Edgar Filing: FONAR CORP

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended MARCH 31, 2012

[ ] 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 0-10248

FONAR CORPORATION

____________________________________________

(Exact name of registrant as specified in its charter)

DELAWARE		11-2464137
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

110 Marcus Drive Melville, New York		11747
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (631) 694-2929

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files. YES _X_ NO ___

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___ Accelerated filer___ Non-accelerated filer___ Smaller reporting company _X_

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ___ NO _X_

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the latest practicable date.

Class	Outstanding at April 30, 2012
Common Stock, par value $.0001		5,861,262
Class B Common Stock, par value $.0001		158
Class C Common Stock, par value $.0001		382,513
Class A Preferred Stock, par value $.0001		313,451

FONAR CORPORATION AND SUBSIDIARIES

INDEX

PART I - FINANCIAL INFORMATION			PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2012 (Unaudited) and June 30, 2011			3
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2012 and March 31, 2011 (Unaudited)			6
Condensed Consolidated Statements of Income for the Nine Months Ended March 31, 2012 and March 31, 2011 (Unaudited)			7
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and March 31, 2011 (Unaudited)			8
Condensed Consolidated Statements of Comprehensive Income for the Nine Months Ended March 31, 2012 and March 31, 2011 (Unaudited)			9
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2012 and March 31, 2011 (Unaudited)			10
Notes to Condensed Consolidated Financial Statements (Unaudited)			11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			31
Item 4. Controls and Procedures			31
PART II - OTHER INFORMATION			32
Item 1. Legal Proceedings			32
Item 1A. Risk Factors			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 3. Defaults Upon Senior Securities			32
Item 4. Mine Safety Disclosures			32
Item 5. Other Information			32
Item 6. Exhibits			32
Signatures			33

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(000's OMITTED)

ASSETS

Current Assets:	March 31, 2012 (UNAUDITED)		June 30, 2011
Cash and cash equivalents	$	11,003	$	9,251
Marketable securities		34		33
Accounts receivable – net		6,236		5,264
Accounts receivable - related party		30		—
Management and other fees receivable - net		3,633		3,309
Management and other fees receivable – related medical practices – net		1,118		1,669
Costs and estimated earnings in excess of billings on uncompleted contracts		1,172		169
Inventories		3,336		2,400
Current portion of notes receivable - net		116		114
Prepaid expenses and other current assets		223		352
Total Current Assets		26,901		22,561
Property and equipment – net		3,157		3,769
Notes receivable		300		359
Other intangible assets – net		4,002		4,318
Other assets		466		574
Total Assets	$	34,826	$	31,581

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(000's OMITTED)

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:	March 31, 2012 (UNAUDITED)		June 30, 2011
Current portion of long-term debt and capital leases	$	1,629	$	2,026
Accounts payable		2,055		2,187
Other current liabilities		8,164		8,236
Unearned revenue on service contracts		6,357		5,762
Unearned revenue on service contracts - related Parties		28		—
Customer advances		3,308		4,846
Billings in excess of costs and estimated earnings on uncompleted contracts		804		4
Income tax payable		—		75
Total Current Liabilities		22,345		23,136

Long-Term Liabilities:
Accounts payable - non current		70		102
Due to related medical practices		222		228
Long-term debt and capital leases, less current Portion		1,048		1,746
Other liabilities		484		502
Total Long-Term Liabilities		1,824		2,578
Total Liabilities		24,169		25,714

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(000's OMITTED)

LIABILITIES AND STOCKHOLDERS' EQUITY (Continued)

LIABILITIES AND STOCKHOLDERS' EQUITY (continued)		March 31, 2012 (UNAUDITED)			June 30, 2011
STOCKHOLDERS' EQUITY:
Class A non-voting preferred stock $.0001 par value; 453,000 shares authorized at March 31, 2012 and June 30, 2011, 313,451 issued and outstanding at March 31, 2012 and June 30, 2011		—			—

Preferred stock $.001 par value; 567,000 shares authorized at March 31, 2012 and June 30, 2011, issued and outstanding – none		—			—

Common Stock $.0001 par value; 8,500,000 shares authorized at March 31, 2012 and June 30, 2011, 5,872,905 and 5,636,571 issued at March 31, 2012 and June 30, 2011, respectively; 5,861,262 and 5,624,928 outstanding at March 31, 2012 and June 30, 2011, respectively		1			1

Class B Common Stock (10 votes per share) $ .0001 par value; 227,000 shares authorized at March 31, 2012 and June 30, 2011, 158 issued and outstanding at March 31, 2012 and June 30, 2011		—			—

Class C Common Stock (25 votes per share) $.0001 par value; 567,000 shares authorized at March 31, 2012 and June 30, 2011, 382,513 issued and outstanding at March 31, 2012 and June 30, 2011		—			—

Paid-in capital in excess of par value		173,908			173,476
Accumulated other comprehensive loss		(17	)		(16	)
Accumulated deficit		(169,769	)		(174,110	)
Notes receivable from employee stockholders		(72	)		(115	)
Treasury stock, at cost - 11,643 shares of common stock at March 31, 2012 and June 30, 2011		(675	)		(675	)
Non controlling interests		7,281			7,306

Total Stockholders' Equity		10,657			5,867
Total Liabilities and Stockholders' Equity	$	34,826		$	31,581

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(000's OMITTED, except per share data)

	FOR THE THREE MONTHS ENDED MARCH 31,
REVENUES	2012			2011
Product sales – net	$	1,309		$	1,855
Service and repair fees – net		3,008			2,769
Service and repair fees – related parties - net		27			55
Management and other fees – net		3,601			2,726
Management and other fees – related medical practices – net		1,571			1,249
Total Revenues – Net		9,516			8,654

COSTS AND EXPENSES
Costs related to product sales		962			1,392
Costs related to service and repair fees		891			792
Costs related to service and repair fees – related parties		8			16
Costs related to management and other fees		2,390			1,768
Costs related to management and other fees – related medical practices		953			616
Research and development		315			453
Selling, general and administrative		2,224			2,064
Provision for bad debts		170			175
Total Costs and Expenses		7,913			7,276

Income From Operations		1,603			1,378

Interest Expense		(103	)		(128	)
Investment Income		53			64
Other Expense		—			(61	)


Net Income		1,553			1,253
Net Income - Non Controlling Interests		261			69
Net Income - Controlling Interests	$	1,292		$	1,184
Net Income Available to Common Stockholders	$	1,206		$	1,099
Net Income Available to Class A Non-Voting Preferred Stockholders	$	64		$	64
Net Income Available to Class C Common Stockholders	$	22		$	21
Basic Net Income Per Common Share	$	0.21		$	0.21
Diluted Net Income Per Common Share	$	0.20		$	0.20
Basic and Diluted Income Per Share-Common C	$	0.06		$	0.05
Weighted Average Basis Shares Outstanding		5,836,229			5,345,349
Weighted Average Diluted Shares Outstanding		5,963,733			5,472,853

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(000's OMITTED, except per share data)

	FOR THE NINE MONTHS ENDED MARCH 31,
	2012			2011
REVENUES
Product sales – net	$	4,699		$	6,303
Service and repair fees – net		8,720			8,111
Service and repair fees – related parties - net		83			165
Management and other fees – net		10,238			7,195
Management and other fees – related medical practices – net		4,712			3,584
Total Revenues – Net		28,452			25,358

COSTS AND EXPENSES
Costs related to product sales		3,608			5,265
Costs related to service and repair fees		2,572			2,158
Costs related to service and repair fees – related parties		24			44
Costs related to management and other fees		6,462			4,789
Costs related to management and other fees – related medical practices		2,673			1,988
Research and development		938			1,060
Selling, general and administrative		6,261			6,192
Provision for bad debts		655			606
Total Costs and Expenses		23,193			22,102

Income From Operations		5,259			3,256

Interest Expense		(333	)		(359	)
Interest Expense – Related Party		—			(4	)
Investment Income		178			160
Interest Income - Related Party		—			1
Other Income (Expense)		55			(53	)
Provision for Income Taxes		(21	)		—
Net Income		5,138			3,001
Net Income - Non Controlling Interests		796			69
Net Income - Controlling Interests	$	4,342		$	2,932
Net Income Available to Common Stockholders	$	4,051		$	2,720
Net Income Available to Class A Non-voting Preferred Stockholders	$	217		$	164
Net Income Available to Class C Common Stockholders	$	74		$	53
Basic Net Income Per Common Share	$	0.71		$	0.53
Diluted Net Income Per Common Share	$	0.69		$	0.51
Basic and Diluted Income Per Share-Common C	$	0.19		$	0.14
Weighted Average Basic Shares Outstanding		5,744,506			5,169,253
Weighted Average Diluted Shares Outstanding		5,872,010			5,296,757

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(000'S OMITTED)

	FOR THE THREE MONTHS ENDED MARCH 31,
	2012		2011
Net income	$	1,553	$	1,253

Other comprehensive income, net of tax: Unrealized gains (losses) on marketable securities, net of tax		3		(1	)
Total comprehensive income	$	1,556	$	1,252
Comprehensive income-non controlling interests		261		69
Comprehensive income-controlling interests	$	1,295	$	1,183

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(000'S OMITTED)

	FOR THE NINE MONTHS ENDED MARCH 31,
	2012			2011
Net income	$	5,138		$	3,001

Other comprehensive income, net of tax: Unrealized (losses) gains on marketable securities, net of tax		(1	)		4
Total comprehensive income	$	5,137		$	3,005
Comprehensive income-non controlling interests		796			69
Comprehensive income-controlling interests	$	4,341		$	2,936

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(000'S OMITTED)

	FOR THE NINE MONTHS ENDED MARCH 31,
	2012			2011
Cash Flows from Operating Activities:
Net income	$	5,138		$	3,001
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,629			1,480
Provision for bad debts		655			606
Stock issued for costs and expenses		384			553
Compensatory element of stock issuances		49			161
(Increase) decrease in operating assets, net:
Accounts, management fee and medical receivable(s)		(1,430	)		(2,348	)
Notes receivable		57			(283	)
Costs and estimated earnings in excess of Billings on uncompleted contracts		(1,003	)		(324	)
Inventories		(936	)		634
Prepaid expenses and other current assets		129			307
Other assets		108			(49	)
Advances and notes to related medical practices		—			83
Increase (decrease) in operating liabilities, net:
Accounts payable		(164	)		(830	)
Other current liabilities		550			1,628
Customer advances		(1,537	)		(121	)
Billings in excess of costs and estimated earnings on uncompleted contracts		800			(2,555	)
Other liabilities		(18	)		22
Due to related medical practices		(7	)		(298	)
Income tax payable		(75	)		—
Net cash provided by operating activities		4,329			1,667

Cash Flows from Investing Activities:
Sales of marketable securities		(2	)		(2	)
Purchases of property and equipment		(606	)		(349	)
Costs of capitalized software development		—			(67	)
Cost of patents		(94	)		(105	)
Proceeds from non controlling interest		16			694
Sale to non controlling interest		10			—
Cash acquired from business combination		—			289
Net cash (used in) provided by investing activities		(676	)		460

Cash Flows from Financing Activities:
Repayment of borrowings and capital lease obligations		(1,096	)		(1,133	)
Distributions to non controlling interests		(848	)		(13	)
Repayment of notes receivable from employee stockholders		43			74
Net cash used in financing activities		(1,901	)		(1,072	)
Net Increase in Cash and Cash Equivalents		1,752			1,055
Cash and Cash Equivalents – Beginning of Period		9,251			1,299
Cash and Cash Equivalents - End of Period	$	11,003		$	2,354

See accompanying notes to condensed consolidated financial statements.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 and 2011

(UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION & LIQUIDITY & CAPITAL RESOURCES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended March 31, 2012, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K filed on September 30, 2011 for the fiscal year ended June 30, 2011.

Liquidity and Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and assume that the Company will continue as a going concern.

Although the Company has experienced eight consecutive fiscal quarters of profitability, we previously had a history of operating losses and negative cash flows from operating activities. We had a stockholders’ deficiency as recently as the fourth fiscal quarter of fiscal 2011, until we completed a private placement of $6 million on May 2, 2011. In the event that we are unable to sustain our current profitability or are otherwise unable to secure external financing, we may not be able to meet our obligations as they come due, raising substantial doubts as to our ability to continue as a going concern. Our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles, contemplate that we will continue as a going concern and do not contain any adjustments that might result if we were unable to continue as a going concern. Changes in our operational plans, our existing and anticipated working capital needs, the acceleration or modification of our business plans, lower than anticipated revenues, increased expenses, potential acquisitions or other events will all affect our ability to continue as a going concern.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of FONAR Corporation, its majority and wholly-owned subsidiaries and partnerships (collectively the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 and 2011

(UNAUDITED)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings Per Share

Basic earnings per share (“EPS”) is computed based on weighted average shares outstanding and excludes any potential dilution. In accordance with ASC topic 260-10, “Participating Securities and the Two-Class method”, the Company used the Two-Class method for calculating basic earnings per share and applied the if converted method in calculating diluted earnings per share for the three and nine months ended March 31, 2012 and March 31, 2011.

Diluted EPS reflects the potential dilution from the exercise or conversion of all dilutive securities into common stock based on the average market price of common shares outstanding during the period. For the three and nine months ended March 31, 2012 and March 31, 2011, the number of common shares potentially issuable upon the exercise of certain options of 16,205 and 29,000; respectively, have not been included in the computation of diluted EPS since the effect would be antidilutive.

	Three months ended March 31, 2012						Three months ended March 31, 2011
	(000's omitted, except per share data)
	Total		Common Stock		Class C Common Stock		Total		Common Stock		Class C Common Stock
Numerator: Net income Available to common stockholders	$	1,292	$	1,206	$	22	$	1,184	$	1,099	$	21
Denominator: Weighted average Shares outstanding		5,836		5,836		383		5,345		5,345		383
Basic income per common share	$	0.22	$	0.21	$	0.06	$	0.21	$	0.21	$	0.05
Diluted Denominator:
Weighted average shares outstanding				5,836		383				5,345		383
Stock options				—		—				—		—
Convertible Class C Stock				128		—				128		—
Total Denominator for diluted earnings per share				5,964		383				5,473		383
Diluted income per common share			$	0.20	$	0.06			$	0.20	$	0.05

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 and 2011

(UNAUDITED)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings Per Share (Continued)

	Nine months ended March 31, 2012						Nine months ended March 31, 2011
	(000's omitted, except per share data)
	Total		Common Stock		Class C Common Stock		Total		Common Stock		Class C Common Stock
Numerator: Net income available to common stockholders	$	4,342	$	4,051	$	74	$	2,932	$	2,720	$	53
Denominator:
Weighted average shares outstanding		5,744		5,744		383		5,169		5,169		383
Basic income per common share	$	0.76	$	0.71	$	0.19	$	0.53	$	0.53	$	0.14
Diluted Denominator: Weighted average shares outstanding				5,744		383				5,169		383
Stock options				—		—				—		—
Convertible Class C Stock				128		—				128		—
Total Denominator for diluted earnings per share				5,872		383				5,297		383
Diluted income per common share			$	0.69	$	0.19			$	0.51	$	0.14

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles-Goodwill and Other (Topic 350):Testing Goodwill for Impairment, to simplify how entities test goodwill for impairment. ASU 2011-08 allows entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If a greater than 50 percent likelihood exists that the fair value is less than the carrying amount then a two-step goodwill impairment test as described in Topic 350 must be performed. The guidance provided by this update becomes effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated financial position and results of operations.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 and 2011

(UNAUDITED)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. ASU 2011-12 defers the requirement that companies present reclassification adjustments for each component of Accumulated Other Comprehensive Income in both net income and Other Comprehensive Income on the face of the financial statements. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. The guidance provided by this update becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated position and results of operations.

FASB, the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of June 30, 2011 that will become effective in subsequent periods; however, management does not believe that any of those updates would have significantly affected our financial accounting measures or disclosures had they been in effect during 2011 or 2010, and it does not believe that any of those pronouncements will have a significant impact on our condensed consolidated financial statements at the time they become effective.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassifcations did not have any effect on reported consolidated net income for any periods presented.

NOTE 3 – ACCOUNTS RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE

Receivables, net is comprised of the following at March 31, 2012:

(000’s Omitted)

	Gross Receivable		Allowance for Doubtful accounts		Net
Receivables from equipment sales and service contracts	$	8,069	$	1,833	$	6,236
Receivables from equipment sales and service contracts – related party	$	30		—	$	30
Management and other fees Receivables	$	10,716	$	7,083	$	3,633
Management and other fees Receivables from related medical Practices ("PC’s")	$	1,521	$	403	$	1,118

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 and 2011

(UNAUDITED)

NOTE 3 – ACCOUNTS RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (Continued)

The Company's customers are concentrated in the healthcare industry.

The Company's receivables from the related and non-related professional corporations (PC's) substantially consist of fees outstanding under management agreements. Payment of the outstanding fees is dependent on collection by the PC's of fees from third party medical reimbursement organizations, principally insurance companies and health management organizations.

Payment of the management fee receivables from the PC’s may be impaired by the inability of the PC’s to collect in a timely manner their medical fees from the third party payors, particularly insurance carriers covering automobile no-fault and workers compensation claims due to longer payment cycles and rigorous informational requirements and certain other disallowed claims. Approximately 61% and 34% of the PC's net revenues for the nine months ended March 31, 2012 and 2011, respectively, were derived from no-fault and personal injury protection claims. The Company considers the aging of its accounts receivable in determining the amount of allowance for doubtful accounts. The Company generally takes all legally available steps to collect its receivables. Credit losses associated with the receivables are provided for in the condensed consolidated financial statements and have historically been within management's expectations.

Net revenues from management and other fees charged to the related PCs accounted for approximately 16.6% and 14.1% of the consolidated net revenues for the nine months ended March 31, 2012 and 2011, respectively.

Tallahassee Magnetic Resonance Imaging, PA, Stand Up MRI of Boca Raton, PA and Stand Up MRI & Diagnostic Center, PA (all related medical practices) entered into a guaranty for all management fees which were indebted to the Company. Each entity will jointly and severally guarantee to the Company all payments due to the Company which have arisen under each individual management agreement.

NOTE 4 - INVENTORIES

Inventories included in the accompanying condensed consolidated balance sheet consist of the following:

(000's omitted)

	March 31, 2012		June 30, 2011
Purchased parts, components and supplies	$	2,291	$	1,818
Work-in-process		1,045		582
	$	3,336	$	2,400

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 and 2011

(UNAUDITED)

NOTE 5 - COSTS & ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

1) Information relating to uncompleted contracts as of March 31, 2012 is as

follows:

(000's omitted)

Costs incurred on uncompleted contracts	$	2,613
Estimated earnings		1,862
		4,475
Less: Billings to date		4,107
	$	368

Included in the accompanying condensed consolidated balance sheet at March 31, 2012 under the following captions:

Costs and estimated earnings in excess of billings on uncompleted contracts	$	1,172
Less: Billings in excess of costs and estimated earnings on uncompleted contracts		804
	$	368

NOTE 5 - COSTS & ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS (Continued)

2) Customer advances consist of the following as of March 31, 2012:

	Total
Total Advances	$	7,415
Less: Advances
on contracts under construction		4,107
	$	3,308

NOTE 6 – STOCKHOLDERS EQUITY

Common Stock

During the nine months ended March 31, 2012:

a) The Company issued 28,334 shares of common stock to employees and consultants as compensation valued at $48,718 under a stock bonus plan.

b) The Company issued 208,000 shares of common stock for costs and expenses of $383,658.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 and 2011

(UNAUDITED)

NOTE 7 – OTHER CURRENT LIABILITIES

Other current liabilities in the accompanying condensed consolidated balance sheet consist of the following:

(000’s omitted)

	March 31, 2012		June 30, 2011
Accrued salaries, commissions and payroll taxes	$	515	$	839
Accrued interest		184		157
Litigation accruals		493		193
Sales tax payable		2,800		2,732
Legal and other professional fees		622		694
Accounting fees		296		435
Insurance premiums		53		22
Interest and penalty - sales tax		2,066		1,923
Penalty - 401k plan (see Note 10)		250		250
Purchase scanners		460		105
Rent		237		461
Other		188		425
	$	8,164	$	8,236

NOTE 8 - SEGMENT AND RELATED INFORMATION

The Company operates in two industry segments - manufacturing and the servicing of medical equipment and management of diagnostic imaging centers.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies as disclosed in the Company’s 10-K as of June 30, 2011. All inter-segment sales are market-based. The Company evaluates performance based on income or loss from operations.

Summarized financial information concerning the Company's reportable segments is shown in the following table:

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 and 2011

(UNAUDITED)

NOTE 8 - SEGMENT AND RELATED INFORMATION (Continued)

(000's omitted)

	Medical Equipment		Management of Diagnostic Imaging Centers		Totals
For the three months ended March 31, 2012
Net revenues from external customers	$	4,344	$	5,172	$	9,516
Inter-segment net revenues	$	202	$	—	$	202
Income from operations	$	736	$	867	$	1,603
Depreciation and amortization	$	173	$	407	$	580
Capital expenditures	$	22	$	223	$	245

For the three months ended March 31, 2011
Net revenues from external customers	$	4,679	$	3,975	$	8,654
Inter-segment net revenues	$	220	$	—	$	220
Income from operations	$	576	$	802	$	1,378
Depreciation and amortization	$	206	$	402	$	608
Capital expenditures	$	24	$	349	$	373

For the nine months ended March 31, 2012
Net revenues from external customers	$	13,502	$	14,950	$	28,452
Inter-segment net revenues	$	607	$	—	$	607
Income from operations	$	2,278	$	2,981	$	5,259
Depreciation and amortization	$	518	$	1,111	$	1,629
Capital expenditures	$	97	$	603	$	700

For the nine months ended March 31, 2011
Net revenues from external customers	$	14,579	$	10,779	$	25,358
Inter-segment net revenues	$	677	$	—	$	677
Income from operations	$	1,536	$	1,720	$	3,256
Depreciation and amortization	$	618	$	862	$	1,480
Capital expenditures	$	172	$	349	$	521

NOTE 9 – SUPPLEMENTAL CASH FLOW INFORMATION

During the nine months ended March 31, 2012 and March 31, 2011, the Company paid $122,000 and $230,000 for interest, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 and 2011

(UNAUDITED)

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Litigation

The Company is subject to legal proceedings and claims arising from the ordinary course of its business, including personal injury, customer contract and employment claims. In the opinion of management, the aggregate liability, if any, with respect to such actions, will not have a material adverse effect on the consolidated financial position or results of operations of the Company.

There were no material changes in litigation from that reported in our Form 10-K for the fiscal year ended June 30, 2011. In the Golden Triangle Company v. Fonar Corporation et al case (U.S. District Court for the Eastern District of New York CV10-2932), the Company made a motion to dismiss the plaintiff’s amended complaint, which was granted, leaving only the cause of action for breach of contract. The claims against the individual officers and employees were also dismissed. The Company filed its answer to the complaint, together with a counterclaim alleging the plaintiff, by attempting to overcharge the end customer, has damaged the Company’s reputation and ability to sell in Kuwait. The plaintiff, in turn has answered our counterclaim. In the Matt Malek Madison v. Fonar case (U.S. District Court, Northern District of California), Fonar appealed the judgment against it, but the U.S. Court of Appeals for 9^th Circuit affirmed the judgment of the District Court on January 31, 2012, awarding the plaintiff the $300,000 deposit with prejudgment interest from July 1, 2006. The $300,000 plus interest of $72,000 has been accrued as of March 31, 2012. Although, we have asked the Court of Appeals to reconsider its decision in an en banc (larger panel of judges) proceeding, our request was not granted.

Other Matters

The Company is also delinquent in filing sales tax returns for certain states, in which the Company has transacted business. As of March 31, 2012, the Company has recorded tax obligations of approximately $2,421,000 plus interest and penalties of approximately $2,066,000. The Company is in the process of determining the regulatory requirements in order to become compliant.

The Company has determined they may not be in compliance with the Department of Labor and Internal Revenue Service regulations concerning the requirements to file Form 5500 to report activity of its 401(k) Employee Benefit Plan. The filings do not require the Company to pay tax, however they may be subject to penalty for non-compliance. The Company has recorded provisions for any potential penalties totaling $250,000. The amount was the Company’s best estimate of potential penalties. Management is unable to determine the outcome of this uncertainty. The Company has engaged outside counsel to handle such matters to determine the necessary requirements to ensure compliance. On August 31, 2011, the Company submitted with the Internal Revenue Service a request for a compliance statement and a determination letter for our 401K plan. On December 9, 2011, the Internal Revenue Service issued a favorable determination letter on our 401K plan. The Company is still working with outside counsel to complete and file forms with the US Department of Labor.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 and 2011

(UNAUDITED)

NOTE 11 - INCOME TAXES

Effective January 1, 2007, the Company adopted the provisions of ASC topic 740 (formerly FASB Interpretation No. 48/FASB Statement No. 109, “Accounting for Uncertainty in Income Taxes”). ASC topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a corporate tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits”. A liability is recognized (or amount of net operating loss carryforward or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC topic 740.

In accordance with ASC topic 740, interest costs related to unrecognized tax benefits are required to be calculated (if applicable) and would be classified as “Interest expense, net”. Penalties if incurred would be recognized as a component of “Selling, general and administrative” expenses.

The Company files corporate income tax returns in the United States (federal) and in various state and local jurisdictions. In most instances, the Company is no longer subject to federal, state and local income tax examinations by tax authorities for years prior to 2007.

The adoption of the provisions of ASC topic 740 did not have a material impact on the Company’s consolidated financial position and results of operations. Upon the adoption and as of March 31, 2012, no liability for unrecognized tax benefits was required to be recorded. The Company does not expect its unrecognized tax benefit position to change during the next 12 months.

The Company recognized a deferred tax asset of $605,460, net of valuation allowance and a deferred tax liability of $605,460 as of March 31, 2012, primarily relating to net operating loss carryforwards of approximately $163,660,000 available to offset future taxable income through 2029. The net operating losses begin to expire in 2012 for federal and state income tax purposes.

The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers projected future taxable income and tax planning strategies in making this assessment. At present, the Company does not have a sufficient history of income to conclude that it is more-likely-than-not that the Company will be able to realize all of its tax benefits in the near future and therefore a valuation allowance was established for the full value of the deferred tax asset.

A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion or all of the valuation. Should the Company become profitable in future periods with supportable trends, the valuation allowance will be reversed accordingly.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012 and 2011

(UNAUDITED)

NOTE 12 – SUBSEQUENT EVENTS

On May 1, 2012, the Company repaid a portion of the Class A Stockholders capital contribution in the amount of $1.2 million. The Company’s subsidiary, HMCA, now owns an 80% interest in Imperial Management Services.

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

For the nine month period ended March 31, 2012, we reported a net income of $5.1 million on revenues of $28.5 million as compared to net income of $3.0 million on revenues of $25.4 million for the nine month period ended March 31, 2011. We recognized an operating income of $5.3 million for the nine month period ended March 31, 2012 compared to an operating income of $3.3 million for the nine month period ended March 31, 2011. The principal reason for our increased net income in the first nine months of fiscal 2012 as compared to our net income for the first nine months of fiscal 2011, was a significant increase in revenues for management fees coupled with a smaller increase in costs and expenses. Also contributing to our increased net income was an increase in revenues from service and repair fees.

For the three month period ended March 31, 2012, we reported net income of $1.6 million on revenues of $9.5 million as compared to net income of $1.3 million on revenues of $8.7 million for the three month period ended March 31, 2011.

Overall, our revenues increased 12.2% from $25.4 million for the first nine months of fiscal 2011 to $28.5 million for the first nine months of fiscal 2012. Although revenues from product sales decreased 25.4%, from $6.3 million for the first nine months of 2011 to $4.7 million for the first nine months of fiscal 2012, management fees increased by 38.7% from $10.8 million for the first nine months of fiscal 2011 to $15.0 million for the first nine months of fiscal 2012, and service and repair fees increased 6.4% from $8.3 million the first nine months of fiscal 2011 to $8.8 million the first nine months of fiscal 2012.

Due to the increase in our revenues along with a smaller increase in our costs and expenses, we recognized an operating income for the nine months ended March 31, 2012 of $5.3 million as compared to an operating income of $3.3 for the nine months ended March 31, 2011. The increase in the operating income was principally due to the smaller increase in costs and expenses of 4.9% from $22.1 million in the first nine months of fiscal 2011 to $23.2 million in the first nine months of fiscal 2012, while revenues increased 12.2%, from $25.4 million in the first nine months of fiscal 2011 to $28.5 million in the first nine months of fiscal 2012.

Our continuing efforts to control costs, combined with our intensive efforts to increase our management fees, the adoption of a new billing and collection contract in fiscal 2011 and the addition of an additional site, are responsible for our profitability during the nine months ended March 31, 2012.

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FONAR CORPORATION AND SUBSIDIARIES

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. Additionally, health care policy changes, including the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010 may have a material adverse effect on our operations or financial results. 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.

Effective May 2, 2011, HMCA contributed all of its assets, liabilities and business to Imperial, which is controlled but not wholly-owned by HMCA. Imperial is continuing the business of HMCA utilizing the same facilities, equipment and personnel as HMCA. This transaction did not result in a change of control or policy, but was solely a means to raise capital. To avoid confusion in making comparisons and to show the continuity of the business, our physician management and diagnostic services segment is sometimes referred to as “HMCA-IMPERIAL” for both periods before and after May 2, 2011.

Trends in the first nine months of fiscal 2012 include an increase in management and other fee revenues, which more than offset the decline in product sales revenues. Also costs related to product sales decreased 31.5% from $5.3 million for the first nine months of fiscal 2011 to $3.6 million for the first nine months of fiscal 2012 which corresponds to the decrease in product sales. We will continue to focus on our marketing efforts to improve sales performance and increase patient volume at the MRI facilities managed by HMCA-IMPERIAL in fiscal 2012. In addition, we will monitor our cost control program and will continue to reduce costs as necessary.

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FONAR CORPORATION AND SUBSIDIARIES

For the three month period ended March 31, 2012, as compared to the three month period ended March 31, 2011 overall revenues from MRI product sales decreased 29.4% ($1.3 million compared to $1.9 million), and for the nine month period ended March 31, 2012, as compared to the nine month period ended December 31, 2011 overall revenues from MRI product sales decreased 25.4% ($4.7 million compared to $6.3 million). Continuing tight credit and world-wide economic uncertainty have depressed the market for our MRI products, which in the overwhelming majority of cases are purchased on credit.

Service revenues for the three month period ended March 31, 2012 as compared to the three month period ended March 31, 2011 increased 7.5% ($3.0 million compared to $2.8 million). Unrelated party service and repair fees increased 8.6% ($3.0 million compared to $2.8 million) and related party service and repair fees decreased from $55,000 for the three month period ended March 31, 2011 to $27,000 for the three month period ended March 31, 2012. 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, 2012 as compared to the nine month period ended March 31, 2011 increased 6.4% ($8.8 million compared to $8.3 million). Unrelated party service and repair fees increased 7.5% ($8.7 million compared to $8.1 million) and related party service and repair fees decreased from $165,000 for the nine months ended March 31, 2011 to $83,000 for the nine months ended March 31, 2012.

There were approximately $2.2 million in foreign revenues for the first nine months of fiscal 2012 as compared to approximately $2.5 million in foreign revenues for the first nine months of fiscal 2011, representing a decrease in foreign revenues of 12%. We do not regard this as a material trend, but as part of a normal variation resulting from low volumes of foreign sales.

Overall, for the first nine months of fiscal 2012, revenues for the medical equipment segment decreased by 7.4% to $13.5 million from $14.6 million for the first nine months of fiscal 2011. The revenues generated by HMCA-IMPERIAL increased by 38.7%, to $15.0 million for the first nine months of fiscal 2012 as compared to $10.8 million for the first nine months of fiscal 2011. This trend reflects an increase in the percentage of our revenues derived from our diagnostic facilities management segment relative to our revenues derived from our medical equipment segment (52.5% for the first nine months of fiscal 2012 relative to 42.5% for the first nine months of fiscal 2011). The increase in HMCA-IMPERIAL revenues was the result of increased marketing efforts for the scanning centers and the opening of a new center.

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.

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FONAR CORPORATION AND SUBSIDIARIES

Costs related to product sales decreased by 30.9% from $1.4 million in the third quarter of fiscal 2011 to $962,000 in the third quarter of 2012, resulting from a decrease in the manufacturing activity. Costs related to product sales also decreased by 31.5% from $5.3 million in the first nine months of fiscal 2011 to $3.6 million in the first nine months of fiscal 2012.

Costs related to providing service for the third quarter increased by 11.3% from $808,000 in the third quarter of fiscal 2011 to $899,000 in fiscal 2012, notwithstanding an increase in service revenues of only 7.5%, from $2.8 million in the third quarter of fiscal 2011 to $3.0 million in the third quarter of fiscal 2012. Certain of the costs of providing service (employee salaries and overhead, for example) are not directly tied to revenue. Notwithstanding the foregoing, we believe that an important factor in controlling our service costs 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.

Costs related to providing service for the first nine months of fiscal 2012 increased by 17.9% from $2.2 million in the nine months of fiscal 2011 to $2.6 million in fiscal 2012, notwithstanding that service revenues increased only 6.4% from $8.3 million in the first nine months of fiscal 2011 to $8.8 million in the first nine months of fiscal 2012.

Overall, the operating results for our medical equipment segment increased to an operating income of $736,000 for the third quarter of fiscal 2012 as compared to an operating income of $576,000 for the third quarter of 2011, and improved to an operating income of $2.3 million for the first nine months of fiscal 2012 as compared to an operating income of $1.5 million for the first nine months of fiscal 2011.

HMCA-IMPERIAL revenues increased in the third quarter of fiscal 2012 by 30.1% to $5.2 million from $4.0 million for the third quarter of fiscal 2011, primarily due to increased revenues from our New York locations. Part of this increase in revenues was due to HMCA’s acquisition of Fair Haven Services, Inc. (“Fairhaven”) from Dr. Raymond V. Damadian, the President, Chairman of the Board and principal stockholder of the Company for $10 effective as of October 1, 2010. Fairhaven is the Company which leases the MRI scanners to the New York sites managed by HMCA-IMPERIAL. Also contributing to the increase in revenue was the increase in management and other fees resulting from renegotiating our annual management contracts with the professional corporations we manage, the opening of a new facility along with the acquisition of a new billing and collection contract with Health Diagnostics LLC.

HMCA-IMPERIAL revenues for the first nine months of fiscal 2012 increased by 38.7% from $10.8 million in the first nine months of fiscal 2011 to $15.0 million in the first nine months of fiscal 2012. We now manage eleven sites, all of which are equipped with FONAR UPRIGHT® MRI scanners. HMCA-IMPERIAL experienced an operating income of $3.0 million for the first nine months of fiscal 2012 compared to operating income of $1.7 million for the first nine months of fiscal 2011. The greater operating income was due primarily to an increase in management and other fees and the acquisition of a new billing and collection contract.

HMCA-IMPERIAL cost of revenues for the first nine months of fiscal 2012 as compared to the first nine months of fiscal 2011 increased by 34.8% to $9.1 million from $6.8 million. The increase in HMCA’s cost of revenues was primarily the result of the increased expenditures we have been making to improve HMCA revenues by our marketing efforts, which focus on the unique capability of our Upright® MRI Scanners to scan patients in different positions.

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FONAR CORPORATION AND SUBSIDIARIES

The increase in our consolidated net revenues of 10% from $8.7 million in the third quarter of fiscal 2011 to $9.5 million in the third quarter of fiscal 2012 was coupled with a smaller increase of 8.8% in total costs and expenses from $7.3 million in the third quarter of fiscal 2011 compared to $7.9 million in the third quarter of fiscal 2012. As a result, our income from operations of $1.4 million in the third quarter of fiscal 2011 increased to $1.6 million in the third quarter of fiscal 2012.

For the first nine months of fiscal 2012 our consolidated revenues increased by 12.2% to $28.5 million from $25.4 million for the first nine months of fiscal 2011 while the total costs and expenses increased by a significantly smaller 4.9% to $23.2 million for the first nine months of fiscal 2012 from $22.1 million for the first nine months of fiscal 2011. Our operating income of $3.3 million in the first nine months of fiscal 2011 increased to $5.3 million in the first nine months of fiscal 2012.

Selling, general and administrative expenses increased by 1.1% to $6.3 million in the first nine months of fiscal 2012 from $6.2 million in the first nine months of fiscal 2011. The compensatory element of stock issuances, which is included in selling, general and administrative expenses, was $49,000 for the first nine months of fiscal 2012 as compared to $161,000 for the first nine months of fiscal 2011.

Research and development expenses decreased by 11.5% to $938,000 for the first nine months of fiscal 2012 as compared to $1.1 million for the first nine months of fiscal 2011.

Interest expense in the first nine months of fiscal 2012 decreased by 8.3% to $333,000 from $363,000 in the first nine months of fiscal 2011.

Inventories increased by 39% to $3.3 million at March 31, 2012 as compared to $2.4 million at June 30, 2011 representing the purchase of raw materials and components in our inventory to fill orders.

Management fee and medical receivables decreased by 4.6% to $4.8 million at March 31, 2012 from $5.0 million at June 30, 2011, primarily due to renegotiated management fee contracts with an unrelated party and increased collections of outstanding receivables.

The overall trends reflected in the results of operations for the first nine months of fiscal 2012 are an increase in revenues from management and other fees, as compared to the first nine months of fiscal 2011 ($15.0 million for the first nine months of fiscal 2012 as compared to $10.8 million for the first nine months of fiscal 2011), and an decrease in MRI equipment segment revenues both absolutely ($13.5 million as compared to $14.6 million) and as compared to HMCA-IMPERIAL. Revenues were $13.5 million or 47.5% from the MRI equipment segment as compared to $15.0 million or 52.5% from HMCA-IMPERIAL, for the first nine months of fiscal 2012, as compared to $14.6 million or 57.5% from the MRI equipment segment and $10.8 million or 42.5%, from HMCA-IMPERIAL, for the first nine months of fiscal 2011.

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FONAR CORPORATION AND SUBSIDIARIES

On March 23, 2010, President Obama signed into law healthcare reform legislation in the form of the Patient Protection and Affordable Care Act (PPACA). The implementation of this law could have a profound impact on the healthcare industry. Most of the provisions of PPACA will be phased in over the next few years. In 2011, however, the House of Representatives voted to repeal PPACA; the Senate, however, narrowly defeated the bill to repeal the Act. Over half the States have brought or joined lawsuits challenging the Act as unconstitutional. The Supreme Court has heard oral arguments on the case and is planning to render a decision in June, 2012. To date, the PPACA has not had any material effect on our business, and it is not possible in the current legal and political environment to determine the impact of any healthcare reform which ultimately may be implemented.

We are committed to improving the operating results we experienced in the first nine months in fiscal 2012. 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® MRI, and Fonar-360™ MRI scanners, together with our works-in-progress, are intended to significantly improve our competitive position.

Our FONAR UPRIGHT® 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.

Fonar recently announced a major diagnostic breakthrough in multiple sclerosis achieved with advanced UPRIGHT® MRI. In a newly published paper, medical researchers at FONAR report a diagnostic breakthrough in multiple sclerosis (MS), based on observations made possible by the Company’s unique FONAR UPRIGHT® Multi-Position™ MRI scanner. The findings reveal that the cause of multiple sclerosis may be biomechanical and related to earlier trauma to the neck, which can result in obstruction of the flow of cerebrospinal fluid (CSF), which is produced and stored in the central anatomic structures of the brain known as the ventricles. Since the ventricles produce a large volume of CSF each day (500 cc), the obstruction can result in a build up of pressure within the ventricles, resulting in leakage of the CSF into the surrounding brain tissue. This leakage could be responsible for generating the brain lesions of multiple sclerosis.

The paper, titled “The Possible Role of Cranio-Cervical Trauma and Abnormal CSF Hydrodynamics in the Genesis of Multiple Sclerosis," has just been published and appears in the latest issue of the journal Physiological Chemistry and Physics and Medical NMR (Sept. 20, 2011, 41: 1-17).

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FONAR CORPORATION AND SUBSIDIARIES

Recently, this capability of the FONAR UPRIGHT® 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® 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® 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® 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® Multi-Position™ 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™ FONAR UPRIGHT® 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® and examined in a full range of flexion and extension positions made possible by FONAR’s new UPRIGHT® 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™ Multi-Position™ 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).

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FONAR CORPORATION AND SUBSIDIARIES

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® Multi-Position™ 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.

Most recently a combined study of 1,200 neck pain patients published in “Brain Injury” (July 2010: 24(7-8): 988-944) by 8 university medical centers reported that cerebellar tonsil ectopia (CTE) 1mm or greater was found and visualized 2.5 times (250%) more frequently when patients who had sustained MVA whiplash injuries were scanned upright rather than lying down (recumbent).

The FONAR UPRIGHT® 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™ 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™ 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™ is presently marketed as a diagnostic scanner and is sometimes referred to as the Open Sky™ MRI. In its Open Sky™ version, the Fonar 360™ 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™ 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®, is 0.6 Tesla.

In the future, we expect the Fonar 360™ to function as an interventional MRI. The enlarged room sized magnet and 360º access to the patient afforded by the Fonar 360™ 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.

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The Company expects marked demand for its most commanding MRI product, the FONAR UPRIGHT® MRI because of its exceptional features in patient diagnosis and treatment. This scanner additionally provides improved image quality and higher imaging speed because of its higher field strength of .6 Tesla. The geometry of the FONAR UPRIGHT® MRI magnet and its transverse magnetic field enables the use of two detector rf coils operating in quadrature which increases the FONAR UPRIGHT® 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 increased by 18.9% from $9.3 million at June 30, 2011 to $11.0 million at March 31, 2012 Marketable securities approximated $34,000 at March 31, 2012, as compared to $33,000 at June 30, 2011.

Cash provided by operating activities for the first nine months of fiscal 2012 was $4.3 million. Cash provided by operating activities was attributable to net income of $5.1 million, an increase in billing in excess of costs and estimated earnings on uncompleted contracts of $800,000 offset by a decrease of customer advances of $1.5 million, an increase in inventories of $936,000, an increase in costs and estimated earnings on uncompleted contracts of $1.0 million along with an increase in accounts management fee and medical receivables of $1.4 million.

Cash used in investing activities for the first nine months of fiscal 2012 was $676,000. The principal uses of cash used in investing activities during the first nine months of fiscal 2012 consisted mainly of capitalized software and patent costs of $94,000, and the purchase of property and equipment of $606,000.

Cash used in financing activities for the first nine months of fiscal 2012 was $1.9 million. The uses of cash in financing activities during the first nine months of fiscal 2012 were the repayment of principal on long-term debt and capital lease obligations of $1.1 million along with distributions to noncontrolling interests of $848,000.

Total liabilities decreased by 6.0% to $24.2 million at March 31, 2012 from $25.7 million at June 30, 2011. Miscellaneous (“Other”) current liabilities remained constant at $8.2 million at June 30, 2011 and at March 31, 2012 coupled with a decrease in long-term debt and capital leases from $1.7 million at June 30, 2011 to $1.0 million at March 31, 2012, a decrease in accounts payable from $2.2 million at June 30, 2011 to $2.1 million at March 31, 2012, and a decrease in customer advances from $4.8 million at June 30, 2011 to $3.3 million at March 31, 2012. Unearned revenue on service contracts increased to $6.4 million at March 31, 2012 as compared to $5.8 million at June 30, 2011.

As of March 31, 2012, the total of $8.2 million in other current liabilities included accrued salaries and payroll taxes of $515,000, accrued interest and penalties of $2.1 million and sales taxes of $2.8 million.

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Our working capital increased to $4.6 million at March 31, 2012 from a working capital deficit of $575,000 at June 30, 2011. This resulted from an increase in current assets ($22.6 million at June 30, 2011 as compared to $26.9 million at March 31, 2012), in particular an increase in inventories of $936,000 ($2.4 million at June 30, 2011 as compared to $3.3 million at March 31, 2012), and an increase of accounts receivable of $1.0 million ($5.3 million at June 30, 2011 as compared to $6.3 million at March 31, 2012) along with a decrease in current liabilities from $23.1 million at June 30, 2011 to $22.3 million at March 31, 2012.

Fonar has not committed to making any significant capital expenditures in the remainder of the 2012 fiscal year.

Our business plan calls for a continuing emphasis on providing our customers with enhanced equipment service and maintenance capabilities and delivering state-of-the-art, innovative and high quality equipment and upgrades at competitive prices. Also critical to our business plan are improvement and expansion of the MRI facilities managed by our subsidiary HMCA-IMPERIAL.

Critical to our business plan are improvement and expansion of the MRI facilities managed by our subsidiary HMCA-IMPERIAL, and increasing the number of scans performed at those facilities. In addition, our business plan calls for a continuing emphasis on providing our customers with enhanced equipment service and maintenance capabilities and delivering state-of-the-art, innovative and high quality equipment and upgrades at competitive prices.

The Company continues to focus its efforts on increased marketing campaigns to strengthen the demand for its products and services. Management is seeking to promote wider market recognition of Fonar’s scanner products, and increase demand for Upright® scanning at the facilities HMCA-IMPERIAL manages. Given the liquidity and credit constraints in the markets, the sale of medical equipment has and may continue to suffer. There can be no assurance that the Company would be able to secure additional funds in the event such funds were needed on terms and conditions acceptable to the Company. In such case, further reduction in operating expenses might need to be implemented in order for the Company to generate positive cash flow to sustain the operations of the Company.

Management anticipates that Fonar’s capital resources will improve if (1) Fonar’s MRI scanner products gain wider market recognition and acceptance resulting in increased product sales, (2) service and maintenance revenues increase as the warranties on scanners expire and (3) HMCA revenues can be increased through the Company’s vigorous marketing efforts and the installation of more HMCA managed Upright® MRI scanners. If our marketing efforts to increase revenues fail, and we are unable to raise debt or equity capital, we will experience a shortfall in cash, and it will be necessary to further reduce operating expenses to attempt to avoid the need to curtail our operations. Current economic, credit and political conditions have contributed to a challenging business environment for our company. The precise impact of these conditions can not be fully predicted. There can be no assurance that we would be able to secure additional funds if needed.

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Although the Company has experienced eight consecutive fiscal quarters of profitability, we previously had a history of operating losses and negative cash flows from operating activities. We had a stockholders deficiency as recently as the fourth fiscal quarter of fiscal 2011, until we completed a private placement of $6 million on May 2, 2011. In the event that we are unable to sustain our current profitability and working capital surplus, and are unable to secure external financing, we may not be able to meet our obligations as they come due, raising substantial doubts as to our ability to continue as a going concern. Our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles, contemplate that we will continue as a going concern and do not contain any adjustments that might result if we were unable to continue as a going concern. Changes in our operational plans, our existing and anticipated working capital needs, the acceleration or modification of our business plans, lower than anticipated revenues, increased expenses, or other events may all affect our ability to continue as a going concern.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company maintains its funds in liquid accounts. None of our investments are in fixed rate instruments.

All of our revenue, expense and capital purchasing activities are transacted in United States dollars.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rule 13(a)-15(e)) are controls and other procedures that are designed to ensure that information required to be disclosed by a public company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a public company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow for timely decisions regarding required disclosure. Disclosure controls and procedures include many aspects of internal control over financial reporting.

In connection with the preparation of this Quarterly Report on Form 10-Q for the nine months ended March 31, 2012, management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act and have determined that such controls and procedures were effective as of March 31, 2012.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls or in other factors that could significantly affect these controls, during the quarter ended March 31, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings: There were no material changes in litigation from that reported in our Form 10-K for the fiscal year ended June 30, 2011 and the Form 10-Q for the fiscal quarter ended December 31, 2011. In the Golden Triangle Company v. Fonar Corporation et al case (U.S. District Court for the Eastern District of New York CV10-2932), the Company has made a motion to dismiss the plaintiff’s amended complaint, which was granted, leaving only the cause of action for breach of contract. The claims against the individual officers and employees were also dismissed. Fonar filed its answer to the complaint, together with a counterclaim alleging the plaintiff, by attempting to overcharge the end customer has damaged Fonar’s reputation and ability to sell in Kuwait. The plaintiff, in turn, has answered our counterclaim. The case is now in discovery, with a deadline of October 31, 2012 to complete discovery.

In the Matt Malek Madison v. Fonar case (U.S. District Court, Northern District of California), Fonar appealed the judgment against it, but the U.S. Court of Appeals for 9th Circuit affirmed the judgment of the District Court on January 31, 2012, awarding the plaintiff the $300,000 deposit with prejudgment interest from July 1, 2006. The $300,000 plus interest of $72,000 has been accrued as of March 31, 2012. Although we have asked the Court of Appeals to reconsider its decision in an en banc (larger panel of judges) proceeding, our request was not granted.

Item 1A – Risk Factors: Not required. We are a smaller reporting company.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds: None

Item 3 - Defaults Upon Senior Securities: None

Item 4 - Mine Safety Disclosure: Not Applicable

Item 5 - Other Information: The deficiency referred to in the Form 8-K in Item 6(d) was too few directors on the audit committee resulting from the death of director Robert Djerejian. This deficiency has been remedied by the appointment of another independent director to fill the vacancy, Ronald G. Lehman.

Item 6 - Exhibits and Reports on Form 8-K:

a) Exhibit 31.1 Certification. See Exhibits

b)Exhibit 32.1 Certification. See Exhibits

c)Report on Form 8-K filed on February 15, 2012, Item 2.02: Results of Operations and Financial Condition for the second quarter of Fiscal 2012

d)Report on Form 8-K filed on April 27, 2012, Item 3:01(a) Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing.

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SIGNATURES

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

FONAR CORPORATION

(Registrant)

By: /s/ Raymond V. Damadian

Raymond V. Damadian

President & Chairman

Dated: May 15, 2012

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