions, including professional services, business services, and our advanced, proprietary clinical workflow technology, all designed to increase efficiencies and improve the quality of patient care and the lives of physicians who provide it. Our independent contractor team of American Board of Radiology-certified, state-licensed and hospital-privileged physicians, located in the United States and around the world, provides services 24 hours per day, seven days a week, for approximately 28% of all U.S. hospitals.

Our team of American Board of Radiology-certified, U.S. state-licensed and hospital-privileged affiliated radiologists uses our proprietary workflow technology to provide professional services ("interpretations", "exams", "scans" or "reads") to our customers in the United States and Canada. The reads that we provide consist primarily of off-hours preliminary reads, but increasingly include final and sub-specialty interpretations. In addition to these professional services, we also provide our customers with cardiac 3D reconstructions, clinical workflow technology, and business services, all designed to enhance the care they provide to patients and improve the efficiency of their practices. For more information, visit our website at www.nighthawkrad.net. The information on, or accessible through, our website is not incorporated in this filing.

Recent Developments

Capital structure.

During the nine months ended September 30, 2009, we paid a total of $32.3 million in cash to reduce our outstanding debt and to repurchase shares of our common stock. We believe that these transactions are prudent uses of our cash given our history of strong free cash flow generation and then current level of available cash and investments. Specifically, in the first quarter of 2009, we repurchased 1.1 million shares of our common stock under an open market share repurchase program that we began in December 2008 for approximately $5.5 million, or an average of $4.87 per share. In addition, in the third quarter of 2009, we repurchased 3.0 million shares of our common stock held by our founder and former chief executive officer for approximately $13.9 million, or $4.63 per share. Finally, in September 2009 we made a $12.0 million voluntary principal prepayment reducing the outstanding loan balance on our term loan to approximately $81.4 million.

Goodwill Impairment

The difficult macroeconomic environment and decline in the market price of our common stock as of March 31, 2009, indicated that our goodwill could be impaired. As a result, we performed an impairment test as of March 31, 2009 as required by the Intangibles-Goodwill and Other Topic of the FASB Accounting Standards Codification (ASC Topic 350), (formerly Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets), and determined that the entire goodwill balance of $68.7 million was impaired and we recorded a non-cash goodwill impairment charge of $68.7 million for the three months ended March 31, 2009.

Trends in our Business and Results of Operations

Service Revenue

We generate revenue from a number of sources, including off-hours preliminary exams, business services offerings and final and subspecialty interpretations. The revenue growth that we have historically experienced has been due in large part to the growth in scan volume in our off-hours preliminary business, which continues to make up the bulk of our revenue. The market for off-hours preliminary interpretations has historically experienced rapid volume growth. This volume growth has been driven by an increase in our customer base, an increase in utilization of our services by our customers, acquisitions, an expansion of our service hours, a high customer retention rate and growth in the use of diagnostic imaging technologies and procedures in the healthcare industry in general. In recent quarters, however, our volume growth in the off-hours preliminary business has slowed as the market for these services has matured and become more competitive. As a result of these factors, we have seen the average price for our preliminary reads decline and have also experienced customer losses which, combined, have caused our revenues and margins from our off-hours preliminary business to be flat or decline in recent periods. We expect these challenges to continue in the foreseeable future which will affect our ability to grow revenue organically in our off-hours preliminary business. In response to such trends, our strategy is to sell new services (including final interpretations and business services) to our existing customers by communicating their value and demonstrating the advantages we offer over our competitors. Our future growth depends primarily upon our ability to successfully execute that strategy while also effectively responding to competitive pressures in the market for off-hours preliminary exams.

Professional Services Expense

Professional service expenses consist primarily of the fees we pay to our affiliated radiologists, any physician stock-based compensation, the premiums for medical liability insurance, and any medical liability claims loss expenses. Since inception, our professional service fees have increased in absolute dollars each year, primarily due to the addition of new affiliated radiologists to perform an increased workload volume as our business has grown. We expect that our professional service fees will continue to fluctuate in absolute dollars as volumes vary and we expect our professional services expenses to increase as a percentage of revenue due to the price declines we are experiencing.

Our medical liability expense has also increased in absolute dollars each year since inception, primarily due to the increasing number of scans as our business has grown. We expect our medical liability premiums and our IBNR expense to continue to fluctuate as volumes vary.

We record physician stock-based compensation expense in connection with any equity-based grants to our affiliated radiologists in accordance with the Compensation-Stock Compensation Topic of the FASB Accounting Standards Codification (ASC Topic 718) (formerly SFAS No. 123 (revised 2004), Share-Based Payment, and the Equity Topic of the FASB Accounting Standards Codification (ASC Topic 505) (formerly Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services), and present this expense in our consolidated statements of operations as part of our professional services expense. The amount of physician stock-based compensation expense we record in a given period depends primarily on the number of shares subject to equity-based grants held by our affiliated radiologists, the number of hours worked, and the change in the value of our common stock in that period. Our expense in future periods for physician stock-based compensation will be driven primarily by changes in our stock price, new equity-based grants we make to our affiliated radiologists, and the rate at which those equity-based grants are earned over such periods.

Sales, General and Administrative Expense

Our sales, general and administrative expense consists primarily of salaries and related expenses for our employees, employee stock-based compensation, information technology and telecommunications expenses, costs associated with licensing and privileging our affiliated radiologists, facilities and office-related expenses, sales and marketing expenses and other general and administrative expenses. Our sales, general and administrative expense has increased in absolute dollars since inception primarily as a result of increased payroll expenses in connection with higher headcount in support of the growth in our business. In the coming quarters, we expect our sales, general and administrative expenses to remain roughly flat as we invest in our information technology platform and our sales and marketing capabilities.

The amount of employee stock-based compensation expense we record in a given period depends primarily on the number of shares subject to outstanding shared-based awards and the valuation criteria used at the time of the grant. The amount of expense is also impacted by the accelerated method we use to expense these awards and by forfeitures of non-vested awards.

Trends in Interest Expense

Interest on our term loan borrowings is at variable rates. Since 2007, we have hedged the risk associated with fluctuations in interest rates by entering into interest rate swap contracts. In December 2008, in response to interest rates falling to historically low levels, we settled our original interest rate swap contracts and entered into new interest rate swap contracts. Our new effective interest rate and actual cash payments for interest under these hedges will be 4.95% for the remaining life of the loan. The swap contracts expire in June 2014. Over the next four quarters our reported interest rate will be higher than our stated effective rate due to the amortization of losses from our original swap contracts and amortization of loan closing costs. In addition, interest expense will be impacted by the mark-to-market adjustment of two interest rate swap contracts which have been deemed to be ineffective hedges. Finally, the Company also expects lower interest expense in the future due to lower outstanding debt levels following the $12.0 million principal debt prepayment made in the third quarter of 2009.

Trends in Income Tax Expense

Income tax expense consists of U.S federal, state, and foreign jurisdiction income taxes. We expect our income tax expense to fluctuate due to changes to the Internal Revenue Code and the apportionment of our business geographically with regards to state taxes. Our income tax expense may also increase or fluctuate in future periods if our actual stock compensation deductions are less than our previously recognized tax benefit in accordance with the Compensation-Stock Compensation Topic of the FASB Accounting Standards Codification (ASC Topic 718).

Critical Accounting Estimates and Recent Accounting Standards

The preparation of financial statements in accordance with generally accepted accounting principles in the United States ("GAAP") requires our management to select and apply accounting policies that best provide the framework to report the results of operations and financial position. The selection and application of those policies requires management to make difficult, subjective and/or complex judgments concerning reported amounts of revenue and expenses during the reporting period and the reported amounts of assets and liabilities at the date of the financial statements. As a result, there exists the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

As of September 30, 2009, there have been no significant changes with regard to the critical accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008. The policies disclosed included the use of estimates, stock-based compensation, purchase accounting and long-lived assets including goodwill and other acquired intangible assets, income taxes, and derivative accounting.

See Note 1 "Summary of Significant Accounting Policies-Recent Accounting Standards" to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information regarding recently adopted and new accounting pronouncements.

Results of Operations

The following table sets forth selected consolidated statements of operations
data for each of the periods indicated as a percentage of service revenue:



                                        Three Months Ended          Nine Months Ended
                                           September 30,              September 30,
                                       2009            2008         2009           2008
 Service revenue                          100 %           100 %        100 %        100 %
 Operating costs and expenses:
 Professional services                     47              42           44           42
 Sales, general and administrative         35              35           37           39
 Depreciation and amortization              6               7            7            7
 Goodwill impairment                       -               -            55           -

 Total operating costs and expenses        88              84          143           88

 Operating income (loss)                   12              16          (43 )         12
 Other income (expense):
 Interest expense                          (6 )            (5 )         (5 )         (5 )
 Interest income                           -                1           -             1
 Other, net                                -               -            -            -

 Total other income (expense)              (6 )            (4 )         (5 )         (4 )

 Income (loss) before income taxes          6              12          (48 )          8
 Income tax expense (benefit)               2               4           (9 )          3

 Net income (loss)                          4               8          (39 )          5

Comparison of Three Months Ended September 30, 2009 and September 30, 2008

Service Revenue

Service revenue for the three months ended September 30, 2009 was relatively flat compared to the three months ended September 30, 2008. Preliminary read revenue decreased by $2.3 million and was offset by an increase of $2.0 million in final read revenue and a $0.4 million increase in business service revenue.

The preliminary read revenue decline was predominantly due to a 10% price decline from the year ago quarter. Preliminary read volumes increased 4% over the same period, consisting of same site volume growth of 7% and new customer volumes of 7%, partially offset by a 10% decrease in volumes from the cumulative impact of customers lost over the past 12 months.

The increase in final read revenue was predominantly due to a 56% increase in volume. Final read volume growth consisted of new customer growth of 53% and same site volume growth of 22%, partially offset by a 20% decrease in volumes from the impact of customers lost over the past 12 months. Pricing for final reads was down 10% from the year ago quarter.

Operating Costs and Expenses

Professional Services



                                    Three Months Ended
                                       September 30,                    Change
                                                  (Dollars in thousands)
                                    2009           2008         In Dollars    Percentage
  Professional services           $  20,216      $ 18,340      $      1,876           10 %
  Percentage of service revenue          47 %          42 %

The increase in professional services expense of $1.9 million for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 was primarily attributable to a 9% increase in read volumes. The growth in professional services expense as a percentage of revenue is largely due to the declines in the price of preliminary and final reads described above.

Sales, General and Administrative Expense



                                                 Three Months Ended
                                                    September 30,                          Change
                                                                  (Dollars in thousands)
                                                2009             2008           In Dollars         Percentage
Sales, general and administrative expense     $  15,289        $ 15,367        $        (78 )              (1 )%
Percentage of service revenue                        35 %            35 %

Sales, general and administrative expense for the three months ended September 30, 2009 was relatively unchanged from the prior period. Sales, general and administrative expense for the three months ended September 30, 2008 included a one-time $0.7 million restructuring charge. Excluding the effect of the restructuring charge in the third quarter of 2008, sales, general and administrative expense has increased in the current period primarily due to higher payroll and information technology spending, partially offset by reductions in non-cash stock compensation.

Comparison of Nine Months Ended September 30, 2009 and September 30, 2008

Service Revenue

The decrease in service revenue for the nine months ended September 30, 2009 relative to the nine months ended September 30, 2008 primarily consists of a decrease of $7.9 million in preliminary read revenue offset by an increase of $3.4 million in final read revenue and an increase of $1.1 million in business service revenue.

The preliminary read revenue decrease was predominantly due to a 9% price decline from the same period one year ago. Preliminary read volume increased 1% over the same period, consisting of same site volume growth of 7% and new customer volumes of 6%, partially offset by a 12% decrease in volumes from the cumulative impact of customers lost over the past 12 months.

The final read revenue increase was predominantly due to a 24% increase in volume. Final read volume growth consisted of new customer growth of 43% and same site volume growth of 2%, partially offset by a 21% decrease in volumes from the impact of customers lost over the past 12 months. Final read pricing was relatively flat compared to the same period one year ago.

Operating Costs and Expenses

Professional Services



                                     Nine Months Ended
                                       September 30,                    Change
                                                  (Dollars in thousands)
                                     2009          2008         In Dollars    Percentage
   Professional services           $ 55,177      $ 53,243      $      1,934            4 %
   Percentage of service revenue         44 %          42 %

The increase in professional services expense of $1.9 million for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 was primarily attributable to a 4% increase in read volumes. Professional service fees increased $2.9 million related to the higher volumes, offset by lower physician stock-based compensation expense of $1.0 million. The growth in professional services expense as a percentage of revenue is largely due to the declines in the price of preliminary and final reads described above.

Sales, General and Administrative Expense



                                                 Nine Months Ended
                                                   September 30,                          Change
                                                                  (Dollars in thousands)
                                                2009            2008           In Dollars         Percentage
Sales, general and administrative expense     $ 46,007        $ 50,002        $     (3,995 )              (8 )%
Percentage of service revenue                       37 %            39 %

Sales, general and administrative expense in the nine months ended September 30, 2009 was approximately $4 million lower than in the comparable period of 2008. During 2009, our stock compensation and severance expenses were lower compared to 2008, and were partially offset by higher information technology spending.

Goodwill Impairment

We recorded a $68.7 million goodwill impairment charge during the quarter ended March 31, 2009 due to our determination that the fair value of goodwill was less than the carrying value. The goodwill impairment charge was non-cash and does not affect our operations, cash flow or cash position.

Income Tax Expense (Benefit)



                                    Nine Months Ended
                                      September 30,                      Change
                                                  (Dollars in thousands)
                                   2009           2008         In Dollars       Percentage
 Income tax expense (benefit)    $ (11,311 )     $ 4,119      $    (15,430 )          (375 )%
 Percentage of service revenue          (9 )%          3 %

The change in our income tax expense was due primarily to the goodwill impairment charge recorded during the nine months ended September 30, 2009 resulting in a tax benefit for the period.

Liquidity and Capital Resources

Capital Resources

Our capital resources include cash, cash equivalents and marketable securities.
The tables below highlight significant aspects of our capital resources.



                                     September 30, 2009     December 31, 2008
                                                  (In millions)
        Capital resources
        Cash and cash equivalents   $               24.9   $              47.2
        Marketable securities                        6.0                     -

        Total                       $               30.9   $              47.2

Cash Flow Activities

The tables below highlight significant aspects of our cash flow activities.



                                                            Nine Months Ended
                                                              September 30,
                                                              (In millions)
                                                            2009          2008
     Cash flow activities
     Net cash provided by (used in):
     Operating activities                                 $    21.5      $  22.9
     Investing activities                                     (10.4 )       18.9
     Financing activities                                     (33.4 )      (18.5 )

     Increase / (decrease) in cash and cash equivalents   $   (22.3 )    $  23.3

The discussion below highlights significant aspects of our cash flows.

Net Cash Provided by Operating Activities

Since our inception in August 2001, we have funded our operations primarily from cash flows generated by our operating activities, the sale and issuance of shares of capital stock and the incurrence of long-term debt. Net cash provided by operating activities of $21.5 million in the nine months ended September 30, 2009 was down from $22.9 million in the nine months ended September 30, 2008. This decrease was principally due to the decline in our preliminary read pricing and is expected to continue in future quarters.

For the nine months ended September 30, 2009, we generated net cash from operations of $21.5 million from a net loss of $(48.8) million. Significant non-cash charges that affected our net loss but which did not impact our net cash from operations during this period include the goodwill impairment of $68.7 million and the associated deferred income tax benefit of $14.5 million, depreciation and amortization of $8.2 million, and stock compensation expense of $3.8 million. Significant changes in operating assets and liabilities include a decrease in prepaid and other assets of $0.8 million, an increase in accounts receivable of $0.3 million and a decrease in accounts payable of $0.4 million primarily due to the timing of invoices.

For the nine months ended September 30, 2008, we generated net cash from operations of $22.9 million from net income of $6.8 million. Significant non-cash charges that affected net income that did not impact our net cash from operations during this period include depreciation and amortization of $8.6 million and stock compensation expense of $7.1 million.

Net Cash (Used in) Provided by Investing Activities

Net cash used in investing activities was $10.4 million for the nine months ended September 30, 2009 compared to $18.9 million provided by investing . . .