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,~~SEPTEMBER 30, 2014

~~[ ] 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 incorporation or organization)		(I.R.S. Employer Identification No.)
~~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~~

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, a non-accelerated filer, or a ~~non-accelerated filer.~~smaller reporting company. See definition of accelerated filer, ~~and~~ large accelerated filer or smaller reporting company in Rule 12b-2 of the Exchange Act.(Check one): Large accelerated filer___ Accelerated ~~filer___~~filer_X_ 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,~~October 31, 2014
Common Stock, par value $.0001	~~6,025,075~~	6,050,840
Class B Common Stock, par value $.0001	146
Class C Common Stock, par value $.0001	382,513
Class A Preferred Stock, par value $.0001	313,438

FONAR CORPORATION AND SUBSIDIARIES

INDEX

PART I - FINANCIAL INFORMATION	PAGE
Item 1. Financial Statements			3
Condensed Consolidated Balance Sheets - ~~March 31,~~September 30, 2014 (Unaudited) and June 30, ~~2013~~	2014	3
Condensed Consolidated Statements of Income for the Three Months Ended ~~March 31,~~September 30, 2014 and ~~March 31,~~September 30, 2013 (Unaudited)		6
~~Condensed Consolidated Statements of Income for the Nine Months~~ ~~Ended March 31, 2014 and March 31, 2013 (Unaudited)~~		7
Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~March 31,~~September 30, 2014 and ~~March 31,~~September 30, 2013 (Unaudited)		8	7
Notes to Condensed Consolidated Financial Statements (Unaudited)		9	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		25	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk		33	23
Item 4. Controls and Procedures		33	23
PART II - OTHER INFORMATION		34	24
Item 1. Legal Proceedings		34	24
Item 1A. Risk Factors		34	24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		34	24
Item 3. Defaults Upon Senior Securities		34	24
Item 4. Mine Safety Disclosures		34	24
Item 5. Other Information		34	24
Item 6. Exhibits		34	24
Signatures		34	24

Page 2

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(~~AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

ASSETS

March 31,
2014 June 30,
2013 *
Cash and cash equivalents $ 9,589 $ 7,871

Accounts receivable – net 4,444 4,444

Accounts receivable - related party 30 —

Medical receivable – net 8,924 8,126

Management and other fees receivable – net 12,675 11,466

Management and other fees receivable – related medical practices – net 3,463 2,382

Inventories 2,510 2,077

Prepaid expenses and other current assets 1,708 1,500

Total Current Assets 43,343 37,866

Property and equipment – net 16,045 17,524

Goodwill 1,767 1,767

Other intangible assets – net 11,043 11,904

Deferred income tax asset 2,936 2,936

Other assets 1,013 1,154

Total Assets $ 76,147 $ 73,151

	September 30, 2014		June 30, 2014 *
Current Assets:
Cash and cash equivalents	$	10,662	$	9,952
Accounts receivable – net		5,186		4,450
Accounts receivable - related party		90		—
Medical receivable – net		8,779		8,808
Management and other fees receivable - net		12,952		11,970
Management and other fees receivable – related medical practices – net		3,253		3,427
Costs and estimated earnings in excess of billings on uncompleted contracts		1,620		760
Inventories		2,422		2,444
Prepaid expenses and other current assets		669		1,011
Total Current Assets		45,633		42,822
Deferred income tax asset		5,740		5,740
Property and equipment – net		14,489		15,030
Goodwill		1,767		1,767
Other intangible assets – net		10,233		10,509
Other assets		905		922
Total Current Assets	$	78,767	$	76,790

*Condensed from audited financial statements.

See accompanying notes to condensed consolidated financial statements.

Page 3

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

LIABILITIES AND STOCKHOLDERS’ EQUITY

	September 30, 2014		June 30, 2014 *
Current Liabilities:
Current portion of long-term debt and capital leases	$	2,892	$	2,891
Accounts payable		2,805		2,482
Other current liabilities		9,242		9,024
Unearned revenue on service contracts		5,296		4,731
Unearned revenue on service contracts – related party		83		—
Customer deposits		1,570		1,927
Billings in excess of costs and estimated earnings on uncompleted contracts		142		142
Total Current Liabilities		22,030		21,197
Long-Term Liabilities:
Deferred income tax liability		584		584
Due to related medical practices		228		234
Long-term debt and capital leases, less current portion		7,559		8,482
Other liabilities		263		386
Total Long-Term Liabilities		8,634		9,686
Total Liabilities		30,664		30,883

*Condensed from audited financial statements.

See accompanying notes to condensed consolidated financial statements.

~~See accompanying notes to condensed consolidated financial statements.~~

~~Page 3~~

~~FONAR CORPORATION AND SUBSIDIARIES~~

~~CONDENSED CONSOLIDATED BALANCE SHEETS~~

~~(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~

~~(UNAUDITED)~~

~~LIABILITIES AND STOCKHOLDERS' EQUITY~~

March 31,
2014 June 30,
2013 *
Current Liabilities:
Current portion of long-term debt and capital leases $ 2,967 $ 2,886
Accounts payable 2,863 2,752
Other current liabilities 9,665 8,636
Unearned revenue on service contracts 4,873 4,965
Unearned revenue on service contracts - related party 28 —
Customer advances 1,791 1,858
Income tax payable — 20
Total Current Liabilities 22,187 21,117

Long-Term Liabilities:
Due to related medical practices 231 231
Long-term debt and capital leases, less current
portion 9,404 12,887
Deferred income tax liability 462 462
Other liabilities 433 654

Total Long-Term Liabilities 10,530 14,234

Total Liabilities 32,717 35,351

*Condensed from audited financial statements.

~~See accompanying notes to condensed consolidated financial statements.~~

Page 4

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(~~AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

LIABILITIES AND ~~STOCKHOLDERS'~~STOCKHOLDERS’ EQUITY (Continued)

STOCKHOLDERS' EQUITY:	September 30, 2014			June 30, 2014 *
Class A non-voting preferred stock $.0001 par value; 453 shares authorized at September 30, 2014 and June 30, 2014, 313 issued and outstanding at September 30, 2014 and June 30, 2014	$	—		$	—
Preferred stock $.001 par value; 567 shares authorized at September 30, 2014 and June 30, 2014, issued and outstanding – none		—			—
Common Stock $.0001 par value; 8,500 shares authorized at September 30, 2014 and June 30, 2014, 6,062 and 6,057 issued at September 30, 2014 and June 30, 2014, respectively; 6,051 and 6,046 outstanding at September 30, 2014 and June 30, 2014, respectively		1			1
Class B Common Stock (10 votes per share) $.0001 par value; 227 shares authorized at September 30, 2014 and June 30, 2014; .146 issued and outstanding at September 30, 2014 and June 30, 2014		—			—
Class C Common Stock (25 votes per share) $.0001 par value; 567 shares authorized at September 30, 2014 and June 30, 2014, 383 issued and outstanding at September 30, 2014 and June 30, 2014		—			—
Paid-in capital in excess of par value		175,413			175,284
Accumulated deficit		(146,724	)		(149,259	)
Notes receivable from employee stockholders		(37	)		(39	)
Treasury stock, at cost - 12 shares of common stock at September 30, 2014 and June 30, 2014		(675	)		(675	)
Total Fonar Corporation Stockholder Equity		27,978			25,312
Noncontrolling interests		20,125			20,595
Total Stockholders' Equity		48,103			45,907
Total Liabilities and Stockholders' Equity	$	78,767		$	76,790

STOCKHOLDERS' EQUITY March 31, 2014 June 30, 2013 *

Class A non-voting preferred stock $.0001 par value; 453 shares authorized at March 31, 2014 and June 30, 2013, 313 issued and outstanding at March 31, 2014 and June 30, 2013 —   —
Preferred stock $.001 par value; 567 shares authorized at March 31, 2014 and June 30, 2013, issued and outstanding – none —   —
Common Stock $.0001 par value; 8,500 shares authorized at March 31, 2014 and June 30, 2013, 6,037 and 5,981 issued at March 31, 2014 and June 30, 2013, respectively; 6,025 and 5,969 outstanding at March 31, 2014 and June 30, 2013, respectively 1 1
Class B Common Stock (10 votes per share) $ .0001 par value; 227 shares authorized at March 31, 2014 and June 30, 2013, .146 issued and outstanding at March 31, 2014 and June 30, 2013 —   —
Class C Common Stock (25 votes per share) $.0001 par value; 567 shares authorized at March 31, 2014 and June 30, 2013, 383 issued and outstanding at March 31, 2014 and June 30, 2013 —   —
Paid-in capital in excess of par value 175,023 174,499
Accumulated deficit (153,336 ) (159,655 )
Notes receivable from employee stockholders (41 ) (55 )
Treasury stock, at cost - 12 shares of common stock at March 31, 2014 and June 30, 2013 (675 ) (675 )
Total Fonar Corporation Stockholder Equity 20,972 14,115
Non controlling interests 22,458 23,685
Total Stockholders' Equity 43,430 37,800
Total Liabilities and Stockholders' Equity $ 76,147 $ 73,151

*Condensed from audited financial statements.

See accompanying notes to condensed consolidated financial statements.

Page 5

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(~~AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

	FOR THE THREE MONTHS ENDED MARCH 31						FOR THE THREE MONTHS ENDED SEPTEMBER 30,
REVENUES	2014			2013			2014			2013
Product sales – net	$	478		$	416		$	1,271		$	28
Service and repair fees – net		2,518			2,867			2,491			2,512
Service and repair fees – related parties - net		27			27
Service and repair fees - related parties – net								28			28
Patient fee revenue, net of contractual allowances and discounts		6,090			965			6,787			5,827
Provision for bad debts for patient fee		(2,868	)		—			(3,146	)		(2,040	)
Management and other fees – net		8,538			5,402			8,738			8,511
Management and other fees – related medical practices – net		2,257			1,965
Management and other fees - related medical practices – net								1,816			1,965
Total Revenues – Net		17,040			11,642			17,985			16,831
COSTS AND EXPENSES
Costs related to product sales		223			498			1,085			48
Costs related to service and repair fees		623			819			507			544
Costs related to service and repair fees – related parties		7			8
Costs related to service and repair fees - related parties								6			6
Costs related to patient fee revenue		1,947			791			1,899			1,848
Costs related to management and other fees		5,327			2,606			5,590			5,075
Costs related to management and other fees – related medical practices		1,318			900			979			1,219
Research and development		360			381			397			395
Selling, general and administrative		3,935			3,774			3,578			3,737
Provision for bad debts		981			235			506			(94	)
Total Costs and Expenses		14,721			10,012			14,547			12,778
Income From Operations		2,319			1,630			3,438			4,053
Interest Expense		(203	)		(79	)		(204	)		(243	)
Investment Income		57			55			62			61
Other Income		39			—
Income Before Provision for Income Taxes		2,212			1,606
Other Expense								—			(151	)
Income Before Provision for Income Taxes and noncontrolling Interests								3,296			3,720
Provision for Income Taxes		65			25			40			100
Net Income		2,147			1,581			3,256			3,620
Net Income - Non Controlling Interests		(408	)		(505	)
Net Income - Noncontrolling Interests								(721	)		(1,183	)
Net Income - Controlling Interests	$	1,739		$	1,076		$	2,535		$	2,437
Net Income Available to Common Stockholders	$	1,625		$	1,005		$	2,370		$	2,277
Net Income Available to Class A Non-Voting Preferred Stockholders	$	85		$	53		$	123		$	119
Net Income Available to Class C Common Stockholders	$	29		$	18		$	42		$	41
Basic Net Income Per Common Share Available to Common Stockholders	$	0.27		$	0.17		$	0.39		$	0.38
Diluted Net Income Per Common Share Available to Common Stockholders	$	0.26		$	0.17		$	0.38		$	0.37
Basic and Diluted Income Per Share-Common C	$	0.08		$	0.05
Weighted Average Basic Shares Outstanding - Common Stockholders		6,022			5,937
Weighted Average Diluted Shares Outstanding		6,150			6,065
Weighted Average Basic Shares Outstanding – Class C		383			383
Basic and Diluted Income Per Share - Class C Common							$	0.11		$	0.11
Weighted Average Basic Shares Outstanding – Common Stockholders								6,050			5,978
Weighted Average Diluted Shares Outstanding - Common Stockholders								6,178			6,106
Weighted Average Basic Shares Outstanding – Class C Common								383			383
Weighted Average Diluted Shares Outstanding – Class C Common		383			383			383			383

See accompanying notes to condensed consolidated financial ~~statements (unaudited).~~statements.

Page 6

~~FONAR CORPORATION AND SUBSIDIARIES~~

~~CONDENSED CONSOLIDATED STATEMENTS OF INCOME~~

~~(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~

~~(UNAUDITED)~~

FOR THE NINE MONTHS ENDED MARCH 31,
REVENUES 2014 2013
Product sales – net $ 1,261 $ 2,536
Service and repair fees – net 7,578 8,341
Service and repair fees – related parties - net 83 83
Patient fee revenue, net of contractual allowances and discounts 17,811 965
Provision for bad debts for patient fee (7,130 ) —
Management and other fees – net 24,955 12,946
Management and other fees – related medical practices – net 6,923 5,895
Total Revenues – Net 51,481 30,766

COSTS AND EXPENSES
Costs related to product sales 902 2,457
Costs related to service and repair fees 1,755 2,579
Costs related to service and repair fees - related parties 19 26
Costs related to patient fee revenue 5,823 791
Costs related to management and other fees 15,591 7,013
Costs related to management and other fees – related medical practices 3,808 2,568
Research and development 1,128 1,031
Selling, general and administrative 12,024 8,338
Provision for bad debts 763 735
Total Costs and Expenses 41,813 25,538
Income From Operations 9,668 5,228
Interest Expense (682 ) (258 )
Investment Income 178 174
Other Expense (113 ) (13 )

Income Before Provision for Income Taxes 9,051 5,131
Provision for Income Taxes 235 152
Net Income 8,816 4,979
Net Income - Non Controlling Interests (2,497 ) (1,103 )
Net Income - Controlling Interests $ 6,319 $ 3,876
Net Income Available to Common Stockholders $ 5,907 $ 3,621
Net Income Available to Class A Non-voting Preferred Stockholders $ 307 $ 190
Net Income Available to Class C Common Stockholders $ 105 $ 65
Basic Net Income Per Common Share Available to Common Stockholders $ 0.98 $ 0.61
Diluted Net Income Per Common Share Available to Common Stockholders $ 0.96 $ 0.60
Basic and Diluted Income Per Share-Common C $ 0.27 $ 0.17
Weighted Average Basic Shares Outstanding 6,002 5,921
Weighted Average Diluted Shares Outstanding 6,130 6,049
Weighted Average Basic Shares Outstanding – Class C Common 383 383
Weighted Average Diluted Shares Outstanding – Class C Common 383 383

~~See accompanying notes to condensed consolidated financial statements (unaudited).~~

~~Page 7~~

FONAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(~~AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

FOR THE NINE MONTHS ENDED MARCH 31,
2014 2013
Cash Flows from Operating Activities:
Net income $ 8,816 $ 4,979
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 2,887 1,489
Provision for bad debts 7,894 735
Stock issued for costs and expenses 407 —
Compensatory element of stock issuances 86 395
(Increase) decrease in operating assets, net:
Accounts, management fee and medical receivable(s) (11,012 ) (3,552 )
Notes receivable 75 82
Costs and estimated earnings in excess of billings on uncompleted contracts (236 ) 640
Inventories (433 ) (89 )
Prepaid expenses and other current assets 31 (615 )
Other assets 63 (183 )
Increase (decrease) in operating liabilities, net:
Accounts payable 110 515
Other current liabilities 964 1,214
Customer advances (67 ) 882
Other liabilities (221 ) (39 )
Due to related medical practices 1 2
Income tax payable (20 ) (100 )
Net cash provided by operating activities 9,345 6,355

Cash Flows from Investing Activities:
Purchases of property and equipment (375 ) (568 )
Cost of HDM acquisition —   (40,000 )
Cost of patents (172 ) (109 )
Proceeds from non controlling interests —   19,800
Net cash used in investing activities (547 ) (20,877 )

Cash Flows from Financing Activities:
Repayment of borrowings and capital lease obligations (3,401 ) (983 )
Stock option exercised 31 —
Distributions to non controlling interests (3,724 ) (1,298 )
Proceeds from long-term debt —   14,000
Repayment of notes receivable from employee stockholders 14 14
Net cash (used in) provided by financing activities (7,080 ) 11,733
Net Increase (Decrease) in Cash and Cash Equivalents 1,718 (2,789 )
Cash and Cash Equivalents – Beginning of Period 7,871 12,032
Cash and Cash Equivalents - End of Period $ 9,589 $ 9,243

	FOR THE THREE MONTHS ENDED SEPTEMBER 30,
	2014			2013
Cash Flows from Operating Activities:
Net income	$	3,256		$	3,620
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		888			982
Provision for bad debts		506			(94	)
Compensatory element of stock issuances		53			19
Stock issued for costs and expenses		76			110
(Increase) decrease in operating assets, net:
Accounts, medical and management fee receivable(s)		(2,111	)		(1,974	)
Notes receivable		81			35
Costs and estimated earnings in excess of billings on uncompleted contracts		(860	)		—
Inventories		22			(49	)
Prepaid expenses and other current assets		284			210
Other assets		(5	)		40
Increase (decrease) in operating liabilities, net:
Accounts payable		323			(58	)
Other current liabilities		865			1,008
Customer deposits		(357	)		60
Other liabilities		(123	)		(29	)
Due to related medical practices		(6	)		(1	)
Income tax payable		—			(20	)
Net cash provided by operating activities		2,892			3,859
Cash Flows from Investing Activities:
Purchases of property and equipment		(26	)		(182	)
Cost of patents		(46	)		(47	)
Net cash used in investing activities		(72	)		(229	)
Cash Flows from Financing Activities:
Repayment of borrowings and capital lease obligations		(921	)		(970	)
Distributions to noncontrolling interests		(1,191	)		(1,295	)
Repayment of notes receivable from employee stockholders		2			2
Net cash used in financing activities		(2,110	)		(2,263	)
Net Increase in Cash and Cash Equivalents		710			1,367
Cash and Cash Equivalents - Beginning of Period		9,952			7,871
Cash and Cash Equivalents - End of Period	$	10,662		$	9,238

See accompanying notes to condensed consolidated financial ~~statements (unaudited).~~statements.

Page 87

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~MARCH 31,~~SEPTEMBER 30, 2014 and 2013

(~~AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~Amounts and shares in thousands, except per share amounts)

(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,~~September 30, 2014, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, ~~2014.~~2015. 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 ~~October 15, 2013~~September 29, 2014 for the fiscal year ended June 30, ~~2013.~~2014.

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.

Earnings Per Share

Basic earnings per share (“EPS”) is computed based onupon the weighted average number of shares of common stock and stock equivalents outstanding, net of common stock. 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~~income per share and applied the if converted method in calculating diluted ~~earnings~~income per share for the three ~~and nine~~ months ended ~~March 31,~~September 30, 2014 and ~~March 31,~~ 2013.

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,~~September 30, 2014 and ~~March 31,~~ 2013, diluted EPS for common shareholders includes 128 shares upon conversion of Class C Common.

Page 9

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~MARCH 31,~~SEPTEMBER 30, 2014 and 2013

(~~AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ~~(Continued)~~(CONTINUED)

Earnings Per Share (Continued)

Three months ended
March 31, 2014

Three months ended
March 31, 2013
Basic Total Common Stock Class C Common Stock Total Common Stock Class C Common Stock
Numerator:
Net income Available to  common stockholders $ 1,739 $ 1,625 $ 29 $ 1,076 $ 1,005 $ 18
Denominator:
Weighted average shares  outstanding 6,022 6,022 383 5,937 5,937 383
Basic income per common  share $ 0.29 $ 0.27 $ 0.08 $ 0.18 $ 0.17 $ 0.05

Diluted

Denominator:
Weighted average shares  outstanding 6,022 383 5,937 383
Stock options —   —   —   —
Convertible Class C Stock 128 —   128 —
Total Denominator for diluted earnings per share 6,150 383 6,065 383
Diluted income per common share $ 0.26 $ 0.08 $ 0.17 $ 0.05

	Three months ended September 30, 2014						Three months ended September 30, 2013
		Total		Common Stock		Class C Common Stock		Total		Common Stock		Class C Common Stock
Basic Numerator: Net income available to common stockholders	$	2,535	$	2,370	$	42	$	2,437	$	2,277	$	41
Denominator: Weighted average shares outstanding		6,050		6,050		383		5,978		5,978		383
Basic income per common share	$	0.42	$	0.39	$	0.11	$	0.41	$	0.38	$	0.11
Diluted Denominator: Weighted average shares outstanding				6,050		383				5,978		383
Convertible Class C Stock				128		—				128		—
Total Denominator for diluted earnings per share				6,178		383				6,106		383
Diluted income per common share			$	0.38	$	0.11			$	0.37	$	0.11

~~Page 10~~

~~FONAR CORPORATION AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~MARCH 31, 2014 and 2013~~

~~(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~

~~(UNAUDITED)~~

~~NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)~~

~~Earnings Per Share~~ ~~(Continued)~~

Nine months ended
March 31, 2014

Nine months ended
March 31, 2013
Basic Total Common Stock Class C Common Stock Total Common Stock Class C Common Stock
Numerator:
Net income Available to  common stockholders $ 6,319 $ 5,907 $ 105 $ 3,876 $ 3,621 $ 65
Denominator:
Weighted average shares  outstanding 6,002 6,002 383 5,921 5,921 383
Basic income per common  share $ 1.05 $ 0.98 $ 0.27 $ 0.65 $ 0.61 $ 0.17

Diluted

Denominator:
Weighted average shares  outstanding 6,002 383 5,921 383
Stock options —   —   —   —
Convertible Class C Stock 128 —   128 —
Total Denominator for diluted earnings per share 6,130 383 6,049 383
Diluted income per common share $ 0.96 $ 0.27 $ 0.60 $ 0.17

~~Page 11~~

~~FONAR CORPORATION AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~MARCH 31, 2014 and 2013~~

~~(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~

~~(UNAUDITED)~~

~~NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)~~

Recent Accounting Pronouncements

In July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment. This ASU simplifies how entities test indefinite-lived intangible assets for impairment which improves consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in previously issued standards. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, early adoption is permitted. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial position and results of operations.

The FASB has issued ASU No. ~~2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of~~2014-09,Revenue from Contracts with Customers. This ASU supercedes the ~~FASB Emerging Issues Task Force).~~revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The ~~amendments in this ASU state~~standard requires that an ~~unrecognized tax benefit,~~entity recognizes revenue to depict the transfer of promised goods or ~~a portion of~~services to customers in an ~~unrecognized tax benefit, should~~amount that reflects the consideration to which the company expects to be ~~presented~~entitled in ~~the financial statements as a reduction to a deferred tax asset~~exchange for ~~a net operating loss carryforward, a similar tax loss,~~those goods or ~~a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward~~services. This ASU is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use,effective on January 1, 2017 and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The amendments should be applied ~~prospectively~~retrospectively to ~~all unrecognized tax benefits that exist~~each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the ~~effective date. Retrospective application is permitted.~~date of initial application. The adoption of this standard ~~did~~is not expected to have a material impact on the Company’s condensed consolidated financial 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 ~~March 31,~~September 30, 2014 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 2014 or 2013, 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.

Page 12

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~MARCH 31,~~SEPTEMBER 30, 2014 and 2013

(~~AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ~~(Continued)~~(CONTINUED)

Reclassifications

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

NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE

~~Receivables, net is comprised of the following at March 31, 2014:~~Accounts Receivable, Medical Receivable and Management and Other Fees Receivable

Gross
Receivable Allowance for
doubtful accounts Net
Receivables from equipment sales and service contracts $ 4,701 $ 257 $ 4,444
Receivables from equipment sales and service contracts - related party $ 30 — $ 30
Medical Receivable $ 18,639 $ 9,715 $ 8,924
Management and other fees receivables $ 22,534 $ 9,859 $ 12,675
Management and other fees receivables from related medical practices ("PC’s") $ 3,866 $ 403 $ 3,463

Receivables, net is comprised of the following at September 30, 2014, June 30, ~~2013:~~2014:

Gross
Receivable Allowance for
doubtful accounts Net
Receivables from equipment sales and service contracts $ 4,701 $ 257 $ 4,444
Receivables from equipment sales and service contracts - related party $ — — $ —
Medical Receivable $ 10,711 $ 2,585 $ 8,126
Management and other fees receivables $ 20,561 $ 9,095 $ 11,466
Management and other fees receivables from related medical practices ("PC’s") $ 2,785 $ 403 $ 2,382

	September 30, 2014
		Gross Receivable		Allowance for doubtful accounts		Net
Accounts receivable	$	5,443	$	257	$	5,186
Accounts receivable - related party	$	90		—	$	90
Medical receivables	$	24,843	$	16,064	$	8,779
Management and other fees receivable	$	24,359	$	11,407	$	12,952
Management and other fees receivable from related medical practices ("PC’s")	$	3,656	$	403	$	3,253

	June 30, 2014
		Gross Receivable		Allowance for doubtful accounts		Net
Accounts receivable	$	4,707	$	257	$	4,450
Accounts receivable - related party	$	—		—	$	—
Medical receivables	$	21,726	$	12,918	$	8,808
Management and other fees receivable	$	22,872	$	10,902	$	11,970
Management and other fees receivable from related medical practices ("PC’s")	$	3,830	$	403	$	3,427

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

~~Page 13~~

~~FONAR CORPORATION AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~MARCH 31, 2014 and 2013~~

~~(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~

~~(UNAUDITED)~~

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

Accounts Receivable

Credit risk with respect to the Company’s accounts receivable related to product sales and service and repair fees is limited due to the customer advances received prior to the commencement of work performed and the billing of amounts to customers as sub-assemblies are completed. Service and repair fees are billed on a monthly or quarterly basis and the Company does not continue providing these services if accounts receivable become past due. The Company controls credit risk with respect to accounts receivable from service and repair fees through its credit evaluation process, credit limits, monitoring procedures and reasonably short collection terms. The Company performs ongoing credit authorizations before a product sales contract is entered into or service and repair fees are provided.

Page 10

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and 2013

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 3 – ACCOUNTS RECEIVABLE, MEDICAL RECEIVABLE AND MANAGEMENT AND OTHER FEES RECEIVABLE (CONTINUED)

Medical Receivable

Medical receivables are due under fee-for-service contracts from third party payors, such as hospitals, government sponsored healthcare programs, patient’s legal counsel and directly from patients. Substantially all the revenue relates to patients residing in Florida. The carrying amount of the medical receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. The Company continuously monitors collections from its clients and maintains an allowance for bad debts based upon the Company’s historical collection experience. The Company determines allowances for contractual adjustments and uncollectible accounts based on specific agings, specific payor collection issues that have been identified and based on payor classifications and historical experience at each site.

Management and Other Fees Receivable

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 ~~50%~~54% and 51% of the PCs’ net revenues for the three months ended ~~March 31, 2014 and 2013, respectively, were derived from no-fault and personal injury protection claims. Approximately 50% and 47% of the PCs’ net revenues for the nine months ended March 31,~~September 30, 2014 and 2013, 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.

~~Page 14~~

~~FONAR CORPORATION AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~MARCH 31, 2014 and 2013~~

~~(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~

~~(UNAUDITED)~~

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

~~Management and Other Fees Receivable(Continued)~~

Net revenues from management and other fees charged to the related PCs accounted for approximately ~~13.2%~~10.1% and ~~16.9%~~13.9% of the consolidated net revenues for the three months ended March 31, 2014 and 2013, respectively. Net revenues from management and other fees charged to the related PCs accounted for approximately 13.4% and 19.2% of the consolidated net revenues for the nine months ended March 31,September 30, 2014 and 2013, 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 agreement, pursuant to which they cross guaranteed all management fees which are payable to the Company, which have arisen under each individual management agreement.

The Company’s patient fee revenue, net of contractual allowances and discounts less the provision for bad debts for the three ~~and nine~~ months ended ~~March 31,~~September 30, 2014 and 2013 are summarized in the following ~~tables.~~table.

For the Three Months Ended
March 31,
2014 2013
Commercial Insurance/ Managed Care $ 1,033 $ 186
Medicare/Medicaid 343 81
Workers' Compensation/Personal Injury 3,329 404
Other 1,385 294
Patient Fee Revenue, net of contractual allowances and discounts 6,090 965
Provision for Bad Debts (2,868 ) —
Net Patient Fee for Revenue $ 3,222 $ 965

	For the Nine Months Ended March 31,					For the Three Months Ended September 30,
	2014			2013		2014			2013
Commercial Insurance/ Managed Care	$	3,144		$	186	$	1,080		$	1,100
Medicare/Medicaid		1,161			81		297			379
Workers' Compensation/Personal Injury		9,679			404		3,695			2,895
Other		3,827			294		1,715			1,453
Patient Fee Revenue, net of contractual allowances and discounts		17,811			965		6,787			5,827
Provision for Bad Debts		(7,130	)		—		(3,146	)		(2,040	)
Net Patient Fee for Revenue	$	10,681		$	965	$	3,641		$	3,787

Page 1511

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~MARCH 31,~~SEPTEMBER 30, 2014 and 2013

(~~AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 4 - INVENTORIES

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

March 31,
2014 June 30,
2013
Purchased parts, components and supplies $ 2,120 $ 1,784
Work-in-process 390 293
Total Inventories $ 2,510 $ 2,077

	September 30, 2014		June 30, 2014
Purchased parts, components and supplies	$	2,131	$	2,094
Work-in-process		291		350
TOTAL INVENTORIES	$	2,422	$	2,444

NOTE 5 ~~– CUSTOMER ADVANCES~~- COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

~~Customer advances consist~~Information relating to uncompleted contracts as of ~~the following:~~September 30, 2014 is as follows:

March 31,
2014 June 30,
2013
Total Advances $ 4,484 $ 4,228
Less: Advances on contracts under construction 2,693 2,370
Total customer advances $ 1,791 $ 1,858

		September 30, 2014		June 30, 2014
Costs incurred on uncompleted contracts	$	2,860	$	1,885
Estimated earnings		2,039		1,746
Subtotal		4,899		3,631
Less: Billings to date		3,421		3,013
Total Costs and estimated earnings in excess of billings on uncompleted contracts	$	1,478	$	618

Included in the accompanying condensed consolidated balance sheets under the following captions:

		September 30, 2014		June 30, 2014
Costs and estimated earnings in excess of billings on uncompleted contracts	$	1,620	$	760
Less: Billings in excess of costs and estimated earnings on uncompleted contracts		142		142
Total Costs and estimated earnings in excess of billings on uncompleted contracts	$	1,478		618

Page 12

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and 2013

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 6 – OTHER INTANGIBLE ASSETS

Other intangible assets, net of accumulated amortization, in the accompanying condensed consolidated balance ~~sheet~~sheets consist of the following:

	March 31, 2014		June 30, 2013		September 30, 2014		June 30, 2014
Capitalized software development costs	$	7,669	$	7,669	$	7,418	$	7,418
Patents and copyrights		4,365		4,194		4,454		4,408
Non-compete		4,100		4,100		4,100		4,100
Customer relationships		3,800		3,800		3,800		3,800
Gross Other intangible assets		19,934		19,763		19,772		19,726
Less: Accumulated amortization		8,891		7,859		9,539		9,217
Other Intangible Assets	$	11,043	$	11,904	$	10,233	$	10,509

~~Page 16~~

~~FONAR CORPORATION AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~MARCH 31, 2014 and 2013~~

~~(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~

~~(UNAUDITED)~~

~~NOTE 6 – OTHER INTANGIBLE ASSETS (Continued)~~

Amortization of patents and copyrights for the three months ended ~~March 31,~~September 30, 2014 and 2013 amounted to ~~$44~~$45 and ~~$42,~~$44, respectively.

Amortization of capitalized software development costs for the three months ended ~~March 31,~~September 30, 2014 and 2013 amounted to ~~$104~~$83 and ~~$76,~~$109, respectively.

Amortization of non-compete for the three months ended ~~March 31,~~September 30, 2014 and 2013 amounted to $146 and ~~$49,~~$146, respectively.

Amortization of customer relationships for the three months ended ~~March 31,~~September 30, 2014 and 2013 amounted to ~~$47~~$48 and ~~$67,~~$44, respectively.

~~Amortization of patents and copyrights for the nine months ended March 31, 2014 and 2013 amounted to $133 and $125, respectively.~~

~~Amortization of capitalized software development costs for the nine months ended March 31, 2014 and 2013 amounted to $321 and $226, respectively.~~

~~Amortization of non-compete for the nine months ended March 31, 2014 and 2013 amounted to $439 and $49, respectively.~~

~~Amortization of customer relationships for the nine months ended March 31, 2014 and 2013 amounted to $139 and $67, respectively.~~

NOTE 7 – OTHER CURRENT LIABILITIES

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

March 31,			June 30,
	2014		2013		September 30, 2014		June 30, 2014
Accrued salaries, commissions and payroll taxes	$	974	$	711	$	1,124	$	835
Accrued interest		117		117		117		117
Litigation accruals		702		809		627		664
Sales tax payable		2,927		2,859		2,623		2,665
Legal and other professional fees		491		569		442		439
Accounting fees		221		305		127		325
Insurance premiums		255		13
Self-funded health insurance reserve						354		306
Interest and penalty - sales tax		2,483		2,322		2,420		2,374
Penalty - 401k plan		250		250
Purchase scanners		450		—		785		450
Rent		57		148
Other		738		533		623		849
Total Other Current Liabilities	$	9,665	$	8,636
TOTAL OTHER CURRENT LIABILITIES					$	9,242	$	9,024

Page 1713

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~MARCH 31,~~SEPTEMBER 30, 2014 and 2013

(~~AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~Amounts and shares in thousands, except per share amounts)

~~(UNAUDITED~~(UNAUDITED)

NOTE 8 – STOCKHOLDERS EQUITY

~~Common Stock~~

During the three months ended ~~March 31, 2014:~~

~~a) The~~September 30, 2014, the Company issued ~~15 shares of common stock for costs and expenses of $110.~~

~~During the nine months ended March 31, 2014:~~

~~a) The Company issued 11~~5 shares of common stock to employees and consultants as compensation valued at ~~$86~~$53 under a stock bonus plan.

~~b) The Company issued 35 shares of common stock for costs and expenses of $407.~~

~~c) Options for 10 shares of common stock pursuant to the 2005 Incentive Stock Option Plan were exercised for $31.~~

~~NOTE 9 – CONTROLLING AND NONCONTROLLING INTERESTS~~

On February 13, 2013 the Company entered into an agreement with outside investors to acquire a 50.5% controlling interest in a newly formed limited liability company, Health Diagnostics Management LLC (HDM). According to the February 13, 2013 LLC operating agreement of HDM there are two classes of members; Class A members and one Class B member. The Class A members have an ownership interest of 49.5% of HDM. The Class B member (HMCA) has an ownership of 50.5% of HDM. On all matters on which members may vote every member is entitled to cast the percentage of votes equal to their percentage of ownership interest. Profits and losses an all items of income, gain or loss, deductions or other allocations of the Company will be allocated among the members in the same proportions as their membership interests in the Company bear to all the Class A and Class B membership interests of the Company in the aggregate outstanding. All of the depreciation and amortization of the assets of the Company will be allocated solely to the Class A members, unless and until their interests have been redeemed by the Company in full pursuant to the provisions of the operating agreement. During March 2013 the Company contributed $20,200 to HDM and the group of outside investors contributed $19,800 for its non-controlling membership interest.

To fund its capital contribution the Company borrowed a total of $14,000 from a bank in the form of a term loan aggregating $11,000 and a revolving credit loan aggregating $3,000. The term loan is payable in 60 consecutive monthly installments, commencing September 1, 2013. The term loan bears interest at 4.75% per annum and is payable monthly. The revolving credit loan is due March 5, 2016. The Company can prepay the loan in whole or in part in multiples of $100 at any time without penalty. The revolving credit note bears interest at a rate of 4% per annum and is payable monthly. All borrowings under the loan agreements are collateralized by substantially all of the Company’s assets. The loan agreements also contain certain financial covenants that must be met on a periodic basis.

~~Page 18~~

~~FONAR CORPORATION AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~MARCH 31, 2014 and 2013~~

~~(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~

~~(UNAUDITED)~~

~~NOTE 9 – CONTROLLING AND NONCONTROLLING INTERESTS (Continued)~~

On March 5, 2013 HDM purchased from Health Diagnostics, LLC (“HD”) and certain of its subsidiaries, a business managing twelve (12) Stand-Up® MRI Centers and two (2) other scanning centers located in the States of New York and Florida for a total purchase price (including consideration of $1,500 to outside investors) aggregating $35,900. Concurrently with the acquisition, HDM entered into several consulting and non-competition agreements for a consideration of $4,100. The acquisition was accounted for using the purchase method in accordance with ASC 805, “Business Combinations”. The accompanying consolidated financial statements include the operations of HDM from the date of acquisition. The Company recognizes and measures goodwill as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired.

~~The following table summarizes the estimated fair values of the assets and liabilities assumed at the acquisition date:~~

Management fee receivable $ 6,667
Medical receivables 7,390
Prepaid expenses and other current assets 10
Property and equipment 14,913
Intangible assets 9,200
Goodwill 1,767
Other assets 333
Other current liabilities (6 )
Long term debt (274 )
Net assets acquired $ 40,000

The purchase price was allocated to the tangible and intangible assets and liabilities assumed based on estimates of their respective fair values at the date of acquisition with the remaining unallocated purchase price recorded as goodwill. Management is responsible for the valuation of net assets acquired and considered a number of factors, including valuations and appraisals, when estimating the fair values and estimated useful lives of acquired assets and liabilities. The intangible assets, excluding goodwill, are being amortized on a straight-line basis over their weighted average lives as follows:

Fair Value
Non compete $ 4,100 7 years
Customer relationships 3,800 20 years
Developed software 1,300 5 years
Total intangible assets $ 9,200

~~Page 19~~

~~FONAR CORPORATION AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~MARCH 31, 2014 and 2013~~

~~(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~

~~(UNAUDITED)~~

~~NOTE 9 – CONTROLLING AND NONCONTROLLING INTERESTS (Continued)~~

The HDM acquisition operating results have been included within the Company’s condensed consolidated financial statements since the date of acquisition. The following unaudited pro forma information assumes that the acquisition had been completed as of July 1, 2012:

FOR THE THREE MONTHS ENDED MARCH 31, 2013 FOR THE NINE MONTHS ENDED MARCH 31, 2013
Total Revenues - Net $ 15,115 $ 51,049
Net Income - Controlling Interests 1,446 5,356
Net Income Available to Common Stockholders 1,351 5,003
Net Income Available to Class A Non-Voting Preferred Stockholders 71 263
Net Income Available to Class C Common Stockholders 24 90
Basic Net Income Per Common Share Available to Common Stockholders $ 0.23 $ 0.84
Diluted Net Income Per Common Share Available to Common Stockholders $ 0.22 $ 0.83
Basic and Diluted Income Per Share - Common C $ 0.06 $ 0.23
Weighted Average Basic Shares Outstanding 5,937 5,922
Weighted Average Diluted Shares Outstanding 6,065 6,049
Weighted Average Basic and Diluted Shares Outstanding - Class C Common 383 383

NOTE 109 - 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, ~~2013.~~2014. All inter-segment sales are market-based. The Company evaluates performance based on income or loss from operations.

~~PAGE 20~~

~~FONAR CORPORATION AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~MARCH 31, 2014 and 2013~~

~~(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~

~~(UNAUDITED)~~

~~NOTE 10 - SEGMENT AND RELATED INFORMATION (Continued)~~

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

Medical
Equipment

Management
of
Diagnostic
Imaging
Centers
Totals
For the three months ended March 31, 2014
Net revenues from external customers $ 3,023 $ 14,017 $ 17,040
Inter-segment net revenues $ 495 $ — $ 495
Income from operations $ 192 $ 2,127 $ 2,319
Depreciation and amortization $ 104 $ 829 $ 933
Capital expenditures $ 114 $ 98 $ 212

For the three months ended March 31, 2013 *
Net revenues from external customers $ 3,310 $ 8,332 $ 11,642
Inter-segment net revenues $ 300 $ 141 $ 441
(Loss) income from operations $ (286 ) $ 1,916 $ 1,630
Depreciation and amortization $ 126 $ 553 $ 679
Capital expenditures $ 58 $ 281 $ 339

For the nine months ended March 31, 2014
Net revenues from external customers $ 8,922 $ 42,559 $ 51,481
Inter-segment net revenues $ 1,485 $ — $ 1,485
Income from operations $ 323 $ 9,345 $ 9,668
Depreciation and amortization $ 322 $ 2,565 $ 2,887
Capital expenditures $ 187 $ 360 $ 547

For the nine months ended March 31, 2013 *
Net revenues from external customers $ 10,960 $ 19,806 $ 30,766
Inter-segment net revenues $ 705 $ 141 $ 846
Income from operations $ 182 $ 5,046 $ 5,228
Depreciation and amortization $ 421 $ 1,068 $ 1,489
Capital expenditures
$ 166 $ 511 $ 677
*includes HDM transactions as of March 5,2013

~~Page 21~~

~~FONAR CORPORATION AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~MARCH 31, 2014 and 2013~~

~~(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~

~~(UNAUDITED)~~

	Medical Equipment		Management Of Diagnostic Imaging Centers		Totals
For the three months ended Sept. 30, 2014
Net revenues from external customers	$	3,790	$	14,195	$	17,985
Inter-segment net revenues	$	501	$	—	$	501
Income from operations	$	378	$	3,060	$	3,438
Depreciation and amortization	$	76	$	812	$	888
Capital expenditures	$	46	$	26	$	72
For the three months ended Sept. 30, 2013
Net revenues from external customers	$	2,568	$	14,263	$	16,831
Inter-segment net revenues	$	495	$	—	$	495
Income from operations	$	162	$	3,891	$	4,053
Depreciation and amortization	$	108	$	874	$	982
Capital expenditures	$	47	$	182	$	229

NOTE ~~11–~~10 – SUPPLEMENTAL CASH FLOW INFORMATION

During the ~~nine~~three months ended ~~March 31,~~September 30, 2014 and ~~March 31,~~September 30, 2013, the Company paid ~~$521~~$159 and ~~$198~~$189 for interest, respectively.

During the ~~nine~~three months ended ~~March 31,~~September 30, 2014 and ~~March 31,~~September 30, 2013, the Company paid ~~$255~~$40 and ~~$252~~$120 for income taxes, respectively.

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and 2013

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 1211 – 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, ~~2013 and our form 10-Q for the first and second quarters of fiscal 2014, except with respect to the following matters.~~2014.

Bonutti Research v. Fonar Corporation, Health Management Corporation of America, Health Diagnostics, LLC et al, was commenced on December 2, 2011. Bonutti Research filed a patent infringement action in the U.S. District Court for the Eastern District Court of New York, alleging that Fonar’s UPRIGHTt® MRI scanners infringe plaintiff’s patent which relates to the moving of a patient into the scanner. Fonar believes plaintiff’s claims are without merit and further, that the patent is invalid. The parties have settled the case for $150 payable by Fonar in twelve installments and certain licenses and covenants not to sue. The $150 has been accrued as of March 31, 2014 in the Company’s condensed consolidated financial statements.

Bolt MRI Technologies v. Fonar Corporation, Health Management Corporation of America & Health Diagnostics, LLC, was commenced on July 22, 2013, when Bolt MRI Technologies filed an action against Fonar Corporation, Health Management Corporation of America and Health Diagnostics, LLC alleging infringement of the same patent which is the subject of the Bonutti case. Bolt alleged that the patent was assigned to Bolt. The settlement of the Bonutti case covers this case as well.

~~PAGE 22~~

~~FONAR CORPORATION AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~MARCH 31, 2014 and 2013~~

~~(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~

~~(UNAUDITED)~~

~~NOTE 12 – COMMITMENTS AND CONTINGENCIES (Continued)~~

Other Matters

The Company is also delinquent in filing sales tax returns for certain states, for which the Company has transacted business. As of ~~March 31,~~September 30, 2014, the Company has recorded tax obligations of approximately ~~$2,717~~$2,623 plus interest and penalties of approximately ~~$2,483.~~$2,420. The Company is in the process of determining the regulatory requirements in order to become compliant.

~~On August 31, 2011~~The Company maintains a self-funded health insurance program with a stop-loss umbrella policy with a third party insurer to limit the maximum potential liability for individual claims to $100 per person and for a maximum potential claim liability based on member enrollment. With respect to this program, the Company ~~submitted an application to the Internal Revenue Service to voluntarily correct required reporting~~considers historical and ~~disclosure requirements regarding~~projected medical utilization data when estimating its ~~401(k) Employee Benefit Plan. On December 9, 2011, the Internal Revenue Service issued a favorable determination letter on the tax-qualified status~~health insurance program liability and related expense. As of ~~the 401K plan document~~September 30, 2014 and ~~a favorable compliance statement. During December 2013,~~June 30, 2014, the Company ~~submitted an application to~~had approximately $354 and $306, respectively, in reserve for its self-funded health insurance programs. The reserves are included in “Other current liabilities” in the ~~U.S. Department of Labor to voluntarily correct the late filing of prior Form 5500s (annual returns). The voluntary correction application is still pending.~~ consolidated balance sheets.

The Company ~~however, does~~regularly analyzes its reserves for incurred but not ~~anticipate any additional penalties will be assessed by the U.S. Department of Labor.~~reported claims, and for reported but not paid claims related to its reinsurance and self-funded insurance programs. The Company ~~has~~believes its reserves are adequate. However, significant judgment is involved in assessing these reserves such as assessing historical paid claims, average lags between the claims’ incurred date, reported dates and paid dates, and the frequency and severity of claims. There may be differences between actual settlement amounts and recorded ~~provisions for~~reserves and any ~~potential penalties totaling $250, which was~~resulting adjustments are included in expense once a probable amount is known. There were no significant adjustments recorded in the ~~Company’s best estimate of its possible exposure for penalties at that time. Management still is unable to determine the outcome of~~periods covered by this uncertainty, but is optimistic that the total penalties will be significantly less than the $250 reserve. The Company has engaged outside counsel to assist with the correction process and to obtain compliance with all reporting and disclosure requirements.report.

Page 15

FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014 and 2013

(Amounts and shares in thousands, except per share amounts)

(UNAUDITED)

NOTE 1312 - 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.

~~Page 23~~

~~FONAR CORPORATION AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~MARCH 31, 2014 and 2013~~

~~(AMOUNTS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~

~~(UNAUDITED)~~

~~NOTE 13 - INCOME TAXES (Continued)~~

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 ~~2008.~~2009.

The Company ~~netted~~recorded a deferred tax asset of ~~$2,936~~$5,740 and a deferred tax liability of ~~$462~~$584 as of ~~March 31,~~September 30, 2014, primarily relating to net operating loss carryforwards of approximately ~~$142,788~~$137,252 available to offset future taxable income through ~~2030.~~2034. The net operating losses begin to expire in 2019 for federal tax purposes and in ~~2013~~2014 for 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 have a sufficient history of income and anticipates profitability in the coming years and has concluded that it is more-likely-than-not that the Company will be able to realize a portion of its tax benefits in the near future and therefore a valuation allowance was established for the partial 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~~the remainder of the valuation. Should the Company ~~become~~continue to remain profitable in future periods with supportable trends, the valuation allowance will be reversed accordingly.

NOTE ~~14-~~13 – SUBSEQUENT EVENTS

~~On May 1,~~The Company has evaluated events that occurred subsequent to September 30, 2014 and through the ~~Company repaid a portion of~~date the ~~Class A Stockholders capital contribution in the amount of $1.1 million. As a result, the Company’s subsidiary, HMCA, owns a 91% interest in Imperial Management Services.~~

condensed consolidated financial statements were issued.

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FONAR CORPORATION AND SUBSIDIARIES

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

OPERATIONS.

For the nine month period ended March 31, 2014, we reported a net income of $8.8 million on revenues of $51.5 million as compared to net income of $5.0 million on revenues of $30.8 million for the nine month period ended March 31, 2013. We recognized an operating income of $9.7 million for the nine month period ended March 31, 2014 compared to an operating income of $5.2 million for the nine month period ended March 31, 2013.

For the three month period ended ~~March 31,~~September 30, 2014, we reported a net income of ~~$2.1~~$3.3 million on revenues of ~~$17.0~~$18.0 million as compared to net income of ~~$1.6~~$3.6 million on revenues of ~~$11.6~~$16.8 million for the three month period ended ~~March 31,~~September 30, 2013. Operating income declined, by 15.2% from $4.1 million for the three month period ended September 30, 2013 to $3.4 million for the three month period ended September 30, 2014.

The revenue increase of ~~67.3%~~6.9%, from ~~$30.8~~$16.8 million for the first ~~nine~~three months of fiscal ~~2013~~2014 to ~~$51.5~~$18.0 million for the first ~~nine~~three months of fiscal ~~2014,~~2015, was due to an increase in ~~management fees by 69.2%,~~product sales from ~~$18.8 million~~$28,000 for the ~~nine~~first three months of fiscal ~~2013~~2014 to ~~$31.9~~$1.3 million for the first ~~nine~~three months of fiscal ~~2014. In addition, our revenue included $10.7~~2015, and an increase in management fees by 0.7%, from $10.5 million ~~in net patient revenues~~ for the ~~first nine~~three months of fiscal 2014 ~~compared~~ to ~~$965,000 of patient revenues~~$10.6 million for the first ~~nine~~three months of fiscal ~~2013.~~2015.

Offsetting these increases, however, was a decline in net patient fees from $3.8 million for the first three months of fiscal 2014, to $3.6 million for the first three months of fiscal 2015 (patient fees less the provision for bad debts for patient fees). Patient ~~revenues~~fees represent fees for services paid directly by patients to facilities owned by us. All patient ~~revenues~~fees are derived from our Florida ~~facilities acquired from Health Diagnostics, LLC in the third quarter of fiscal 2013.~~facilities.

Service and repair fees ~~however, decreased 9.1% from $8.4 million for the first nine months of fiscal 2013 to $7.7 million for the first nine months of fiscal 2014, and revenues from product sales decreased 50.3%, from~~remained constant at $2.5 million for the first ~~nine~~three months of ~~2013 to $1.3 million for the first nine months of~~both fiscal 2015 and fiscal 2014.

The increase in our revenues was ~~larger~~smaller than the increase in our costs and expenses, and ~~we recognized increased~~as a result, our operating income ~~of $9.7~~decreased by 15.2% to $3.4 million for the ~~nine~~three months ended ~~March 31,~~September 30, 2014, ~~as compared to an operating income of $5.2~~from $4.1 million for the ~~nine~~three months ended ~~March 31,~~September 30, 2013. ~~The increase in costs~~Costs and expenses ~~of 63.7%~~increased 13.9% from ~~$25.5~~$12.8 million in the first ~~nine~~three months of fiscal ~~2013~~2014 to ~~$41.8~~$14.5 million in the first ~~nine~~three months of fiscal 2015, while in revenues increased only 6.9%, from $16.8 million in the first three months of fiscal 2014 ~~was less than the increase in revenues of 67.3%, from $30.8~~to $18.0 million in the first ~~nine~~three months of fiscal ~~2013 to $51.5 million in the first nine months of fiscal 2014.~~2015.

Fonar’s wholly-owned subsidiary, Health Management Corporation of America (“HMCA”), is the controlling, but not sole owner of two limited liability companies, Imperial Management Services, LLC (“Imperial”) and Health Diagnostics Management, LLC (“HDM”), through which HMCA conducts its business. The outside investors are passive investors, and do not have the right to participate in the management of either company. For the sake of simplicity, ~~and to avoid confusion,~~ HMCA, Imperial and HDM are, unless otherwise indicated, referred to as “HMCA” ~~for all periods.~~

~~Page 25~~

~~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. 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.

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FONAR CORPORATION AND SUBSIDIARIES

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 HMCA and its subsidiaries.

Effective May 2, 2011, HMCA contributed all of its assets, liabilities and business to Imperial Management Services, LLC (“Imperial”), which is controlled but not wholly-owned by HMCA. Imperial is conducting the business of HMCA utilizing the same facilities, equipment and personnel. This transaction did not result in a change of control or policy, but was solely a means to raise capital. The membership interests of the non-controlling investors in Imperial are redeemable over a five year period.

Effective March 5, 2013, HDM, in which HMCA has a 50.5% interest, acquired twelve (12) Stand-Up® MRI Centers and two (2) other scanning centers from Health Diagnostics, LLC. The contribution of these new scanning centers to the operating results of the Company are reflected in both the first ~~nine~~three months of fiscal ~~2014, but only from March 5 to March 31 in~~2015, and the first ~~nine~~three months of fiscal ~~2013.~~

~~As a result, the increased revenues, expenses, assets, liabilities and other items reflected in our diagnostic facilities management services segment are due in part to the acquisition of HDM.~~2014.

Manufacturing and Service of MRI Equipment

Revenues from MRI product sales ~~decreased 50.3% for the nine month period ended March 31, 2014~~increased to $1.3 million for the first three months of fiscal ~~2014~~2015 from ~~$2.5 million~~$28,000 for the first ~~nine~~three months of fiscal ~~2013. For the three month period ended March 31, 2014, as compared to the three month period ended March 31, 2013, revenues from MRI product sales increased 14.9% ($478,000 compared to $416,000).~~2014. Continuing tight credit and economic uncertainty, including ~~uncertainty and~~ lower reimbursement rates for MRI scans, ~~arising as a result of the Patient Protection and Affordable Care Act,~~ have depressed the market for our MRI scanner products.

~~Page 26~~

~~FONAR CORPORATION AND SUBSIDIARIES~~

Costs related to product sales also ~~decreased by 63.3%~~increased from ~~$2.5 million for the nine month period ended March 31, 2013 to $902,000 for the nine month period ended March 31, 2014. Costs related to product sales decreased 55.2% from $498,000~~$48,000 for the three month period ended ~~March 31,~~September 30, 2013 to ~~$223,000~~$1.1 million for the three month period ended ~~March 31,~~September 30, 2014.

~~Service~~The volatility in the product sales figures reflect the low sales volume. The greater revenues ~~for~~in the ~~nine month period ended March 31, 2014~~first quarter of fiscal 2015, as ~~compared to~~a case in point, reflect the ~~nine month period ended March 31, 2013 decreased 9.1% ($7.7 million compared to $8.4 million).~~ recognition of revenues from the sale of one MRI scanner. We do not regard the changes as indicative of a material trend.

Service revenues for the three month period ended ~~March 31,~~September 30, 2014 as compared to the three month period ended ~~March 31,~~September 30, 2013 decreased 12.1% ($2.5 million compared to $2.9 million). These decreases were primarily due to the consolidation of service contract revenues resulting from the acquisition by HDM from Health Diagnostics of the previously unconsolidated MRI Centers being serviced by Fonar.remained constant at $2.5 million.

Costs relating to providing service for the first ~~nine~~three months of fiscal 2015 decreased by 6.8% from $550,000 in the first three months of fiscal 2014 ~~decreased by 31.9% from $2.6 million~~to $513,000 in the first ~~nine~~three months of fiscal 2013 to $1.8 million in the first nine months of fiscal 2014. Costs related to providing service for the third quarter decreased by 23.8% from $827,000 in the third quarter of fiscal 2013 to $630,000 in fiscal 2014.2015. 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.

There were approximately ~~$1.2~~$1.5 million in foreign revenues for the first ~~nine~~three months of fiscal ~~2014~~2015 as compared to approximately ~~$782,000~~$229,000 in foreign revenues for the first ~~nine~~three months of fiscal ~~2013,~~2014, representing an increase in foreign revenues of ~~59.5%~~555%. We do not regard this as a material trend, but as part of a normal although sometimes volatile variation resulting from low volumes of foreign sales.

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 that are recognized in a fiscal quarter or quarters following the quarter in which the sale was made.

Revenues for the medical equipment segment as a whole decreased by 18.6% to $8.9 million for the first nine months of fiscal 2014 from $11.0 million for the first nine months of fiscal 2013. Operating results for our medical equipment segment increased to an operating income of $323,000 for the first nine months of fiscal 2014 as compared to an operating income of $182,000 for the first nine months of fiscal 2013. For the third quarter of fiscal 2014, our medical equipment segment recognized a net income of $125,000, compared to net loss of $322,000 in the third quarter of fiscal 2013.

~~Diagnostic Facilities Management Services~~

Trends in the first nine months of fiscal 2014 show a continuing increase in management and other fee revenues, in contrast to the decline in product sales revenues and product service and repair fees.

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FONAR CORPORATION AND SUBSIDIARIES

~~HMCA revenues~~

Revenues for the medical equipment segment as a whole increased inby 48.2% to $3.8 million for the ~~first nine~~three months of fiscal ~~2014 by 114.9% to $42.6 million~~2015 from ~~$19.8~~$2.6 million for the first ~~nine~~three months of fiscal ~~2013, and by 68.2% in~~2014. Operating results for our medical equipment segment increased to an operating income of $378,000 for the ~~third~~first three months of fiscal 2015 as compared to an operating income of $162,000 for the first three months of fiscal 2014. For the first quarter of fiscal ~~2014~~2015, our medical equipment segment recognized a net income of $342,000, compared to ~~$14.0 million from $8.3 million~~net loss of $96,000 in the ~~third~~first quarter of fiscal ~~2013. These significant increases are primarily due to the acquisition by HDM of an existing scanning center management business~~2014.

Diagnostic Facilities Management Services

HMCA revenues decreased slightly in the ~~third~~first quarter of fiscal ~~2013. This acquisition also magnified~~2015 by 0.5% to $14.2 million from $14.3 million for the ~~increase in the~~first quarter of fiscal 2014. The percentage of our revenues derived from our diagnostic facilities management segment relative to the percentage of our revenues derived from our medical equipment segment ~~(82.7%~~decreased slightly (78.9% for the first ~~nine~~three months of fiscal ~~2014~~2015 compared to ~~64.4%~~84.7% for the first ~~nine~~three months of fiscal ~~2013)~~2014). ~~In addition to the acquisition by HMCA of a 50.5% interest in HDM, the increase~~

The decrease in HMCA revenues ~~was~~is principally due to the decrease in reimbursement rates paid by insurers, Medicare and other government programs for MRI scans to HMCA’s clients and scanning centers. These developments are not unique to HMCA or HMCA’s clients but are being experienced by the industry in general.

HMCA has been able to limit the effect of lower reimbursement rates by increasing the scan volume of the facilities it manages.

As a result of ~~increased~~our vigorous marketing efforts, ~~for~~which increased the ~~scanning~~number of scans performed at our centers and at our client’s centers from 32,342 in the ~~managing~~first quarter of fiscal 2014 to 35,484 in the first quarter of fiscal 2015, there was only a ~~newly opened center.~~small decrease in scanning center and HMCA revenue.

We manage twenty-four sites, twenty-three of which are equipped with Fonar Upright® MRI scanners (our Stand-Up® MRI Scanners are also called Upright® MRI Scanners). HMCA experienced an operating income of ~~$9.3~~$3.1 million for the first ~~nine~~three months of fiscal ~~2014~~2015 compared to operating income of ~~$5.0~~$3.9 million for the first ~~nine~~three months of fiscal ~~2013. The greater operating income was due primarily to the operations of HDM.~~2014.

HMCA cost of revenues for the first ~~nine~~three months of fiscal ~~2014~~2015 as compared to the first ~~nine~~three months of fiscal ~~2013~~2014 increased by ~~143.2%~~4.0% from ~~$10.4~~$8.1 million to ~~$25.2~~$8.5 million. HMCA’s cost of revenues includes expenditures we have been making to strengthen our marketing efforts, which focus on the unique capability of our Upright® MRI Scanners to scan patients in different positions. The increase in the cost of revenues is attributable to the acquisition of HDM in March 2013.

Revenues, costs and expenses for the ~~nine~~three month period ended ~~March 31,~~September 30, 2014 attributable to the HDM acquisition include revenues of ~~$27.1~~$9.0 million, and costs and expenses of ~~$21.2 million.~~$7.1 million as compared to revenues of $9.2 million and costs and expenses of $6.6 million for the three month period ended September 30, 2013.

Consolidated

For the first ~~nine~~three months of fiscal ~~2014,~~2015, our consolidated net revenues increased by ~~67.3%~~6.9% to ~~$51.5~~$18.0 million from ~~$30.8~~$16.8 million for the first ~~nine~~three months of fiscal ~~2013. While~~2014, while total costs and expenses increased by ~~63.7%~~13.8% to ~~$41.8~~$14.5 million for the first ~~nine~~three months of fiscal ~~2014~~2015 from ~~$25.5~~$12.8 million for the first ~~nine~~three months ~~of fiscal 2013, our operating income of $5.2 million in the first nine months of fiscal 2013 increased to $9.7 million in the first nine months of fiscal 2014.~~

The increase in our consolidated net revenues of 46.4% from $11.6 million in the third quarter of fiscal 2013 to $17.0 million in the third quarter of fiscal 2014 was coupled with a increase of 47.0% in total costs and expenses from $10.0 million in the third quarter of fiscal 2013 to $14.7 million in the third quarter of fiscal 2014. As a result, our operating income ~~from operations increased to $2.3~~of $4.1 million in the ~~third quarter~~first three months of fiscal 2014 ~~from $1.6~~decreased to $3.4 million in the ~~third quarter~~first three months of fiscal ~~2013.~~2015.

Selling, general and administrative expenses ~~increased~~decreased by ~~44.2%~~4.3% to ~~$12.0~~$3.6 million in the first ~~nine~~three months of fiscal 2015 from $3.7 million in the first three months of fiscal 2014 ~~from $8.3 million in the first nine months of fiscal 2013.~~as we continued our cost-cutting policies. The compensatory element of stock issuances, however, which is included in selling, general and administrative expenses, ~~decreased 78.2%~~increased 64.3% to ~~$86,290~~$53,200 for the first ~~nine~~three months of fiscal 2014 from ~~$394,500~~$19,000 for the first ~~nine~~three months of fiscal ~~2013.~~

2014. We do not regard this as reflecting a trend, since the expenses are relatively small in either case.

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FONAR CORPORATION AND SUBSIDIARIES

Research and development expenses increased by ~~9.4%~~0.5% to ~~$1.1 million~~$397,000 for the first ~~nine~~three months of fiscal ~~2014~~2015 as compared to ~~$1.0 million~~$395,000 for the first ~~nine~~three months of fiscal ~~2013.~~2014.

Interest expense in the first ~~nine~~three months of fiscal ~~2014 increased~~2015 decreased by ~~164%~~16.0% to ~~$682,000~~$204,000 from ~~$258,000~~$243,000 in the first ~~nine~~three months of fiscal ~~2013.~~2014. The ~~increase~~decrease was due to the ~~additional~~repayment of debt incurred by Fonar in connection with the acquisition of HDM.

Inventories ~~increased by 20.8% to $2.5~~remained constant at $2.4 million at ~~March 31,~~September 30, 2014 ~~from $2.1 million at~~compared to June 30, ~~2013.~~2014. This represents our purchase of raw materials and components which have not yet been used to fill orders.

Net Management fee and medical receivables increased by ~~14.1%~~3.2% to ~~$25.1~~$25.0 million at ~~March 31,~~September 30, 2014 from ~~$22.0~~$24.2 million at June 30, ~~2013. This increase is primarily the result of the receivables acquired by HDM in connection with the purchase of the businesses managing fourteen (14) scanning centers from HD.~~2014.

The ~~overall trends reflected in the~~ results of operations for the first ~~nine~~three months of fiscal ~~2014 are an increase~~2015 reflect a slight decrease in revenues from management and other fees, as compared to the first ~~nine~~three months of fiscal ~~2013~~2014 ($~~42.6~~14.2 million for the first ~~nine~~three months of fiscal ~~2014~~2015 as compared to ~~$19.8~~$14.3 million for the first ~~nine~~three months of fiscal ~~2013)~~2014), and ~~a decrease~~an increase in MRI equipment segment revenues ~~both in the amount of revenues~~ ($~~8.9~~1.3 million as compared to ~~$11.0 million) and as compared to HMCA’s revenues.~~$28,000). Revenues were ~~17.3%~~21.1% from the MRI equipment segment as compared to ~~82.7%~~78.9% from HMCA, for the first ~~nine~~three months of fiscal ~~2014,~~2015, as compared to ~~35.6%~~15.3% from the MRI equipment segment and ~~64.4%~~84.7% from HMCA for the first ~~nine~~three months of fiscal ~~2013.~~2014. It is too early to determine whether these variations constitute a trend.

~~On March 23, 2010, President Obama signed into law healthcare reform legislation in the form~~The implementation of the Patient Protection and Affordable Care Act (PPACA)~~. The implementation of this law could~~ is likely to have a profound impact on the healthcare industry. We are beginning to see some impact of the Act on our business, in the reduction of reimbursement rates, but are unable to predict the degree of the effect of the new legislative mandates ~~contained in PPACA~~ and ~~the~~ regulations on our MRI equipment segment or HMCA in the future.

We are committed to improving our operating ~~results.~~results and dealing with the challenges posed by new legislative and regulatory requirements. 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 problematical to forecast future operating results.

~~One~~As mentioned, one of the effects of the PPACA on our business has been the reduction in Medicare reimbursement rates for MRI scans. This also has ~~also~~ resulted in a reduction in the reimbursement rates by ~~those~~ commercial insurers and government programs which tie their reimbursement rates to those of Medicare. Nevertheless, the increased patient volume of the scanning centers has enabled us to maintain a healthy profitability in spite of these challenges. We believe we are pursuing the correct policies ~~which should prove successful in improving~~to cope with these problems and to improve the Company’s operating results.

Our Upright® MRI (also referred to as the Stand-Up® MRI), together with our works-in-progress, are intended to significantly improve our competitive position.

~~Page 29~~

~~FONAR CORPORATION AND SUBSIDIARIES~~

The 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.~~pathology and therefore, in general enables the treating physician to achieve a better treatment OUTCOME for his patient. 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, ~~another~~a particularly promising feature for sports injuries.

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FONAR CORPORATION AND SUBSIDIARIES

Fonar has announced a major diagnostic breakthrough in multiple sclerosis
achieved with advanced Upright® MRI. Medical researchers at FONAR published a paper reporting a diagnostic breakthrough in multiple sclerosis (MS), based on observations made possible by the Company’s unique 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 and the antigenic polypeptides it contains 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," appears in the ~~of the~~ journal Physiological Chemistry and Physics and Medical NMR (Sept. 20, 2011).

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, because 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~~this pathology since the patient's pathology is most visible and the symptoms most acute when the patient is scanned in the upright fully weight-bearing position.

A combined study of 1,200 neck pain patients published in “Brain Injury” (July 2010) by eight university medical centers reported that cerebellar tonsil ectopia (CTE) of 1mm or greater was found and visualized 2.5 times (250%) more frequently when patients who had sustained automobile whiplash injuries were scanned upright rather than lying down.

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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 a complete evaluation of the ~~exam,~~extent of the patient’s scoliosis, 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 an 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 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® MRI at the 22^nd22nd Annual Meeting of the North American Spine Society on October 23, 2007. The UCLA study showed the superior ability of the Fonar Upright® MRI to detect spine pathology, including spondylolisthesis, disc herniations and disc degeneration, 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 in the Fonar Upright® MRI 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 the Upright® 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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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®, MRI thereby enabling the extent of spinal canal stenosis that existed in patients to be measured. Spinal canal stenosis gives rise to the symptom complex intermittent neurogenic claudication manifest as debilitating pain in the back and lower extremities, weakness and difficulties in ambulation and leg paresthesias. Spinal canal stenosis is a spinal compression syndrome separate and distinct from the more common nerve compression syndrome of the spinal nerves as they exit the vertebral column through the bony neural foramen.

The Fonar Upright® 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.

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Liquidity and Capital Resources

Cash and cash equivalents increased by ~~21.8%~~7.1% from ~~$7.9~~$10.0 million at June 30, ~~2013~~2014 to ~~$9.6~~$10.7 million at ~~March 31,~~September 30, 2014, primarily as a result of collections.

Cash provided by operating activities for the first ~~nine~~three months of fiscal ~~2014~~2015 was ~~$9.4~~$2.9 million. Cash provided by operating activities was attributable principally to net income of ~~$8.8~~$3.3 million, an increase of other current liabilities of ~~$964,000,~~$865,000, depreciation and amortization of ~~$2.9 million,~~$888,000, provision for bad debt of ~~$7.9 million,~~$506,000, offset by an increase in accounts, management fee and medical receivables of ~~$11.0~~$2.1 million.

Cash used in investing activities for the first ~~nine~~three months of fiscal ~~2014~~2015 was ~~$547,000.~~$72,000. The principal uses of cash used in investing activities during the first ~~nine~~three months of fiscal ~~2014~~2015 consisted of patent costs of ~~$172,000~~$46,000 and the purchase of property and equipment of ~~$375,000.~~$26,000.

Cash used by financing activities for the first ~~nine~~three months of fiscal ~~2014~~2015 was ~~$7.1~~$2.1 million. The principal uses of cash in financing activities during the first ~~nine~~three months of fiscal ~~2014~~2015 were the repayment of principal on long-term debt and capital lease obligations of ~~$3.4 million,~~$921,000, along with distributions to non-controlling interests of ~~$3.7~~$1.2 million.

Total liabilities decreased by ~~7.5%~~0.7% to ~~$32.7~~$30.7 million at ~~March 31,~~September 30, 2014 from ~~$35.4~~$30.9 million at June 30, ~~2013.~~2014. Other current liabilities increased from ~~$8.6~~$9.0 million at June 30, ~~2013~~2014 to ~~$9.7~~$9.2 million at ~~March 31,~~September 30, 2014 along with a decrease in long-term debt and capital ~~leases~~lease obligations from ~~$12.9~~$8.5 million ~~at June 30, 2013~~ to ~~$9.4~~$7.6 million, ~~at March 31, 2014,~~ an increase in the current portion of our ~~long term debt~~unearned revenue on service contracts from ~~$2.9~~$4.7 million to $5.3 million. Customer deposits decreased to $1.6 million at September 30, 2014 as compared to $1.9 million at June 30, ~~2013 to $3.0 million at March 31,~~ 2014. ~~Unearned revenue on service contracts decreased to $4.9 million at March 31, 2014 as compared to $5.0 million at June 30, 2013.~~

As of ~~March 31,~~September 30, 2014, the total of ~~$9.7~~$22.0 million in other current liabilities included accrued salaries and payroll taxes of ~~$974,000,~~$1.1 million, and sales taxes of ~~$2.9~~$2.6 million plus accrued interest and penalties of ~~$2.5~~$2.4 million.

Our working capital increased to ~~$21.2~~$23.6 million at ~~March 31,~~September 30, 2014 from ~~$16.7~~$21.6 million at June 30, ~~2013.~~2014. This resulted from an increase in current assets ($~~37.9~~42.8 million at June 30, ~~2013~~2014 as compared to ~~$43.3~~$45.6 million at ~~March 31,~~September 30, 2014), ~~and~~but a smaller increase in current liabilities from ~~$21.1~~$21.2 million at June 30, ~~2013~~2014 to ~~$22.2~~$22.0 million at ~~March 31,~~September 30, 2014.

Fonar has not committed to making any significant capital expenditures for the remainder of the ~~2014~~2015 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.

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FONAR CORPORATION AND SUBSIDIARIES

Critical to our business plan are improvement and expansion of the MRI facilities managed by ~~our subsidiary~~ HMCA, 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.

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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 to increase demand for Upright® scanning at the facilities HMCA manages. Given the liquidity and credit constraints in the markets, and the uncertainty resulting for the Patient Protection and Affordable Care Act, the sale of medical equipment has and may continue to suffer.

Management anticipates that Fonar’s capital resources will continue to 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 warranties on scanners expire and (3) HMCA revenues are increased through the Company’s vigorous marketing efforts and the installation or acquisition 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 may experience a shortfall in cash, and it may be necessary to 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.

The Company believes that its business plan has been responsible for the past ~~two~~three consecutive fiscal years and past ~~three~~ fiscal ~~quarters~~quarter of profitability (fiscal 2012, fiscal 2013, fiscal ~~2012~~2014 and the first ~~three quarters~~quarter of fiscal ~~2014)~~2015) and that its capital resources will be adequate to support operations at current levels through ~~March 31,~~at least September 30, 2015. In the past, the Company experienced periods of working capital deficits and prior to fiscal 2011, losses. The future effects on our business of healthcare reform legislation, the Deficit Reduction Act, the 2.3% excise tax on sales of medical equipment, and the general economic and business climate are not known at the present time. Nevertheless, there is a possibility of adverse consequences to our business operations from these causes.

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

Evaluation of Disclosure Controls and Procedures

~~Disclosure~~The Company maintains “disclosure controls and procedures, ~~(as~~” as such term is defined inunder Rule ~~13(a)-15(e))~~13a-15(e) of the Exchange Act, that are designed to ~~ensure~~provide reasonable assurance that information required to be disclosed ~~by a public company~~ in the ~~reports that it files or submits under the~~Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and ~~forms. Disclosure controls~~forms, and ~~procedures include, without limitation, controls and procedures designed to ensure~~ that such 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~~Company’s management, including its ~~principal executive~~Principal Executive Officer and ~~principal financial officers, or persons performing similar functions,~~Acting Principal Financial Officer, as appropriate, to allow ~~for~~ timely decisions regarding required disclosure. ~~Disclosure~~In designing and evaluating the disclosure controls and procedures, ~~include many aspects~~management recognized that any control and procedures, no matter how well designed and operated, can provide only reasonable assurance of ~~internal~~achieving the desired control ~~over financial reporting.~~objective.

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~~In connection with~~

As required by SEC Rule 13a-15(b), the ~~preparation of this Quarterly Report on Form 10-Q for~~Company carried out an evaluation, under the ~~nine months ended March 31, 2014, management,~~supervision and with the participation of ~~our Chief~~the Company’s management, including the Company’s Principal Executive Officer and ~~Chief~~Acting Principal Financial Officer, ~~has evaluated~~of the effectiveness of ~~our~~the design and operation of the Company’s disclosure controls and procedures ~~pursuant to Rule 13a-15 under~~as of September 30, 2014. Based on this evaluation, the ~~Exchange Act~~Company’s Principal Executive Officer and ~~have determined~~Acting Principal Financial Officer concluded that ~~such~~the Company’s disclosure controls and procedures were not effective as of ~~March 31, 2014.~~September 30, 2014 because of the material weakness in our internal control over financial reporting described in our Annual Report on Form 10-K. The Company has started the remediation process of implementing changes in information technology general controls in order to improve controls over segregation of duties, restricted access to programs and data, and change management activities in order to address the previously reported internal control deficiencies in our Form 10-K. The Company will continue to take measures that may be necessary and advisable so as to institute measures to address the material weakness.

Changes in Internal Control Over Financial Reporting

There ~~were~~have been no changes in ~~our~~the Company’s internal ~~controls or in other factors that could significantly affect these controls,~~control over financial reporting, during the fiscal quarter ended ~~March 31,~~September 30, 2014, that ~~have~~has materially affected, or are reasonably likely to materially affect, ~~our~~the Company’s internal control over financial reporting.

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, ~~2013 and our form 10-Q for the second quarter of fiscal~~ 2014.

Item 1A – Risk Factors: ~~Not required.~~An investment in the securities of the Company is subject to various risks, the most significant of which are summarized below.

1. Reduced Reimbursement Rates. Most of our revenues are derived from our scanning center business conducted by HCMA (including HMCA’s subsidiary HDM). Already we are experiencing lower reimbursement rates from Medicare, other government programs and private insurance companies. To date, we have been able to counter the impact of these reductions by increasing our volume of scans, maintaining a high level of profitability in this business segment.

2. Demand for MRI Scanners. The reduced reimbursement rates also may affect our sales of MRI scanners negatively. With lower revenue projections, fewer prospective customers may be able to operate a profitable scanning center business, resulting in a lower demand and lower prices for scanners. Although the reduced reimbursements may not affect foreign demand, a lower demand and number of sales in the aggregate could reduce economies of scale and consequently, profit margins.

3. Competition. Many if not most of our competing scanner manufacturers have significantly greater financial resources, production capacity, and other resources than we do. Such competitors would include General Electric, Siemens, Hitachi and Phillips. Although Fonar is the only company which can manufacture and sell the unique Stand-Up® (Upright®) MRI scanner, potential customers must be convinced that the purchase of a Fonar scanner is their best choice. We ~~are a smaller reporting company.~~believe that with time, that objective will be reached, particularly with customers scanning patients having neck, back, knee and various orthopedic issues who would benefit from being scanned in weight-bearing positions.

Item 2 ~~–Unregistered~~– Unregistered Sales of Equity Securities and Use of Proceeds: The Company has not issued ~~15,000~~any unregistered shares of its Common Stock ~~as part~~during the first quarter of ~~a settlement of a lawsuit.~~fiscal 2015.

Item 3 - Defaults Upon Senior Securities: None

Item 4 - Mine Safety Disclosure: Not Applicable

Item 5 - Other Information: None

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

a) Exhibit 31.1 Certification. See Exhibits

b) Exhibit 32.1 Certification. See Exhibits

Report on Form 8-K filed on September 16, 2014, Item 2.02: Results of Operations and Financial Condition for the fiscal year ended June 30, 2014.

~~c) Report on Form 8-K filed on February 18, 2014, Item 2.02: Results of Operations and Financial Condition for the fiscal quarter ended December 31, 2013.~~

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,~~November 10, 2014

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