UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-Q





x QUARATERLY REORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF
1934





For the quarterly
period ended September 30, 2008




or





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





For the
transition period from_________________________ to
_________________________________





AXCESS
      MEDICAL IMAGING CORPORATION





Delaware
            
            26-3161206(State
      or other jurisdiction of incorporation or organization)
            
            (IRS
      Employer Identification No.)600
      North Cattleman Road, Sarasota, Florida
            34232(Address
      of principal executive offices)
            (Zip
      Code)





(941)
      488-5791(Registrant’s
      telephone number, including area code)None(Former
      name, former address and fiscal year, if changed since last
      report)




Indicate
by check mark whether the registrant has (1) filed all reports required to be
filed by section 13 or 15(d) of the Securities and Exchange Act during the
preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. x Yes  o No




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.





Large
      accelerated filer
            o
            
            Accelerated
      filer
            oNon-accelerated
      filer
            o
            
            Smaller
      reporting company
            x





Indicate
      by check mark whether the registrant is a shell company.
            o
            Yes
            x
            No





Indicate
the number of shares outstanding as of the latest practicable date:





Common
stock, par value $0.0001, 49,666,015 shares outstanding at November 14,
2008






1







Forward
Looking Statements





Some of
the statements contained in this Form 10-Q that are not historical facts are
"forward-looking statements" which can be identified by the use of terminology
such as "estimates," "projects," "plans," "believes," "expects," "anticipates,"
"intends," or the negative or other variations, or by discussions of strategy
that involve risks and uncertainties. We urge you to be cautious of the
forward-looking statements, that such statements, which are contained in this
Form 10-Q, reflect our current beliefs with respect to future events and involve
known and unknown risks, uncertainties and other factors affecting our
operations, market growth, services, products and licenses. No assurances can be
given regarding the achievement of future results, as actual results may differ
materially as a result of the risks we face, and actual events may differ from
the assumptions underlying the statements that have been made regarding
anticipated events. Factors that may cause actual results, our performance or
achievements, or industry results, to differ materially from those contemplated
by such forward-looking statements include without limitation:





1. Our
ability to attract and retain management, and to integrate and maintain
technical information and management information systems;





2. Our
ability to generate customer demand for our services;





3. The
intensity of competition; and





4.
General economic conditions.





All
written and oral forward-looking statements made in connection with this Form
10-Q that are attributable to us or persons acting on our behalf are expressly
qualified in their entirety by these cautionary statements. Given the
uncertainties that surround such statements, you are cautioned not to place
undue reliance on such forward-looking statements.






2







PART
I—FINANCIAL INFORMATION





Item 1.
Financial statements.





Axcess
Medical Imaging Corporation


Consolidated
Balance Sheets





September
      30,
            
            
            December
      31,2008
            
            
            2007(Unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            268,396
            
            
            $
            140,986Accounts
      receivable, net
            
            
            3,402,121
            
            
            
            3,746,464Current
      portion of notes receivable
            
            
            45,481
            
            
            
            135,521Advances
      due from related parties
            
            
            74,562
            
            
            
            74,662Assets
      of discontinued businesses
            
            
            33,919
            
            
            
            35,951Other
      current assets
            
            
            201,805
            
            
            
            30,770Total
      current assets
            
            
            4,026,284
            
            
            
            4,164,354Property
      and equipment, net
            
            
            8,247,120
            
            
            
            8,715,055Notes
      receivable
            
            
            --
            
            
            
            33,986Other
      assets
            
            
            219,494
            
            
            
            167,365Total
      assets
            
            $
            12,492,898
            
            
            $
            13,080,760Liabilities,
      Non-Controlling Interests and
              Stockholders’
      (Deficit) EquityCurrent
      liabilities:Bank
      credit facilities
            
            $
            1,924,154
            
            
            $
            1,984,002Accounts
      payable
            
            
            1,660,361
            
            
            
            1,275,480Current
      portion of capital lease obligations
            
            
            1,061,940
            
            
            
            895,119Accounts
      payable, related parties
            
            
            577,786
            
            
            
            322,406Accrued
      liabilities
            
            
            463,926
            
            
            
            156,627Current
      portion of long-term debt, related parties
            
            
            303,614
            
            
            
            235,738Current
      portion of long-term debt
            
            
            121,619
            
            
            
            112,487Liabilities
      of discontinued businesses
            
            
            69,362
            
            
            
            73,338Deferred
      income taxes
            
            
            --
            
            
            
            --Total
      current liabilities
            
            
            6,182,762
            
            
            
            5,055,197Long-term
      debt
            
            
            3,466,757
            
            
            
            3,559,254Capital
      lease obligations
            
            
            2,439,308
            
            
            
            2,844,706Deferred
      income taxes
            
            
            --
            
            
            
            --Long-term
      debt, related parties
            
            
            1,100,000
            
            
            
            1,124,044Convertible
      notes ($1,000,000 face value)
            
            
            219,286
            
            
            
            --Total
      liabilities
            
            $
            13,408,113
            
            
            $
            12,583,201






3







Axcess
Medical Imaging Corporation


Consolidated
Balance Sheets (continued)





September
      30,
            
            
            December
      31,2008
            
            
            2007(Unaudited)Liabilities,
      Non-Controlling Interests and
              Stockholders’
      (Deficit) Equity, continuedCommitments
      and contingencies (Note 9)Non-controlling
      interests in variableinterest
      entities
            
            $
            350,894
            
            
            $
            188,284Stockholders’
      (deficit) equity:Preferred
      stock, $0.0001 par value, 20,000,000 shares
              authorized,
      none issued
            
            
            --
            
            
            
            --Common
      stock, $0.0001 par value, 250,000,000 shares
              authorized,
      48,522,266 and 42,452,189 shares issued and
              outstanding
      at September 30, 2008 and December 31, 2007,
              respectively
            
            
            4,852
            
            
            
            4,245Additional
      paid-in capital
            
            
            3,238,513
            
            
            
            1,388,495Accumulated
      deficit
            
            
            (4,509,474
            )
            
            
            (1,083,465
            )Total
      stockholders’ (deficit) equity
            
            
            (1,266,109
            )
            
            
            309,275Total
      liabilities, non-controlling interest
              and
      stockholders’ (deficit) equity
            
            $
            12,492,898
            
            
            $
            13,080,760







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










4





Axcess
Medical Imaging Corporation


Consolidated
Statements of Operations





Three
      Months Ended September 30,2008
            
            
            2007(Unaudited)
            
            
            (Unaudited)Net
      patient revenues
            
            $
            2,467,608
            
            
            $
            2,825,556Rental
      income
            
            
            85,653
            
            
            
            59,8822,553,261
            
            
            
            2,885,438Operating
      costs and expenses:Labor
      and related costs
            
            
            871,867
            
            
            
            878,461Medical
      equipment rental and maintenance
            
            
            734,070
            
            
            
            692,075Merger
      and related consulting
            
            
            588,869
            
            
            
            --Radiology
      costs
            
            
            535,193
            
            
            
            337,262General
      and administrative
            
            
            332,440
            
            
            
            189,561Depreciation
      and amortization
            
            
            269,403
            
            
            
            262,116Facility
      costs
            
            
            186,125
            
            
            
            182,021Medical
      and other supplies
            
            
            139,187
            
            
            
            178,805Advertising
      costs
            
            
            53,902
            
            
            
            40,863Total
      operating costs and expenses
            
            
            3,711,056
            
            
            
            2,761,164Operating
      (loss) income
            
            
            (1,157,795
            )
            
            
            124,274Other
      (expense) income:Interest
      and other income
            
            
            1,910
            
            
            
            6,065Settlement
      of interest payment
            
            
            (43,832
            )
            
            
            --Interest
      expense
            
            
            (277,721
            )
            
            
            (158,801
            )(319,643
            )
            
            
            (152,736
            )Loss
      before non-controlling interests in variable
              interest
      entities, income taxes and discontinued business
            
            
            (1,477,438
            )
            
            
            (28,462
            )Non-controlling
      interests in income of variable
              interest
      entities
            
            
            (51,024
            )
            
            
            (17,842
            )Loss
      from continuing operations, before income taxes
            
            
            (1,528,462
            )
            
            
            (46,304
            )Income
      tax benefit
            
            
            332,400
            
            
            
            --Loss
      from continuing operations
            
            
            (1,196,062
            )
            
            
            (46,304
            )Net
      (loss) income of discontinued business
            
            
            (342
            )
            
            
            246,475Net
      (loss) income
            
            $
            (1,196,404
            )
            
            $
            200,171







5







Axcess
Medical Imaging Corporation


Consolidated
Statements of Operations (continued)





Three
      Months Ended September 30,2008
            
            
            2007(Unaudited)
            
            
            (Unaudited)(Loss)
      income per common share—basic:Continuing
      operations
            
            $
            (0.02
            )
            
            $
            0.00Discontinued
      business
            
            
            (0.00
            )
            
            
            0.01Total
      (loss) income per common share—basic
            
            $
            (0.02
            )
            
            $
            0.01(Loss)
      income per common share—diluted:Continuing
      operations
            
            $
            (0.02
            )
            
            $
            0.00Discontinued
      business
            
            
            (0.00
            )
            
            
            0.01Total
      (loss) income per common share—diluted
            
            $
            (0.02
            )
            
            $
            0.01Weighted
      average common shares used for (loss)
              income
      per common share calculations:Basic
            
            
            48,522,265
            
            
            
            42,452,189Diluted
            
            
            48,522,265
            
            
            
            42,452,189





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









6





Axcess
Medical Imaging Corporation


Consolidated
Statements of Operations





Nine
      Months Ended September 30,2008
            
            
            2007(Unaudited)
            
            
            (Unaudited)Net
      patient revenues
            
            $
            8,454,772
            
            
            $
            9,072,367Rental
      income
            
            
            258,955
            
            
            
            179,6468,713,727
            
            
            
            9,252,013Operating
      costs and expenses:Labor
      and related costs
            
            
            2,656,378
            
            
            
            2,716,414Medical
      equipment rental and maintenance
            
            
            2,361,659
            
            
            
            2,269,802Radiology
      costs
            
            
            1,633,560
            
            
            
            891,989Merger
      and related consulting
            
            
            1,418,265
            
            
            
            --General
      and administrative
            
            
            1,046,647
            
            
            
            731,320Depreciation
      and amortization
            
            
            791,779
            
            
            
            512,280Facility
      costs
            
            
            559,225
            
            
            
            502,389Medical
      and other supplies
            
            
            575,912
            
            
            
            615,104Advertising
      costs
            
            
            134,350
            
            
            
            135,560Total
      operating costs and expenses
            
            
            11,177,775
            
            
            
            8,374,858Operating
      (loss) income
            
            
            (2,464,048
            )
            
            
            877,155Other
      (expense) income:Interest
      and other income
            
            
            5,375
            
            
            
            16,146Settlement
      of interest payment
            
            
            (43,832
            )
            
            
            --Interest
      expense
            
            
            (758,706
            )
            
            
            (567,916
            )(797,163
            )
            
            
            (551,770
            )(Loss)
      income before non-controlling interests in variable
              interest
      entities, income taxes and discontinued business
            
            
            (3,261,211
            )
            
            
            325,385Non-controlling
      interests in income of variable
              interest
      entities
            
            
            (162,610
            )
            
            
            (63,446
            )(Loss)
      income from continuing operations, before income taxes
            
            
            (3,423,821
            )
            
            
            261,939Provision
      for income taxes
            
            
            --
            
            
            
            --(Loss)
      income from continuing operations
            
            
            (3,423,821
            )
            
            
            261,939Net
      (loss) income of discontinued business
            
            
            (1,188
            )
            
            
            260,515Net
      (loss) income
            
            $
            (3,425,009
            )
            
            $
            522,454








7





Axcess
Medical Imaging Corporation


Consolidated
Statements of Operations (continued)





Nine
      Months Ended September 30,2008
            
            
            2007(Unaudited)
            
            
            (Unaudited)(Loss)
      income per common share—basic:Continuing
      operations
            
            $
            (0.07
            )
            
            $
            0.01Discontinued
      businesses
            
            
            (0.00
            )
            
            
            0.00Total
      (loss) income per common share—basic
            
            $
            (0.07
            )
            
            $
            0.01(Loss)
      income per common share—diluted:Continuing
      operations
            
            $
            (0.07
            )
            
            $
            0.01Discontinued
      businesses
            
            
            (0.00
            )
            
            
            0.00Total
      (loss) income per common share—diluted
            
            $
            (0.07
            )
            
            $
            0.01Weighted
      average common shares used for (loss)
              Income
      per common share calculations:Basic
            
            
            45,809,630
            
            
            
            42,452,189Diluted
            
            
            45,809,630
            
            
            
            42,452,189







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










8





Axcess
Medical Imaging Corporation


Consolidated
Statements of Stockholder’s (Deficit) Equity


Nine
Months Ended September 30, 2008 (Unaudited)







Common
      Stock
            
            
            Paid-in
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            TotalBalances
      at January 1, 2008
            
            
            31,340,000
            
            
            $
            3,134
            
            
            $
            1,388,495
            
            
            $
            (1,083,465
            )
            
            $
            308,164Distributions
      to former members
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (1,001
            )
            
            
            (1,001
            )Net
      loss from January1, 2008 to April 30, 2008
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (786,123
            )
            
            
            (786,123
            )Balances
      at April 30, 2008
            
            
            31,340,000
            
            
            
            3,134
            
            
            
            1,388,495
            
            
            
            (1,870,589
            )
            
            
            (478,960
            )Recapitalization
      and direct costs resulting from the
              reverse
      merger:Cancellation
      of shares
            
            
            (29,840,000
            )
            
            
            (2,984
            )
            
            
            --
            
            
            
            --
            
            
            
            (2,984
            )Issuances
      of shares to USI members
            
            
            40,952,189
            
            
            
            4,095
            
            
            
            --
            
            
            
            --
            
            
            
            4,095Shares
      issued for direct costs
            
            
            788,125
            
            
            
            79
            
            
            
            141,783
            
            
            
            --
            
            
            
            141,862Effects
      of the May Financing:Warrants
      issued in the arrangement
            
            
            --
            
            
            
            --
            
            
            
            426,453
            
            
            
            --
            
            
            
            426,453Beneficial
      conversion feature in the
              convertible
      note
            
            
            --
            
            
            
            --
            
            
            
            426,454
            
            
            
            --
            
            
            
            426,454Shares
      issued for direct costs
            
            
            375,117
            
            
            
            37
            
            
            
            67,484
            
            
            
            --
            
            
            
            67,521Direct
      finance costs allocated to warrants
            
            
            --
            
            
            
            --
            
            
            
            (94,895
            )
            
            
            --
            
            
            
            (94,895
            )Shares
      issued to consultants for services
            
            
            4,906,835
            
            
            
            491
            
            
            
            882,739
            
            
            
            --
            
            
            
            883,230Net
      loss from May 1, 2008 to September 30, 2008
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (2,638,885
            )
            
            
            (2,638,885
            )Balances
      at September 30, 2008
            
            
            48,522,266
            
            
            $
            4,852
            
            
            $
            3,238,513
            
            
            $
            (4,509,474
            )
            
            $
            (1,266,109
            )Net
      loss for the nine months ended
              September
      30, 2008
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (3,425,009
            )







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








9





Axcess
Medical Imaging Corporation


Consolidated
Statements of Stockholder’s Equity (Deficit)


Nine
Months Ended September 30, 2007 (Unaudited)





Common
      Stock
            
            
            Paid-in
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            TotalBalances
      at January 1, 2007
            
            
            --
            
            
            $
            --
            
            
            $
            1,403,761
            
            
            $
            (1,128,322
            )
            
            $
            275,439Organization
      of former Firstway Enterprises, Inc.
            
            
            31,340,000
            
            
            
            3,134
            
            
            
            (3,134
            )
            
            
            --
            
            
            
            --Distributions
      to former USI members
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (10,020
            )
            
            
            (10,020
            )Net
      income for the nine months ended
              September
      30, 2007
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            522,454
            
            
            
            522,454Balances
      at September 30, 2007
            
            
            31,340,000
            
            
            $
            3,134
            
            
            $
            1,400,627
            
            
            $
            (615,888
            )
            
            $
            787,873





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








10





Axcess
Medical Imaging Corporation


Consolidated
Statements of Cash Flows





Nine
      Months Ended September 30,2008
            
            
            2007(Unaudited)
            
            
            (Unaudited)Cash
      flows from operating activities:Net
      (loss) income
            
            $
            (3,425,009
            )
            
            $
            522,454Adjustments
      to reconcile net (loss) income to net cash provided by (used in) operating
      activities:Share-based
      payment expense
            
            
            877,888
            
            
            
            --Depreciation
      and amortization
            
            
            791,779
            
            
            
            512,280Non-controlling
      interests
            
            
            162,610
            
            
            
            63,447Amortization
      of debt discount
            
            
            72,192
            
            
            
            --Bad
      debts expense
            
            
            61,977
            
            
            
            --Settlement
      of interest payment
            
            
            43,832
            
            
            
            --Amortization
      of deferred finance costs
            
            
            15,953
            
            
            
            2,061Discontinued
      operations
            
            
            1,188
            
            
            
            (260,515
            )Changes
      in operating assets and liabilities of continuing
    operations:Accounts
      receivable
            
            
            282,366
            
            
            
            (1,988,799
            )Other
      operating assets
            
            
            35,714
            
            
            
            106,170Accounts
      payable and accrued liabilities
            
            
            692,181
            
            
            
            (64,411
            )Accounts
      payable, related parties
            
            
            256,380
            
            
            
            234,970Net
      cash used in operating activities of continuing operations
            
            
            (130,949
            )
            
            
            (872,343
            )Cash
      flows from investing activities:Collections
      on notes receivable
            
            
            124,026
            
            
            
            38,421Purchases
      of property and equipment
            
            
            (10,831
            )
            
            
            (103,710
            )Proceeds
      from sale of business
            
            
            --
            
            
            
            202,641Collections
      of net advances due from related parties
            
            
            100
            
            
            
            60,390Net
      cash provided by investing activities of continuing
    operations
            
            
            113,295
            
            
            
            197,742Cash
      flows from financing activities:Proceeds
      from the sale of convertible notes and warrants, net of $155,000 in cash
      finance costs
            
            
            845,000
            
            
            
            --Principal
      payments on long-term debt and capital lease obligations
            
            
            (634,955
            )
            
            
            (885,593
            )Net
      (decrease) increase in bank credit facilities
            
            
            (59,848
            )
            
            
            565,959Cash
      distributions- pre-merger
            
            
            (1,001
            )
            
            
            (10,020
            )Proceeds
      from bank loans
            
            
            --
            
            
            
            125,138Proceeds
      from long-term debt, related parties
            
            
            --
            
            
            
            1,100,000Repayments
      on long-term debt, related parties
            
            
            (1,000
            )
            
            
            (271,351
            )Net
      cash provided by financing activities of continuing
    operations
            
            $
            148,196
            
            
            $
            624,133








11





Axcess
Medical Imaging Corporation


Consolidated
Statements of Cash Flows (continued)





Nine
      Months Ended September 30,2008
            
            
            2007Net
      increase (decrease) in cash and cash equivalents
              from
      continuing operations
            
            $
            130,542
            
            
            $
            (50,468
            )Net
      (decrease) increase in cash and cash equivalents
              from
      discontinued operations:Operating
      activities
            
            
            2,032
            
            
            
            100,719Financing
      activities
            
            
            (5,164
            )
            
            
            (220,384
            )Net
      increase (decrease) in cash and cash equivalents
            
            
            127,410
            
            
            
            (170,133
            )Cash
      and cash equivalents at the beginning of the period
            
            
            140,986
            
            
            
            481,589Cash
      and cash equivalents at the end of the period
            
            $
            268,396
            
            
            $
            311,456Supplemental
      disclosures of cash flow information:Cash
      paid during the periods for interest:Continuing
      operations
            
            $
            800,121
            
            
            $
            565,854Discontinued
      operations
            
            $
            1,041
            
            
            $
            2,216Cash
      paid during the periods for income taxes
            
            $
            --
            
            
            $
            --Non-cash
      investing and financing activities
              of
      continuing operations:Deferred
      consulting services acquired for 4,906,835
              shares
      of common stock, at fair value
            
            $
            883,230
            
            
            
            --Convertible
      debt and warrant proceeds allocated to warrants
              and
      a beneficial conversion feature
            
            $
            852,906
            
            
            
            --Acquisition
      of property and equipment under
              capital
      lease arrangements
            
            $
            313,013
            
            
            $
            2,729,634Note
      receivable received in connection with sale of
              business
            
            
            --
            
            
            $
            314,259Deferred
      financing costs proportionately paid with
              common
      stock, at fair value
            
            $
            38,656
            
            
            
            --





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








12





Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 1 –
Basis of presentation, nature of business and liquidity and management’s
plans:





Basis
of presentation:





Our
unaudited consolidated financial statements as of September 30, 2008 and for the
three and nine months ended September 30, 2008 and 2007 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with interim reporting standards of Regulation S-X
of the Securities and Exchange Commission (“SEC”). Accordingly, they do not
include all the information required by generally accepted accounting principles
for complete financial statements. In our opinion, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation of
our consolidated financial position as of September 30, 2008, our consolidated
results of operations for the three and nine months ended September 30, 2008 and
2007 and cash flows for the nine months ended September 30, 2008 and 2007 have
been included in their preparation. These unaudited consolidated financial
statements should be read in conjunction with our annual financial statements
for our years ended December 31, 2007 and 2006 and Management’s Discussion and
Analysis or Plan of Operation, and related notes thereto, included in the
Company’s Form 8-K filed with the SEC by Firstway Enterprises, Inc. on June 18,
2008. Operating results for the nine months ended September 30, 2008 are not
necessarily indicative of the results that may be expected for any subsequent
quarter or the entire year ending December 31, 2008.





On May 2,
2008, US Imaging Holding, LLC (“USI”) merged with Firstway Enterprises, Inc.
(“Firstway”) pursuant to a Share Exchange Agreement (the “Exchange Agreement”).
The Exchange Agreement provided for the exchange of all of our member interest
for 40,952,189 (or 96.5%) of Firstway’s post-merger common shares. Considering
that our former members now control the majority of Firstway’s outstanding
voting common stock, our management has actual operational control of Firstway
and Firstway has effectively succeeded its otherwise minimal operations to our
operations, USI is considered the accounting acquirer in this reverse-merger
transaction. A reverse-merger transaction with a non-operating public shell
company is considered, and accounted for as, a capital transaction in substance;
it is equivalent to the issuance of USI’s member interests for the net monetary
assets of Firstway, accompanied by a recapitalization. Accordingly, the
accounting does not contemplate the recognition of unrecorded assets of the
accounting acquiree, such as goodwill. However, on the date of the merger,
Firstway as a blank-check public shell company and had no assets and no
liabilities. Consolidated financial statements presented herein and subsequent
to the merger reflect the consolidated financial assets and liabilities and
operations of USI, at their historical costs, giving effect to the
recapitalization, as if it had been the Issuer during the periods
presented.





Direct
costs associated with the reverse merger amounted to $161,862 and are included
in the caption Merger and related consulting expense. These costs included the
issuance of 788,125 shares of our common stock that had an estimated fair value
of $141,862 and $20,000 in cash, both to an outside professional service
provider.





On June
13, 2008, we changed our name to Axcess Medical Imaging
Corporation.




13







Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 1 –
Basis of presentation, nature of business and liquidity and management’s plans
(continued):





Nature of
business:





Access
Medical Imaging Corporation (the “Company” or “We” or “Our”) is a Delaware
Corporation that was organized on January 9, 2007. Through our USI subsidiary,
we provide diagnostic imaging services for physicians, individuals and managed
care organizations through our integrated network of imaging centers located in
the Southwest region of Florida. Our services include magnetic resonance
imaging, or MRI, positron emission tomography, or PET, computed tomography, or
CT, and other technologies. These services are noninvasive techniques that
generate representations of internal anatomy on film or digital media, which are
used by physicians for the diagnosis and assessment of diseases and disorders.
We also generate revenue from leasing our real estate holdings located in the
Southwest region of Florida principally to commercial customers.





Liquidity
and management’s plans:





We
incurred a net loss from our continuing operations amounting to $1,196,062 and
$3,423,821 for the three and nine months ended September 30, 2008, respectively.
In addition, as of September 30, 2008, we have a working capital deficiency of
$2,156,478 and our bank line of credit facilities with an outstanding balance of
$1,924,154, which expired and are in default on October 28, 2008. These
conditions raise substantial doubt surrounding our ability to continue as a
going concern for a reasonable period.





Our
management is executing certain plans to alleviate the negative trends and
conditions described above. In May 2008, we entered into a merger and financing
transaction that provided $1,000,000 in proceeds to the post-merger combined
companies, from the sale of convertible notes and warrants. Subsequent to
September 30, 2008, we sold 1,143,750 shares of our common stock for net
proceeds of $366,000. In addition, subsequent to September 30, 2008, we
successfully restructured certain of our operating leases that will result in a
net decrease of our operating expenses. Our management is currently negotiating
with financial institutions to restructure our current indebtedness to extend
existing terms as well as provide additional term and revolving credit. Finally,
our management is currently reviewing our operating and cost structure and
believes that there are additional opportunities for cost
curtailment.





Our
ability to continue as a going concern is dependent on our creditor’s
willingness to extend and restructure our existing bank line of credit or our
ability to obtain alternative financing under terms and conditions that are
suitable to our management. There can be no assurances that the creditors will
not call as due and payable the bank line of credit or that our management will
be successful in identifying and closing new financing arrangements. Ultimately,
our ability to continue as a going concern is dependent upon the achievement of
profitable operations. The accompanying financial statements do not include any
adjustments that arise from this uncertainty.





Reclassifications:





Certain
merger-related expenses, amounting to $175,000, for the three months ended March
31, 2008 were previously included as general and administrative costs in our
previous Form 8-K filed with the SEC on June 18, 2008. Due to the increased
level of significance of these costs, commencing with our prior quarterly period
ended June 30, 2008 we now classify all of these expenses in the caption Merger
and related consulting in the accompanying statement of operations.




14







Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 2 –
Summary of significant accounting policies:





Estimates





The
preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires our management to make estimates and assumptions that affect the
reported amounts in our consolidated financial statements. Actual results could
differ from those estimates.





Consolidation





Our
consolidated financial statements include the accounts of our wholly-owned
subsidiaries (USI, Axcess Diagnostics Sarasota, LLC, Axcess Diagnostics
Bradenton, LLC, and US Imaging Center Corp., LLC) and our discontinued
subsidiaries (Axcess MRI Jacksonville, LLC and Axcess Diagnostics Pointe West,
LLC). Our consolidated financial statements also include variable interest
entities (Axcess Management Group, LLC, Access Diagnostics Building, LLC, and
Axcess Diagnostics Building Bradenton, LLC). Variable interest entities, as
defined in Interpretation 46(R), “Consolidation of Variable Interest
Entities” (“FIN No. 46(R)”) of the Financial Accounting Standards Board
(the “FASB”), are primarily entities that are consolidated with their primary
beneficiary, irrespective of the ownership interest, because they either lack
sufficient equity or decision making authority. The non-controlling ownership
interests in the income or loss of variable interest entities are recorded as
charges or credits, respectively, in our consolidated statements of operations.
The intercompany accounts and transactions among all of our consolidated
entities are eliminated in the preparation of our consolidated financial
statements.





Segments





We apply
the management approach to the identification of our reportable operating
segments as provided in accordance with Statements on Financial Accounting
Standards (“SFAS”) No. 131, “Disclosures about Segments of an
Enterprise and Related Information” (“SFAS No. 131”). This approach
requires us to report our segment information based on how our chief decision
making officer internally evaluates our operating performance. Our business
segments consist of (i) Imaging Services and (ii) Commercial Real Estate
Services.





Revenue
Recognition





We
recognize our imaging services revenue when the arrangement is evidenced, the
price of the service is fixed or determinable, the service has been delivered
and the amount is considered to be collectible. As a result, imaging services
revenue is generally recorded when the service is performed. We have certain
contractual arrangements with health care providers that provide for usage of
our imaging equipment over a contractually defined period. These revenues are
recorded as they are earned, which is generally over the term of the
arrangement. Laws, rules and regulations governing the Medicare and Medicaid
programs are extremely complex and subject to interpretation. As a result,
recorded estimates may change in the future and such changes in estimates, if
any, will be recorded in our operating results in the period they are identified
by our management.






15







Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 2 –
Summary of significant accounting policies (continued):





As with
many healthcare services providers, we have agreements with third-party payors
that provide for payments at amounts that differ from our established rates. Net
imaging services revenue is reported at the estimated net realizable amounts
from these payors based upon our contracts, our historical experience rate by
payor class, and all other available information. Adjustments to these
estimates, which have been insignificant during the periods reported, are
recorded in the period that the account is settled with the payor.





We
recognize rental income arising from our Commercial Real Estate Services segment
on a straight-line basis over the term of the lease arrangement, and giving
effect to concessions, rent-holidays and similar terms and conditions, if
any.





Cash
and Cash Equivalents





For
purposes of reporting cash flows, we consider cash in operating bank accounts,
demand deposits, cash on hand and highly-liquid debt instruments, with an
initial maturity of three months or less, as cash and cash
equivalents.





Accounts
Receivable





Provisions
for doubtful accounts are primarily estimated based on historical cash
collection experience by payor classification and the age of the patient’s
account. When considering the adequacy of the allowances, accounts receivable
are routinely reviewed in conjunction with analysis of historical collection
rates, healthcare industry trends or other industry indicators, and all other
business and economic conditions that might reasonably be expected to affect the
collectability of accounts receivable. We write off accounts receivable against
our allowances after all collection efforts have been exhausted. We record
subsequent recoveries, if any, as an adjustment to our expense.





Certain
changes in payor mix, declines in the general economic conditions, and negative
trends in federal and state regulations could adversely affect our revenues,
accounts receivable, collection experience, cash flows and results of
operations.





Property
and Equipment





Property
and equipment is recorded at cost. Equipment acquired under capitalized leases
is recorded based upon the present value of the lease payments, using the
explicit rate in the lease or our implicit rate, whichever is more appropriate.
Property and equipment is depreciated using the straight-line methods over
estimated useful lives of the categories of our assets (ranging from 5 to 39
years), and is limited, in the case of capital leases, to the lease term, if
lower. Renewals and betterments that significantly extend the life of the asset
are capitalized. Otherwise, expenditures for maintenance and repairs are charged
to expense.








16





Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 2 –
Summary of significant accounting policies (continued):





We review
our property and equipment for impairments whenever events or changes in
circumstances indicate that the carrying amount of the long-lived asset may not
be recoverable through undiscounted cash flows that the respective asset, or
group of assets, generates. Impairment charges may be recognized when the
undiscounted cash flow generated from the respective asset, or group of assets,
is insufficient to recover the carrying value. In these circumstances, the
respective asset, or group of assets, is adjusted to its fair value with a
charge to expense.





Advertising





We
expense advertising and marketing costs as they are incurred.





Financial
Instruments





Financial
instruments consist of cash, evidence of ownership in an entity, and contracts
that both (i) impose on one entity a contractual obligation to deliver cash or
another financial instrument to a second entity, or to exchange other financial
instruments on potentially unfavorable terms with the second entity, and (ii)
conveys to that second entity a contractual right (a) to receive cash or another
financial instrument from the first entity, or (b) to exchange other financial
instruments on potentially favorable terms with the first entity. Accordingly,
our financial instruments consist of cash and cash equivalents, accounts and
notes receivable, accounts payable and accrued liabilities, long-term debt (both
third-party and related party), convertible notes and credit
facilities.





We carry
cash and cash equivalents, accounts receivable, accounts payable, accrued
liabilities and credit facilities at historical costs. Their respective
estimated fair values approximate carrying values due to their current nature.
We also carry notes receivable and long-term debt at historical cost. Their
respective carrying value and estimated fair values at December 31, 2007 are
reflected in the table below. Fair value is calculated using market rates for
similar instruments with similar terms and risks. Disclosures about the fair
value of our financial instruments are required annually for information
purposes, only.





December
      31, 2007Carrying
              Value
            
            
            Fair
              ValueNotes
      receivable, including current maturities
            
            $
            169,507
            
            
            $
            162,743Long-term
      debt, including current maturities
            
            $
            (3,671,741
            )
            
            $
            (2,857,311
            )Long-term
      debt, related parties, including current maturities
            
            $
            (1,359,782
            )
            
            $
            (1,231,669
            )





Market
and other conditions from which we derive our assumptions for fair value
measurement have not changed such that the December 31, 2007 disclosed fair
values would materially change. On May 2, 2008, we entered into a financing
arrangement that resulted in the issuance of a 12% per annum, $1,000,000 face
value convertible note, with a maturity in two years, and warrants (See Note 7).
The convertible note is carried on our September 30, 2008 consolidated balance
sheet at its discounted carrying value of $219,286. The estimated fair value of
this convertible note is $1,026,000.











17






Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 2 –
Summary of significant accounting policies (continued):





Income
taxes:





We
account for income taxes applying the asset and liability approach prescribed in
SFAS No. 109, “Accounting for
Income Taxes” (“SFAS No. 109”). Under the asset and liability approach,
we recognize deferred tax assets and liabilities based on the difference between
the financial statements carrying amounts and the tax basis of assets and
liabilities, using the effective tax rates in the years in which the differences
are expected to reverse.  A valuation allowance related to deferred
tax assets is also recorded when it is more likely than not that some or all of
the deferred tax asset may not be realized.





In
applying SFAS No. 109, we reflect the differences arising from variable interest
entities as permanent differences because the general presumption that earnings
will be distributed to us is overcome in these instances since we do not have
contractual rights to those distributions when and if ever made.





(Loss)
income per share:





We
account for (loss) income per share in accordance with SFAS No. 128, “Earnings per Share”. Basic
(loss) income per share represents our net (loss) or income divided by the
weighted average number of shares of common stock outstanding during each
period. It excludes the dilutive effects of potentially issuable common shares
such as those related to our convertible note and warrants. Diluted (loss)
income per share is calculated by including potentially dilutive share issuances
in the denominator. However, diluted earnings per share does not reflect the
effects of 5,555,555 shares potentially issuable upon conversion of our
convertible note, 11,111,110 shares potentially issuable shares upon exercise of
warrants or 750,235 shares that we have agreed to issue to a placement agent for
raising capital above a contractually defined level. These potentially issuable
shares would have an anti-dilutive effect on our (loss) income per
share.





Discontinued
operations





SFAS No.
144,“Accounting for the Impairment or
Disposal of Long-Lived
Assets” (“SFAS No. 144”), requires that a component
of an entity be reported as discontinued operations if, among other things, such
component (i) has been disposed of or is classified as held for sale, (ii) has
operations and cash flows that can be clearly distinguished from the rest of the
reporting entity and (iii) will be eliminated from the ongoing operations of the
reporting entity.  In the period that a component of ours meets the
SFAS No. 144 criteria, the results of operations for current and prior periods
are reclassified to a single caption entitled discontinued operations and the
assets and liabilities of the related disposal group are segregated on the
consolidated balance sheets. See Note 14 for information regarding discontinued
operations.





Recent
Accounting Pronouncements





We have
reviewed accounting pronouncements and interpretations thereof that have
effectiveness dates during the periods reported and in future periods. We
believe that the following impending standards may have an impact on our future
filings. However, the applicability of any standard is subject to the formal
review of our financial management and certain standards are under
consideration.








18







Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 2 –
Summary of significant accounting policies (continued):





·
            In
      February 2006, the Financial Accounting Standards Board (the “FASB”)
      issued SFAS No. 155, “Accountingfor certain Hybrid Financial
      Instruments an amendment of FASB Statements No. 133 and 140” (“SFAS No.
      155”). SFAS No. 155 permits fair value re-measurement for any
      hybrid financial instrument that contains an embedded derivative that
      otherwise would require bifurcation, clarifies which interest-only strips
      and principal-only strips are not subject to the requirements of SFAS No.
      133, establishes a requirement to evaluate interests in securitized
      financial assets to identify interests that are freestanding derivatives
      or that are hybrid financial instruments that contain an embedded
      derivative requiring bifurcation, clarifies that concentrations of credit
      risk in the form of subordination are not embedded derivatives, and amends
      SFAS No. 140 to eliminate the prohibition on a qualifying special purpose
      entity from holding a derivative financial instrument that pertains to a
      beneficial interest other than another derivative financial
      instrument.  SFAS No. 155 is effective for all financial
      instruments acquired or issued after the beginning of an entity’s first
      fiscal year that begins after September 15, 2006. SFAS No. 155 did not
      have a material impact on our consolidated financial position, results of
      operations or cash flows because we do not have any hybrid financial
      instruments that are within the scope of this
  standard.





·
            In
      March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
      Financial Assets - an amendment to FASB Statement No. 140” (“SFAS
      No. 156”).  SFAS No. 156 requires that an entity recognize a
      servicing asset or servicing liability each time it undertakes an
      obligation to service a financial asset by entering into a service
      contract under certain situations.  The new standard is
      effective for fiscal years beginning after September 15,
      2006.  SFAS No.156 did not have a material impact on our
      consolidated financial position, results of operations or cash flows
      because we have no servicing arrangements that are subject to the scope of
      this standard.





·
            In
      July 2006, the FASB issued Interpretation No. 48, “Accountingfor uncertainty in Income Taxes” (“FIN No. 48”).  FIN No.
      48 clarifies the accounting for Income Taxes by prescribing the minimum
      recognition threshold a tax position is required to meet before being
      recognized in the financial statements. It also provides guidance on
      derecognition, measurement, classification, interest and penalties,
      accounting in interim periods, disclosure and transition and clearly
      scopes income taxes out of SFAS No. 5, “Accounting for
      Contingencies”.
      FIN No. 48 was effective for fiscal years beginning after December 15,
      2006. Accordingly, we have implemented FIN 48 by summarizing and
      evaluating all potential uncertain tax positions. As a result of our
      implementation, FIN No. 48 did not have a material impact on our
      consolidated financial position, results of operations or cash
      flows.









19





Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 2 –
Summary of significant accounting policies (continued):





·
            In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements” ("SFAS
      No. 157").The objective of SFAS No. 157 is to increase
      consistency and comparability in fair value measurements and to expand
      disclosures about fair value measurements.  SFAS No. 157 defines
      fair value, establishes a framework for measuring fair value in generally
      accepted accounting principles, and expands disclosures about fair value
      measurements.  SFAS No. 157 applies under other accounting
      pronouncements that require or permit fair value measurements and does not
      require any new fair value measurements. The provisions of SFAS No. 157
      are effective for fair value measurements made in fiscal years beginning
      after November 15, 2007. In February 2008, the FASB issued FASB Staff
      Position (“FSP”) 157-2,“Effective Date of FASB Statement
      No.157”(“FSP 157-2), which delayed the
      effective date of SFAS No. 157 for all non-financial assets and
      liabilities, except those that are recognized or disclosed at fair value
      in the financial statements on a recurring basis, until January 1, 2009.
      We have adopted the applicable sections of SFAS No. 157. The most
      significant area of application was in connection with our Convertible
      Note and Warrant Financing Arrangement, during 2008, where we applied
      Accounting Principles Opinion No. 14, “Accounting for Debt with Detachable
      Warrants” (“APB No. 14”).  In applying APB No. 14, we were
      required to allocate the proceeds from the financing to the debt and
      warrants based upon their relative fair values. In applying SFAS No. 157
      to the determination of fair values, we do not believe that the amounts
      would have been materially different than those reflected in our
      consolidated financial statements under previous
  standards.





·
            In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans, an amendment of
      FASB Statements No. 87, 88, 106 and132(R)” (“SFAS No.
      158”).  SFAS No. 158 improves financial reporting by requiring
      an employer to recognize the overfunded or underfunded status of a defined
      benefit postretirement plan (other than a multiemployer plan) as an asset
      or liability in its statement of financial position and to recognize
      changes in that funded status in the year in which the changes occur
      through comprehensive income of a business entity or changes in
      unrestricted net assets of a not-for-profit organization. SFAS No. 158
      also improves financial reporting by requiring an employer to measure the
      funded status of a plan as of the date of its year-end statement of
      financial position, with limited exceptions.  The effective date
      for an employer with publicly traded equity securities is as of the end of
      the fiscal year ending after December 15, 2006.  The adoption of
      SFAS No. 158 did not have a material impact on our consolidated financial
      position, results of operations or cash flows because we do not have a
      defined benefit plan for our
employees.











20





Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 2 –
Summary of significant accounting policies (continued):





·
            In
      December 2006, the FASB issued FSP EITF 00-19-2, “Accounting for Registration
      Payment Arrangements” (“FSP 00-19-2”) which addresses accounting
      for registration payment arrangements. FSP 00-19-2 specifies that the
      contingent obligation to make future payments or otherwise transfer
      consideration under a registration payment arrangement, whether issued as
      a separate agreement or included as a provision of a financial instrument
      or other agreement, should be separately recognized and measured in
      accordance with SFAS No. 5, “Accounting for
      Contingencies”.  FSP
      00-19-2 further clarifies that a financial instrument subject to a
      registration payment arrangement should be accounted for in accordance
      with other applicable generally accepted accounting principles without
      regard to the contingent obligation to transfer consideration pursuant to
      the registration payment arrangement.  For registration payment
      arrangements and financial instruments subject to those arrangements that
      were entered into prior to the issuance of EITF 00-19-2, this guidance
      shall be effective for financial statements issued for fiscal years
      beginning after December 15, 2006 and interim periods within those fiscal
      years. The adoption of EITF 00-19-02 did not have a material impact on our
      consolidated financial position, results of operations or cash flows,
      because we have no transactions that embody Registration Payment
      Arrangements, as defined in the
standard.





·
            In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities–Including an Amendment of FASB
      Statement No. 115 ” (“SFAS No. 159”).  SFAS No. 159
      permits entities to choose to measure many financial instruments and
      certain other items at fair value.  Most of the provisions of
      SFAS No. 159 apply only to entities that elect the fair value option.
      However, the amendment to SFAS No. 115 “Accounting for Certain
      Investments in Debt and Equity Securities” applies to all entities
      with available-for-sale and trading securities.  SFAS No. 159 is
      effective as of the beginning of an entity’s first fiscal year that begins
      after November 15, 2007.  Early adoption is permitted as of the
      beginning of a fiscal year that begins on or before November 15, 2007,
      provided the entity also elects to apply the provision of SFAS No. 157,
      “Fair ValueMeasurements”.  The
      adoption of SFAS No. 159 is not expected to have a material impact on our
      consolidated financial position, results of operations or cash flows, as
      we currently do not believe the election of fair value measurement will
      enhance the usefulness of our consolidated financial statements. However,
      we will continue to consider its application as new financial instruments
      and other relevant assets and liabilities arise in our
      business.





·
            In
      June 2007, the Accounting Standards Executive Committee issued Statement
      of Position 07-1, “Clarification of the Scope of
      the Audit and Accounting Guide Investment Companies and Accounting by
      Parent Companies and Equity Method Investors for Investments in Investment
      Companies” (“SOP 07-1”). SOP 07-1 provides guidance for determining
      whether an entity is within the scope of the AICPA Audit and Accounting
      Guide Investment Companies (the “Audit Guide”). SOP 07-1 was originally
      determined to be effective for fiscal years beginning on or after December
      15, 2007, however, on February 6, 2008, FASB issued a final Staff Position
      indefinitely deferring the effective date and prohibiting early adoption
      of SOP 07-1 while addressing implementation
  issues.









21





Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 2 –
Summary of significant accounting policies (continued):





·
            In
      June 2007, the FASB ratified the consensus in EITF Issue No. 07-3,“Accounting for Nonrefundable
      Advance Payments for Goods or Services to be Used in Future Researchand Development
      Activities”(EITF 07-3), which requires that nonrefundable advance payments for
      goods or services that will be used or rendered for future research and
      development (R&D) activities be deferred and amortized over the period
      that the goods are delivered or the related services are performed,
      subject to an assessment of recoverability.  EITF 07-3 is
      effective for fiscal years beginning after December 15,
      2007.  The adoption of EITF 07-3 did not have a material impact
      on our consolidated financial position, results of operations or cash
      flows because we have no arrangements within the scope of this
      standard.





·
            In
      December 2007, the FASB issued SFAS No. 141(R),"Business Combinations"
      ("SFAS No. 141(R)"), which establishes principles and requirements for how
      an acquirer recognizes and measures in its financial statements the
      identifiable assets acquired, the liabilities assumed, and any
      non-controlling interest in an acquiree, including the recognition and
      measurement of goodwill acquired in a business
      combination.  SFAS No. 141R is effective as of the beginning of
      the first fiscal year beginning on or after December 15, 2008. Earlier
      adoption is prohibited and we are currently evaluating the effect, if any
      that the adoption will have on our consolidated financial position results
      of operations or cash flows.





·
            In
      December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
      Consolidated Financial Statements Liabilities–an Amendment of ARB No.
      51”.  This statement amends ARB No. 51 to establish
      accounting and reporting standards for the Non-controlling interest in a
      subsidiary and for the deconsolidation of a subsidiary.  SFAS
      No. 160 will change the classification and reporting for minority interest
      and non-controlling interests of variable interest
      entities.  Following the effectiveness of SFAS No. 160, the
      minority interest and non-controlling interest of variable interest
      entities will be carried as a component of stockholders’ equity.
      Accordingly, upon the effectiveness of this statement, we will begin to
      reflect non-controlling interest in our consolidated variable interest
      entities as a component of stockholders’ equity.  This statement
      is effective for fiscal years and interim periods within those fiscal
      years, beginning on or after December 15, 2008 and earlier adoption is
      prohibited. Since we have Variable Interest Entities consolidated in our
      financial statements, upon our adoption of this standard on January 1,
      2009, the non-controlling interests in these variable interest entities
      will be classified as a component of stockholders’
  equity.









22





Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 2 –
Summary of significant accounting policies (continued):





·
            In
      December 2007, the FASB ratified the consensus in EITF Issue No. 07-1,
      “Accounting for Collaborative
      Arrangements” (EITF 07-1). EITF 07-1 defines collaborative
      arrangements and requires collaborators to present the result of
      activities for which they act as the principal on a gross basis and report
      any payments received from (made to) the other collaborators based on
      other applicable authoritative accounting literature, and in the absence
      of other applicable authoritative literature, on a reasonable, rational
      and consistent accounting policy is to be elected.  EITF 07-1
      also provides for disclosures regarding the nature and purpose of the
      arrangement, the entity’s rights and obligations, the accounting policy
      for the arrangement and the income statement classification and amounts
      arising from the agreement. EITF 07-1 will be effective for fiscal years
      beginning after December 15, 2008, and will be applied as a change in
      accounting principle retrospectively for all collaborative arrangements
      existing as of the effective date.  We have not yet evaluated
      the potential impact of adopting EITF 07-1 on our consolidated financial
      position, results of operations or cash flows, because we are not a party
      to arrangements that are within the scope of this
  standard.





·
            In
      March 2008, the FASB” issued SFAS No. 161, “Disclosures about Derivative
      Instruments and Hedging Activities–an amendment to FASB
      Statement No. 133”(“SFAS No.
      161”).  SFAS No.
      161 is intended to improve financial standards for derivative instruments
      and hedging activities by requiring enhanced disclosures to enable
      investors to better understand their effects on an entity's financial
      position, financial performance, and cash flows.  Entities are
      required to provide enhanced disclosures about: (a) how and why an entity
      uses derivative instruments; (b) how derivative instruments and related
      hedged items are accounted for under SFAS No. 133 and its related
      interpretations; and (c) how derivative instruments and related hedged
      items affect an entity’s financial position, financial performance, and
      cash flows. It is effective for financial statements issued for fiscal
      years beginning after November 15, 2008, with early adoption encouraged.
      We are currently evaluating the impact of SFAS No. 161, if any, will have
      on our consolidated financial position, results of operations or cash
      flows. However, we currently do not have derivative financial instruments
      that are recorded as liabilities in our consolidated financial
      statements.





·
            In
      April 2008, the FASB issued FSP No. FAS 142-3,“Determination of the Useful Life of Intangible
      Assets”. This FSP amends the factors that should be considered in
      developing renewal or extension assumptions used to determine the useful
      life of a recognized intangible asset under SFAS No. 142,“Goodwill and Other
      IntangibleAssets”. The Company is required to adopt FSP 142-3 on January
      1, 2009.  The guidance in FSP 142-3 for determining the useful
      life of a recognized intangible asset shall be applied prospectively to
      intangible assets acquired after adoption, and the disclosure requirements
      shall be applied prospectively to all intangible assets recognized as of,
      and subsequent to, adoption. The Company is currently evaluating the
      impact of FSP 142-3 on its consolidated financial position, results of
      operations or cash flows.






23





Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 2 –
Summary of significant accounting policies (continued):





·
            In
      May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
      Accepted Accounting Principles" ("SFAS No.
      162").  SFAS No. 162 identifies the sources of accounting
      principles and the framework for selecting the principles used in the
      preparation of financial statements of nongovernmental entities that are
      presented in conformity with generally accepted accounting principles (the
      GAAP hierarchy). SFAS No. 162 will become effective 60 days following
      the SEC's approval of the Public Company Accounting Oversight Board
      amendments to AU Section 411, "The Meaning of Present Fairly
      in Conformity With Generally Accepted Accounting
      Principles." The Company does not expect the adoption of SFAS No.
      162 will have a material effect on its consolidated financial position,
      results of operations or cash
flows.





·
            In
      May 2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1
      "Accounting for
      Convertible Debt Instruments That May Be Settled in Cash upon Conversion
      (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP
      APB 14-1 requires the issuer of certain convertible debt instruments
      that may be settled in cash (or other assets) on conversion to separately
      account for the liability (debt) and equity (conversion option) components
      of the instrument in a manner that reflects the issuer's non-convertible
      debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning
      after December 15, 2008 on a retroactive basis. The Company is currently
      evaluating the potential impact, if any, of the adoption of FSP APB 14-1
      on its consolidated financial position, results of operations or cash
      flows.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on our present or future consolidated
financial statements.









24


Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 3 –
Accounts and notes receivable:





Accounts
receivable:





Accounts
receivable consisted of the following:





September
      30,
            
            
            December
      31,2008
            
            
            2007Imaging
      accounts receivables
            
            $
            3,198,129
            
            
            $
            3,507,906Rent
      receivable
            
            
            274,931
            
            
            
            256,758Employee
      advances
            
            
            9,236
            
            
            
            --3,482,296
            
            
            
            3,764,664Allowance
      for doubtful accounts
            
            
            (80,175
            )
            
            
            (18,200
            )Net
      accounts receivable
            
            $
            3,402,121
            
            
            $
            3,746,464





Our
imaging accounts receivable are highly concentrated among third party payors.
The following table summarizes the gross imaging receivable by payor and patient
obligations as a percent of the total.





September
      30,
            December
      31,2008
            2007Medicare
            42%
            42%Other
      third-party payors
            28%
            27%Blue
      Cross and Blue Shield
            15%
            17%Workers’
      Compensation
            12%
            11%Patient
      obligations
            3%
            3%100%
            100%





Notes
receivable:





Notes
receivable consists of three notes receivable arising from our sale of a
discontinued business during 2007 (See Note 14). The notes receivable bear
interest at 5.0% to 9.0% per annum and require either monthly or annual
principal and interest payments through 2009. We carry our notes receivable at
historical cost as held-to-maturity investments.






25







Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 4 –
Property and equipment:





Property
and equipment consisted of the following:





September
      30,
            
            
            December
      31,2008
            
            
            2007Land,
      buildings and improvements
            
            $
            5,459,998
            
            
            $
            5,455,605Diagnostic
      and imaging equipment
            
            
            3,097,148
            
            
            
            2,975,166Computer
      equipment
            
            
            1,636,340
            
            
            
            1,438,870Furniture
      and fixtures
            
            
            381,471
            
            
            
            381,47210,574,957
            
            
            
            10,251,113Accumulated
      depreciation and amortization
            
            
            (2,327,837
            )
            
            
            (1,536,058
            )Carrying
      value
            
            $
            8,247,120
            
            
            $
            8,715,055Property
      and equipment acquired under capital lease arrangements included in the
      above amounts:Cost
            
            $
            5,281,757
            
            
            $
            4,968,744Accumulated
      amortization
            
            
            (1,394,939
            )
            
            
            (782,787
            )Carrying
      value
            
            $
            3,886,818
            
            
            $
            4,185,957





Land,
buildings and certain equipment with carrying value of $2,526,356 and $2,564,398
at September 30, 2008 and December 31, 2007, respectively (which are net of
$210,246 and $172,204 of accumulated depreciation, respectively) are
substantially leased to third-party tenants (See Note 12).





Note 5 –
Other assets:





Other
current assets:





Other
current assets consisted of the following:





September
      30,
            
            
            December
      31,2008
            
            
            2007Deferred
      consulting expense
            
            $
            883,230
            
            
            $
            --Prepaid
      expenses
            
            
            54,600
            
            
            
            30,770937,830
            
            
            
            30,770Accumulated
      amortization
            
            
            (736,025
            )
            
            
            --$
            201,805
            
            
            $
            30,770









26







Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 5 –
Other assets (continued):





Other
current assets (continued):





We have
two consulting arrangements with one organization for strategic consulting
services. One contract provides for monthly compensation of $15,000 and expired
in October 2008. These expenses are included in Merger and related consulting
expense. On May 2, 2008, we entered into a second arrangement that provided for
compensation in the form of 3,758,749 shares of our common stock (valued at
$676,575) and a term of six months. We have capitalized the cost associated with
the second contract and are amortizing the cost using the straight-line method
over the contract term. We also entered into a consulting arrangement related to
the acquisition of financing for our Company on May 2, 2008. Compensation for
this arrangement was paid in the form of 1,148,086 shares of our common stock
(valued at $206,655). We have capitalized the cost associated with this contract
and are amortizing the cost using the straight-line method over the contract
term, which is six months. Total amortization expense during the three and nine
month periods ended September 30, 2008 related to our deferred consulting
services amounted to $441,615 and $736,025 and is included in Merger and related
consulting expense.





Other
assets:





Other
assets consisted of the following:





September
      30,
            
            
            December
      31,2008
            
            
            2007Deferred
      loan costs
            
            $
            147,828
            
            
            $
            48,852Prepaid
      expenses
            
            
            55,431
            
            
            
            72,664Security
      deposits
            
            
            16,235
            
            
            
            45,849$
            219,494
            
            
            $
            167,365





Deferred
loan costs arose in connection with our convertible note and warrant financing
and our building mortgage financings. We amortize deferred loan costs using the
straight-line method, which is not materially different than applying the
effective method. Amortization of loan costs during the three and nine months
ended September 30, 2008 amounted to $16,640 and $28,650, respectively, and is
included in interest expense. Amortization of loan costs during the three and
nine months ended September 30, 2007 amounted to $687 and $2,061, respectively,
and is included in interest expense.






27







Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 6 –
Credit facilities and long-term debt:





Our bank
credit facilities with Amegy Bank National Association (“Amegy”), which expired
in February 2008, provided for maximum borrowings of $2,000,000 and are secured
by our consolidated accounts receivable and property and equipment. As of
September 30, 2008 and December 31, 2007 we owed $1,924,154 and $1,984,002,
respectively, on these credit facilities. The facilities bear interest at 8.25%
per annum. The facilities are guaranteed by our subsidiaries and our former
members.





On August
29, 2008, we entered into a Modification of Promissory Note Agreement
(“Modification”) with Amegy amending the terms of the promissory notes. Pursuant
to the Modification, the Company agreed to make all interest payments on the
28th of each month until all amounts are paid in full, make two $10,000 payments
on August 28, 2008 and September 28, 2008 and pay all principal and interest in
full on October 28, 2008. As of the date of this filing, we have made the
required payments, but did not pay in-full the balance of the principal and
interest that was due on October 28, 2008. Accordingly, on that date, we are in
default on this indebtedness.





While
Amergy has the right to require immediate payment of amounts outstanding, they
have not done so. Our management is currently negotiating with the lender to
extend, restructure or replace the credit facilities. However, there can be no
assurances that our management will be successful in these negotiations or that
the lender will not call the balance as immediately payable.





In
connection with the August 29, 2008 Modification, we concluded that the
modification did not meet the definition of “substantial” for purposes of
applying EITF 96-19 “Debtor’s
Accounting for a Modification or Exchange of Debt Instruments.”
Generally, “substantial” modifications to debt instruments are based upon the
present value of cash flows and require extinguishment accounting, where the
instrument is effectively extinguished and replaced with the new instrument, at
fair value. These transactions give rise to gains and losses on debt
extinguishment. While the August 29, 2008 modification was not substantial, a
future modification or exchange, if any, could give rise to an extinguishment
and, accordingly, the recognition of a loss or gain might have a material impact
on our consolidated financial statements.






28





Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 6 –
Credit facilities and long-term debt (continued):





Long-term
debt consisted of the following:





September
      30,
            
            
            December
      31,Arrangement
            
            2008
            
            
            20076.09%
      per annum mortgage note, payable in monthly installments of $19,118,
      through
              January
      2029
            
            $
            2,443,621
            
            
            $
            2,500,4328.05%
      per annum mortgage note, payable in monthly installments of $10,164,
      through 2011
            
            
            1,134,306
            
            
            
            1,155,318Other,
      payable in monthly installments of $661
              through
      October 2009 at 3.8% per annum
            
            
            10,449
            
            
            
            15,9913,588,376
            
            
            
            3,671,741Less
      current maturities
            
            
            (121,619
            )
            
            
            (112,487
            )Long-term
      debt
            
            $
            3,466,757
            
            
            $
            3,559,254Maturities
      of our long-term debt are as follows:Three
      months ending December 31, 2008
            
            $
            29,122
            
            
            $
            --Year
      ending December 31:2008
            
            
            --
            
            
            
            112,4872009
            
            
            121,593
            
            
            
            121,5932010
            
            
            120,893
            
            
            
            120,8932011
            
            
            1,154,537
            
            
            
            1,154,5372012
            
            
            98,147
            
            
            
            98,147Thereafter
            
            
            2,064,084
            
            
            
            2,064,084$
            3,588,376
            
            
            $
            3,671,741





Our
mortgage notes are secured by our land and buildings.








29





Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 7 –
Convertible note and warrant financing arrangement:





On May 2,
2008, we issued a $1,000,000 face value convertible note and warrants to
purchase an aggregate of 11,111,110 shares of our common stock to a trust
controlled by the former majority shareholder of Firstway. The convertible note
bears interest at 12% per annum, payable quarterly commencing on June 30, 2008.
The principal is due on May 2, 2010. The convertible note is convertible at the
option of the investor into 5,555,555 shares of our common stock, at a fixed
conversion price of $0.18 per share. The warrants may be exercised for 5,555,555
and 5,555,555 shares of our common stock at an exercise price of $0.24 and $0.30
per share, respectively. The warrants expire on May 2, 2012.





We
evaluated the conversion and other features embodied in the convertible note for
classification under SFAS No. 133, “Accounting for Derivative Financial
Instruments and Hedging Activities” (“SFAS No. 133”), and other relevant
standards. The conversion option was not exempt from classification as a
derivative under the conventional convertible exemption due to anti-dilution
protections. However, the conversion option was otherwise exempt as an
instrument indexed to the Company’s own stock, as provided for in SFAS No. 133.
The fair value of other features that generally would require bifurcation were
deminimus on the financing date and the reporting date. However, such features
will be evaluated for reclassification upon each future reporting date and may
require classification as derivative liabilities, accompanied by a charge to
expense. We also evaluated the warrants under EITF 00-19, “Accounting for Freestanding
Financial Instruments Indexed to and Potentially Settled in a Company’s Own
Stock” for classification. As a result of this evaluation, the warrants
met all of the requisite conditions for equity classification. However, this
review is required to be performed at each future reporting period. If the
requisite conditions are not achieved in connection with our future review, we
would be required to reclassify the warrants to liabilities and carry them at
fair value with adjustments in fair value made through income or expense, as may
be required.





Since the
equity-indexed instruments and embedded features did not require liability
classification, our accounting provided for the allocation of the proceeds to
the hybrid convertible debt agreement and the warrants based upon their relative
fair values. In addition, we are required to evaluate the presence of a
beneficial conversion feature embodied in the convertible note after such
allocation. As a result of our calculations, the post-allocation convertible
note embodied a beneficial conversion feature that was classified as a component
of stockholders’ equity. The following table summarizes the components of our
allocation:





Financial
      Instrument or Feature
            
            Fair
      Value
            
            
            Relative
              Fair
      Value
            
            
            Accounting
              AllocationConvertible
      note
            
            $
            1,026,624
            
            
            $
            573,547
            
            
            $
            147,093Warrant
      tranche A ($0.24 strike price)
            
            
            411,111
            
            
            
            229,676
            
            
            
            229,676Warrant
      tranche B ($0.30 strike price)
            
            
            352,222
            
            
            
            196,777
            
            
            
            196,777Beneficial
      conversion feature
            
            
            --
            
            
            
            --
            
            
            
            426,454$
            1,789,957
            
            
            $
            1,000,000
            
            
            $
            1,000,000






30








Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 7 –
Convertible note and warrant financing arrangement (continued):





The fair
value of the convertible note was estimated based upon its forward cash-flow
value using terms and features for similar forward contracts and current
market-quoted, risk-adjusted interest rates. Significant assumptions included
the assignment of credit-risk adjusted market rates for similar instruments with
similar risks. Market interest rates for similar contracts were estimated to
range between 7.54% per annum to 10.52% per annum. The fair value of the
warrants was estimated using the Black-Scholes-Merton valuation technique.
Significant assumptions included the fair value of one share of common stock
($0.18) based upon enterprise valuations that we have negotiated with investors,
volatility 61.68% based upon a peer-group of trading companies, a risk-free rate
of 2.37% per annum based upon the current rate for zero-coupon treasury
securities with remaining terms consistent with the expected term, and an
expected term equal to the period to expiration of the warrants, or four
years.





The
accounting allocation of the convertible note requires us to amortize the
discount over the term of the note, using the effective method. Amortization of
the discount for the three and nine months ended September 30, 2008 amounted to
$46,718 and $72,192 and, therefore, our carrying value of the convertible note
amounts to $219,286 at September 30, 2008.





In
connection with the financing, we incurred $222,521 in direct financing costs.
This amount included the issuance of 375,117 shares of our common stock that had
an estimated fair value of $67,521 and $155,000 of cash. We allocated the total
direct financing costs between the convertible note and warrants in the amounts
of $127,626 (recorded in other assets) and $94,895 (recorded in stockholders’
equity), respectively, based upon the relative fair values of these financial
instruments. Amounts allocated to other assets are subject to amortization over
the term of the convertible note. Amortization amounted to $15,954 and $26,589
during the three and nine months ended September 30, 2008, respectively, and is
included in interest expense.





Note 8 –
Variable interest entities:





We have
entered into a contractual agreement as co-signer on the 6.09% per annum
mortgage note, which has been recorded on Axcess Diagnostics Building Bradenton,
LLC’s book. Also, we have entered into certain unconditional guaranties on
Axcess Diagnostics Building, LLC’s 8.05% per annum mortgage note and Axcess
Management Group, LLC’s capital lease obligation. These long-term debt and
capital lease obligations are also guaranteed by the members of these entities
who are also our officers. Based on our evaluation, we have determined that
these entities meet the criteria of variable interest entities under FIN No.
46(R) and that we are the primary beneficiary of these variable interest
entities since they do not have sufficient equity at risk and or decision making
authority for them to finance their activities.








31





Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 8 –
Variable interest entities (continued):





The
following table summarizes the contribution to assets and income (loss) from
continuing operations of consolidating variable interest entities (“VIEs”),
where we are the primary beneficiary, as of September 30, 2008 and December 31,
2007 and for the three and nine months ended September 30, 2008 and
2007:





September
      30, 2008
            
            
            December
      31, 2007VIEs
            
            
            Consolidated
            
            
            VIEs
            
            
            ConsolidatedCurrent
      assets
            
            $
            520,105
            
            
            $
            4,026,284
            
            
            $
            136,801
            
            
            $
            4,164,354Property
      and equipment, net
            
            
            3,532,427
            
            
            
            8,247,120
            
            
            
            3,616,032
            
            
            
            8,715,055Other
      assets
            
            
            57,829
            
            
            
            219,494
            
            
            
            55,504
            
            
            
            201,351$
            4,110,361
            
            
            $
            12,492,898
            
            
            $
            3,808,337
            
            
            $
            13,080,760Current
      liabilities
            
            $
            403,028
            
            
            $
            6,182,762
            
            
            $
            45,792
            
            
            $
            5,055,197Long-term
      debt and
              capital
      lease obligations
            
            
            3,570,963
            
            
            
            7,225,351
            
            
            
            3,794,620
            
            
            
            7,528,004Non-controlling
      interests
            
            
            --
            
            
            
            350,894
            
            
            
            --
            
            
            
            188,284Members’
      equity (deficit)
            
            
            136,370
            
            
            
            (1,266,109
            )
            
            
            (32,075
            )
            
            
            309,275$
            4,110,361
            
            
            $
            12,492,898
            
            
            $
            3,808,337
            
            
            $
            13,080,760Three
      Months Ended
              September
      30, 2008
            
            
            Three
      Months Ended
              September
      30, 2007Loss
      from continuingoperations
            
            $
            (24,048
            )
            
            $
            (1,196,062
            )
            
            $
            (77,924
            )
            
            $
            (46,304
            )








Nine
      Months Ended
              September
      30, 2008
            
            
            Nine
      Months Ended
              September
      30, 2007Income
      (loss) fromcontinuing
      operations
            
            $
            5,836
            
            
            $
            (3,423,821
            )
            
            $
            134,916
            
            
            $
            261,939





Consistent
with traditional consolidation principles, non-controlling interest in the
income (loss) of variable interest entities where we are the primary beneficiary
is limited to the basis in the entities. Accordingly, we have suspended
recognizing non-controlling interest in the losses of variable interest entities
that have exhausted their equity. As a result, the aggregate members’ equity in
variable interest entities differs from non-controlling interests carried on our
consolidated balance sheets.






32





Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 9 –
Commitments and contingencies:





Leasing arrangements – We
lease office space, imaging equipment and office equipment under cancellable and
non-cancellable operating leases and capital leases. Future minimum lease
payments for both operating and capital leases are as follows:





Operating
              Leases
            
            
            Capital
              LeasesThree
      months ending December 31, 2008:
            
            $
            358,068
            
            
            $
            274,920Year
      ending December 31:2009
            
            
            1,721,922
            
            
            
            1,141,0752010
            
            
            1,352,736
            
            
            
            994,4112011
            
            
            1,262,772
            
            
            
            950,5362012
            
            
            1,252,788
            
            
            
            568,9582013
            
            
            1,096,091
            
            
            
            21,861Thereafter
            
            
            1,077,092
            
            
            
            --$
            8,121,469
            
            
            $
            3,951,761Less
      amount representing interest
            
            
            
            
            
            
            (450,513
            )Capital
      lease obligations
            
            
            
            
            
            
            3,501,248Less
      current obligations
            
            
            
            
            
            
            (1,061,940
            )Capital
      lease obligations, non-current
            
            
            
            
            
            $
            2,439,308





Rent
expense amounted to $530,304 and $1,710,406 during the three and nine months
ended September 30, 2008, and $593,014 and $1,930,386 during the three and nine
months ended September 30, 2007, respectively, which is included in the captions
Medical equipment rental and maintenance and Facility costs in our consolidated
statements of operations.





Medical malpractice claims –
There have been no medical malpractice claims filed against our companies as of
the filing date of this report. Further, we are not aware of any material
unasserted medical malpractice claims. These claims are a business risk and we
carry both professional and general liability insurance at levels we believe is
necessary to manage this risk.





Litigation, claims and
assessments – One action has been filed against us by Advanced Data
Systems Corporation (“ADS”) in the form of a demand for AAA Arbitration. The
nature of the dispute is for breach of contract and specific performance. The
claim is for $134,100. The allegation relates to the installment by ADS of
software for medical practice management systems. We have defended on the basis
of a violation of express warranties and implied warranties. We also claimed a
right to offset against any amount allegedly remaining due, with offset was
reflected in the cost to purchase a replacement system at $143,160. Finally, we
have instituted a counterclaim in the amount of $15,149 representing the down
payment and the lease fee paid to the finance company. The pleadings have been
closed and the parties have agreed to refer this to private arbitration. A
hearing date of April 20, 21, and 22, 2009 has been scheduled. Management
intends to contest this matter vigorously if an out of court settlement
cannot be reached. Management asserts that there are valid defenses against the
claim, which should yield a favorable outcome.








33





Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 9 –
Commitments and contingencies (continued):





We are
otherwise subject to other legal proceedings and claims, which arise in the
ordinary course of its business. Although occasional adverse decisions or
settlements may occur, we believe that the final disposition of such matters
should not have a material adverse effect on our consolidated financial
position, results of operations or liquidity.





Note 10 –
Related party transactions:





Long-term
debt, related parties consisted of the following:





September
      30,
            
            
            December
      31,Arrangement
            
            2008
            
            
            200710.0%
      per annum notes payable with interest only through May 2008, followed by
      monthly installments of principal and interest payments of $39,722
      commencing June 2009 and maturing in May 2012
            
            $
            1,100,000
            
            
            $
            1,100,0006.0%
      per annum notes payable in monthly installments of principal and interest
      through maturities in 2011
            
            
            192,832
            
            
            
            148,0006.75%
      - 7.0% per annum unsecured demand notes with interest payable
      annually
            
            
            61,782
            
            
            
            61,782Unsecured
      non-interest bearing demand note
            
            
            49,000
            
            
            
            50,0001,403,614
            
            
            
            1,359,782Less
      current maturities
            
            
            (303,614
            )
            
            
            (235,738
            )Long-term
      debt
            
            $
            1,100,000
            
            
            $
            1,124,044





Advances – We make advances
to related parties, from time-to-time typically under informal demand,
non-interest bearing arrangements.





Leasing arrangements – We
rent one of our imaging facilities from a related party. Rent expense under this
arrangement amounted to $150,421 and $434,121 during the three and nine months
ended September 30, 2008, respectively, which have been included in the caption
Facility costs. For the three and nine months ended September 30, 2007 rent
expense under this arrangement amounted to $132,665 and $394,276, respectively.
As of September 30, 2008 and December 31, 2007, accounts payable under this
arrangement amounted to $577,786 and $322,406, respectively.








34





Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 10 –
Related party transactions (continued):





During
our year ended December 31, 2006, we purchased the remaining minority interest
in Axcess Diagnostics Bradenton, LLC in exchange for a 6.0% per annum face value
of $150,000 notes payable originally due in monthly installments through 2011.
We accounted for this transaction as a purchase that did not give rise to
goodwill or other intangible assets. The current outstanding balance of these
notes payable is approximately $193,000 and we are in default on the payment
terms. On September 18, 2008, the Company entered into a settlement
agreement with one of the noteholders in connection with a judgement rendered
against the Company in favor of the related party. The settlement requires that
the Company make monthly payments on the total judgment of $143,813 and to pay
off the balance by July 15, 2009. The remaining balance of $49,000 which is due
to another noteholder is currently in default. Accordingly, these notes
payable are classified as current liabilities in our consolidated balance
sheets.





Note 11 –
Stockholders’ (deficit) equity:





Reorganization:





On May 2,
2008, we issued 40,952,189 shares of common stock to acquire USI. As discussed
in Note 1, a reverse-merger transaction with a non-operating public shell
company is considered, and accounted for as, a capital transaction in substance;
it is equivalent to the issuance of USI’s member interests for the net monetary
assets of Firstway, accompanied by a recapitalization. Accordingly, as a
recapitalization, the shares issued to the members of USI are reflected as
outstanding for all periods presented.





On April
29, 2008, before the reverse merger described above, our stockholders agreed to
the cancellation of an aggregate 29,840,000 shares pro-rata with their common
stock holdings, which reduced the outstanding shares to 1,500,000. This
transaction was a condition precedent to the reverse merger to effect the
desired post-merger capital structure and was accounted for as a component of
the recapitalization.





Issuances
of common stock:





2008
Issuances:





During
the nine months ended September 30, 2008, we issued 6,070,077 shares of our
common stock, par value $0.0001, for professional and consulting services that
were engaged in our merger with USI and our convertible note and financing
arrangement. We evaluate and account for share-based payments for goods and
services in accordance with SFAS No. 123(R), “Share-based Payments” and
EITF 96-18, “Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services”. The following table
summarizes the captions charged for the services:


Activity:
            
            Number
      of Shares Issued
            
            
            Deferred
              Consulting
              Costs
            
            
            Deferred
              Finance
              Costs
            
            
            Paid-in
              Capital
            
            
            Merger
      and Other
              Expense
            
            
            Total
              ChargesCommon
      shares issued to
              consultants
            
            
            4,906,835
            
            
            $
            883,230
            
            
            $
            --
            
            
            $
            --
            
            
            $
            --
            
            
            $
            883,230Common
      shares issued for direct
              merger-related
      costs
            
            
            788,125
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            141,862
            
            
            
            141,862Common
      shares issued for direct
              finance
      costs
            
            
            375,117
            
            
            
            --
            
            
            
            38,656
            
            
            
            28,865
            
            
            
            --
            
            
            
            67,5216,070,077
            
            
            $
            883,230
            
            
            $
            38,656
            
            
            $
            28,865
            
            
            $
            141,862
            
            
            $
            1,092,613






35







Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 11 –
Stockholders’ (deficit) equity (continued):





2007
Issuances:





The
Company was organized on January 9, 2007 as a blank-check public company. On the
date of our organization, we issued 31,340,000 shares of our common stock, par
value $0.0001 to our founders.





Issuances
of warrants:





During
the nine months ended September 30, 2008, we issued warrants to purchase
11,111,110 shares of our common stock in connection with our convertible note
and warrant financing arrangement at exercise prices ranging from $0.24 to
$0.30. The following table reflects warrant activity during the nine months
ended September 30, 2008:





Number
      of Common Shares Indexed
            
            
            Weighted
      Average
              PriceBalance
      at January 1, 2008
            
            
            --
            
            
            
            --Issuances
            
            
            11,111,110
            
            
            $
            0.27Exercised
            
            
            --
            
            
            
            --Expired
      or cancelled
            
            
            --
            
            
            
            --Balance
      at September 30, 2008
            
            
            11,111,110
            
            
            $
            0.27





The
weighted average remaining lives of our warrants is 3.59 years.





Note 12 –
Leasing activities:





We lease
a significant portion (representing approximately 70%) of one of our office
buildings under operating lease arrangements principally with healthcare
tenants. The office building, including improvements and equipment, has a
carrying value of $2,736,602 as of September 30, 2008, which amount is net of
$210,246 of accumulated depreciation. As of September 30, 2008, non-cancelable
future minimum rentals under our operating leases are as follows:





Operating
              LeasesThree
      months ending December 31, 2008
            
            $
            56,521Years
      ending December 31:2009
            
            
            202,4472010
            
            
            165,9322011
            
            
            170,9102012
            
            
            176,0382013
            
            
            181,319Thereafter
            
            
            123,273$
            1,076,440









36







Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 12 –
Leasing activities (continued):





Our
arrangements do not provide for contingent rentals. In addition, we currently
have no asset retirement obligations related to real estate that we
own.





Note 13 –
Employee benefit plan:





We
sponsor a defined benefit pension plan (the “401K Plan”) covering substantially
all of our employees who have been employed one month. Our 401K Plan provides
for employer matching after one full year of continuous service in amounts up to
50% of the employee’s elective deferral contribution, up to 6.0% of each
employee’s compensation. During the three and nine months ended September 30,
2008, our contributions (and expense) amounted to $7,166 and $22,020,
respectively. During the three and nine months ended September 30, 2007 our
contributions (and expense) amounted to $6,621 and $21,284,
respectively.





Note 14 –
Discontinued operations:





In
February 2007, we discontinued our Axcess Diagnostics Pointe West (“Pointe
West”) imaging center, a business within our Imaging Services Segment that we
concluded was a component of the segment. We decided to sell this business
primarily because of our concern over long-term profitability and our ability to
gain significant market share in the market that the imaging center
served.





The
Pointe West Imaging Center was sold in July 2007. The sales price amounted to
$516,900 that was paid in cash of $202,641 and notes receivable of $314,259. We
recorded a gain of $238,907 on this sale. We have no continuing involvement with
the business.





During
our year ended December 31, 2004, we discontinued a business within our Imaging
Services Segment by abandonment, which we also concluded was a component of the
segment, for reasons similar to the Pointe West disposal. We continue to carry
minimal asset and liability balances with respect to the 2004 business
abandonment, which are being settled in the normal course of
business.





The
captions assets and liabilities of discontinued businesses in our consolidated
balance sheets reflect the following:


September
      30,
            
            
            December
      31,2008
            
            
            2007Assets:Accounts
      receivable
            
            $
            33,919
            
            
            $
            35,951Property
      and equipment
            
            
            --
            
            
            
            --$
            33,919
            
            
            $
            35,951Liabilities:Accounts
      payable
            
            $
            --
            
            
            $
            850Notes
      payable
            
            
            69,362
            
            
            
            72,488$
            69,362
            
            
            $
            73,338









37







Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 14 –
Discontinued operations (continued):





The
caption discontinued operations on our consolidated statements of operations
reflects the following:





Three
      months ended
              September
      30, 2008
            
            
            Nine
      months ended September 30, 2008Net
      revenues
            
            $
            --
            
            
            $
            --Net
      loss
            
            $
            (342
            )
            
            $
            (1,188
            )





Three
      months ended September 30, 2007
            
            
            Nine
      months ended September 30, 2007Net
      revenues
            
            $
            6,539
            
            
            $
            60,798Net
      income
            
            $
            246,475
            
            
            $
            260,515





We have
retained no contingent liabilities associated with the operation discontinued by
sale.





Note 15 –
Income taxes:





Prior to
the merger, USI and its consolidated subsidiaries were treated as partnerships
for federal and state income tax purposes and, accordingly, taxable income or
loss passed through to the personal income tax returns of the members. On the
effective date of the merger, the pass-through status ceased and USI and its
subsidiaries that are not variable interest entities will be included in our
consolidated tax returns. We are required, under SFAS No. 109, Accounting for Income Taxes,
to record the temporary differences between the accounting and tax bases of
assets and liabilities that were acquired through a charge to deferred income
tax expense in the amount of $735,924.





Our
post-merger operations resulted in an operating loss. Under SFAS No. 109, the
tax benefit of an operating loss may be recorded to the extent of future taxable
income sources that are more likely than not to arise. One source of future
income is the reversal of temporary differences that give rise to future taxable
income. Accordingly, we have recorded a benefit of $735,924 for the nine months
ended September 30, 2008, representing the deferred tax benefit related to our
post-merger losses. We may record further benefits up to the remaining balance
of deferred tax liabilities or other sources of taxable income that may arise in
future periods.








38








Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 15 –
Income taxes (continued):





The
following table reflects the establishment of our deferred income taxes, the
recognition of a benefit for a portion of our operating loss, and our net tax
provision for the periods:





Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2008
            
            
            2008Current
      provision (benefit):Federal
            
            $
            --
            
            
            $
            --State,
      net of federal benefit
            
            
            --
            
            
            
            ----
            
            
            
            --Deferred
      provision (benefit):Establishment
      of deferred income taxes on
              the
      merger date
            
            
            --
            
            
            
            735,924Deferred
      benefit
            
            
            (566,111
            )
            
            
            (969,635
            )Change
      in valuation allowances
            
            
            233,711
            
            
            
            233,711$
            (332,400
            )
            
            $
            --





The
composition of our deferred taxes is as follows:


September
      30,
            
            
            Establishment
              May
      2,2008
            
            
            2008Current:Accrual
      to cash basis of accounting differences
            
            $
            (450,958
            )
            
            $
            (450,958
            )Installment
      note receivable
            
            
            (13,306
            )
            
            
            (13,306
            )Non-deductible
      accruals
            
            
            10,469
            
            
            
            10,469Reserves
      for bad debts
            
            
            6,847
            
            
            
            6,847(446,948
            )
            
            
            (446,948
            )Non-current:Net
      operating loss
            
            
            969,635
            
            
            
            --Property
      and equipment depreciation methods
            
            
            (288,976
            )
            
            
            (288,976
            )Valuation
      allowances
            
            
            (233,711
            )
            
            
            --$
            --
            
            
            $
            (735,924
            )








39





Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 15 –
Income taxes (continued):





Our
effective tax rate in the accompanying statements of operations differs from the
statutory tax rates in the jurisdictions in which we are taxed. The following
table reconciles those rates:





Nine
      months ended September 30,2008Federal
      statutory rate
            
            
            (34.00
            %)State
      statutory rate (5.5%), net of federal benefit
            
            
            (3.63
            %)(37.63
            %)Establishment
      of deferred taxes on the date of the merger
            
            
            21.49
            %Non-deductible
      pre-merger losses that passed through to USI members
            
            
            9.39
            %Variable
      interest entities treated as permanent differences
            
            
            (0.08
            %)Change
      in valuation allowances
            
            
            6.83
            %Effective
      tax rate
            
            
            0.00
            %





Note 16 –
Segment information:





Our
business segments consist of our Imaging Services and our Real Estate Business.
Our chief decision making officer considers income (loss) from continuing
operations as the basis to measure segment profitability.





The
following table summarizes important financial information about our business
segments:





Three
      months ended September 30, 2008
            
            Imaging
              Services
            
            
            Real
              Estate
            
            
            TotalRevenues
      from external customers
            
            $
            2,467,608
            
            
            $
            85,653
            
            
            $
            2,553,261Intersegment
      revenues, eliminated
            
            
            --
            
            
            
            70,188
            
            
            
            70,188Share-based
      payments expense, included in
              merger
      and other expense
            
            
            (441,615
            )
            
            
            --
            
            
            
            (441,615
            )Interest
      expense
            
            
            (215,333
            )
            
            
            (62,388
            )
            
            
            (277,721
            )Depreciation
      and amortization
            
            
            (249,987
            )
            
            
            (19,416
            )
            
            
            (269,403
            )Income
      tax
            
            
            332,400
            
            
            
            --
            
            
            
            332,400Loss
      from continuing operations
            
            
            (1,195,874
            )
            
            
            (188
            )
            
            
            (1,196,062
            )Expenditures
      for additions to property
              and
      equipment
            
            
            (128,420
            )
            
            
            --
            
            
            
            (128,420
            )








40









Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 16 –
Segment information (continued):





Three
      months ended September 30, 2007
            
            Imaging
              Services
            
            
            Real
              Estate
            
            
            TotalRevenues
      from external customers
            
            $
            2,825,556
            
            
            $
            59,882
            
            
            $
            2,885,438Intersegment
      revenues, eliminated
            
            
            --
            
            
            
            61,416
            
            
            
            61,416Interest
      expense
            
            
            (94,690
            )
            
            
            (64,111
            )
            
            
            (158,801
            )Depreciation
      and amortization
            
            
            (242,709
            )
            
            
            (19,407
            )
            
            
            (262,116
            )Loss
      from continuing operations
            
            
            (43,937
            )
            
            
            (2,367
            )
            
            
            (46,304
            )Expenditures
      for additions to property
              and
      equipment
            
            
            --
            
            
            
            --
            
            
            
            --








Nine
      months ended September 30, 2008
            
            Imaging
              Services
            
            
            Real
              Estate
            
            
            TotalRevenues
      from external customers
            
            $
            8,454,772
            
            
            $
            258,955
            
            
            $
            8,713,727Intersegment
      revenues, eliminated
            
            
            --
            
            
            
            207,989
            
            
            
            207,989Share-based
      payments expense, included in
              merger
      and other expense
            
            
            (877,888
            )
            
            
            --
            
            
            
            (877,888
            )Interest
      expense
            
            
            (570,925
            )
            
            
            (187,781
            )
            
            
            (758,706
            )Depreciation
      and amortization
            
            
            (733,532
            )
            
            
            (58,247
            )
            
            
            (791,779
            )Income
      tax expense
            
            
            --
            
            
            
            --
            
            
            
            --Loss
      from continuing operations
            
            
            (3,423,121
            )
            
            
            (700
            )
            
            
            (3,423,821
            )Expenditures
      for additions to property
              and
      equipment
            
            
            (323,844
            )
            
            
            --
            
            
            
            (323,844
            )Total
      assets
            
            
            8,797,780
            
            
            
            3,695,118
            
            
            
            12,492,898





Nine
      months ended September 30, 2007
            
            Imaging
              Services
            
            
            Real
              Estate
            
            
            TotalRevenues
      from external customers
            
            $
            9,072,367
            
            
            $
            179,646
            
            
            $
            9,252,013Intersegment
      revenues, eliminated
            
            
            --
            
            
            
            184,247
            
            
            
            184,247Interest
      expense
            
            
            (375,710
            )
            
            
            (192,206
            )
            
            
            (567,916
            )Depreciation
      and amortization
            
            
            (454,059
            )
            
            
            (58,221
            )
            
            
            (512,280
            )Income
      (loss) from continuing operations
            
            
            269,881
            
            
            
            (7,942
            )
            
            
            261,939Expenditures
      for additions to property
              and
      equipment
            
            
            (2,822,564
            )
            
            
            (10,780
            )
            
            
            (2,833,344
            )Total
      assets
            
            
            10,034,498
            
            
            
            3,747,864
            
            
            
            13,782,362






41





Axcess
Medical Imaging Corporation


Notes to
Unaudited Consolidated Financial Statements





Note 17 –
Subsequent events:





Sale of common stock:





On
October 6, 2008, we completed the sale of 1,143,750 shares of our common stock
for net proceeds of $366,000 (or $0.32 per common share). We did not incur
investment banking fees or discounts in connection with this sale. The
aforementioned sale was made pursuant to a Private Offering Memorandum that
provided for the sale of up to 7,812,500 common shares at $0.32 per common
share. The Private Offering Memorandum and the related Subscription Agreements
do not include redemption requirements of any nature and the arrangement does
not extend registration rights to the investors. We will record the sale of
these shares of common stock in the period that the sale is complete and the
cash is collected.





Operating
lease restructuring:





During
October 2008, we successfully restructured certain of our equipment rental
agreements, which are accounted for as operating leases, resulting in a
reduction of our projected equipment expense. As a result of the restructurings,
these leases were reevaluated for operating or capital treatment. In all
instances, we will continue to account for the leases as operating
leases.





On a
pro-forma basis, had these operating lease modifications been effective on
January 1, 2008, our Medical equipment rental and maintenance expense would have
been $224,819 and $674,456 for the three and nine months ended September 30,
2008. On a pro-forma basis, applying the same assumptions, our Medical equipment
rental and maintenance expense would have been lower by $82,358 and $247,075
during the three and nine months ended September 30, 2008, when compared with
the same periods of the prior year.





Amegy
Loan Modification





On August
29, 2008, we entered into a Modification of Promissory Note Agreement
(“Modification”) with Amegy amending the terms of the promissory notes. Pursuant
to the Modification, the Company agreed to make all interest payments on the
28th of each month until all amounts are paid in full, make two $10,000 payments
on August 28, 2008 and September 28, 2008 and pay all principal and interest in
full on October 28, 2008. As of the date of this filing, we have made the
required payments, but did not pay in-full the balance of the principal and
interest on October 28, 2008. Accordingly, on that date, we are in default on
this indebtedness.






42





Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
operations.





Overview:





Access
Medical Imaging Corporation (the “Company” or “We” or “Our”) is a Delaware
Corporation that was organized on January 9, 2007. Through our subsidiary, US
Imaging Holding, LLC (“USI”), we provide diagnostic imaging services for
physicians, individuals and managed care organizations through our integrated
network of imaging centers located in the Southwest region of Florida. Our
services include magnetic resonance imaging, or MRI, positron emission
tomography, or PET, computed tomography, or CT, and other technologies. These
services are noninvasive techniques that generate representations of internal
anatomy on film or digital media, which are used by physicians for the diagnosis
and assessment of diseases and disorders. We also generate revenue from leasing
our real estate holdings located in the Southwest region of Florida principally
to commercial customers.





On May 2,
2008, we merged with USI pursuant to a Share Exchange Agreement (the “Exchange
Agreement”). The Exchange Agreement provided for the exchange of all of USI’s
member interests for 40,952,189 (or 96.5%) of our post-merger common shares.
Considering that USI’s former members now control the majority of our
outstanding voting common stock, USI’s management has actual operational control
of and we have effectively succeeded our otherwise pre-merger minimal operations
to those of USI, USI is considered the accounting acquirer in this
reverse-merger transaction. A reverse-merger transaction with a non-operating
public shell company is considered, and is accounted for as, a capital
transaction in substance; it is equivalent to the issuance of USI’s member
interests for our net monetary assets of, accompanied by a recapitalization.
Accordingly, the accounting does not contemplate the recognition of unrecorded
assets of the accounting acquiree, such as goodwill. However, on the date of the
merger, as a blank-check public shell company, we had no assets and no
liabilities. Consolidated financial statements presented herein and subsequent
to the merger reflect the consolidated financial assets and liabilities and
operations of USI, at their historical amounts, giving effect to the
recapitalization, as if USI had been the Issuer during the periods
presented.





On June
13, 2008, we changed our name to Axcess Medical Imaging
Corporation.






43








Business
segments:





We apply
the “management approach” to the identification of our reportable operating
segments as provided in Financial Accounting Standard No. 131, “Disclosures about Segments of an
Enterprise and Related Information.” This approach requires us to report
our segment information based on how our chief decision making officer
internally evaluates our operating performance. Our business segments consist of
(i) Imaging Services and (ii) Commercial Real Estate Services.





·
            Imaging
      Services: We are a leading provider of outpatient diagnostic imaging
      services through three free-standing, fixed-site imaging centers located
      in the Southwest region of Florida. Our principal sources of revenue are
      derived from magnetic resonance imaging (MRI), computed tomography (CT)
      and positron emission tomography/computed tomography (PET/CT). We provide
      imaging services primarily to referring physicians and patients directly
      and through shared services or block lease arrangements. Our services
      include the use of our imaging systems, technologists to operate the
      systems, equipment maintenance and upgrades and management of day-to-day
      fixed-site diagnostic imaging operations. We also provide reading services
      for scans done outside our fixed facility, which includes the use of our
      imaging storage system under a yearly
contract.





·
            Commercial
      Real Estate Services: We also lease commercial real estate located in the
      southwest region of Florida to principally commercial
      customers.





See Note
16 to the accompanying Notes to Unaudited Financial Statements for our financial
disclosures under Part I, Item 1 of this Form 10Q.






44





Sensitive
accounting policies:





Consolidation
of variable interest entities:





Our
consolidated financial statements include variable interest entities
(specifically, Axcess Management Group LLC, Access Building LLC, and Axcess
Building Bradenton, LLC). Variable interest entities, as defined in
Interpretation 46(R), “Consolidation of Variable Interest
Entities”of the Financial Accounting Standards Board, are primarily
entities that are consolidated with their primary beneficiary, irrespective of
the ownership interest, because they either lack sufficient equity or decision
making authority. The non-controlling ownership interests in the income or loss
of variable interest entities are recorded as charges or credits, respectively,
in our consolidated statement of operations. The intercompany accounts and
transactions among all of our consolidated entities, including variable interest
entities, are eliminated in the preparation of our consolidated financial
statements.





The
ongoing accounting treatment of our consolidated variable interest entities is
subject to periodic review related to (i) the continuing status of the entities
as variable interest entities and (ii) the continuing status of our relationship
with the variable interest entities as the primary beneficiary. While we
currently know of no events or circumstances that would change the status of
either of these items, in the event that the status changes in a future period,
we would be required to deconsolidate the entity to which the status
changed.





Effective,
January 1, 2009, we will be required to adopt Financial Accounting Standard No.
160, “Non-controlling Interest
in Consolidated Financial Statements, and Amendment of ARB51”. Statement
160 changes the classification and reporting for minority interests and
non-controlling interests of variable interest entities. Following the
effectiveness of Statement 160, these amounts will be carried as a component of
stockholders’ equity. Accordingly, upon the effectiveness of this standard, we
will begin to reflect non-controlling interest in our consolidated variable
interest entities as a component of stockholders’ equity.





See “Note
8 - Variable interest entities” to our consolidated financial statements for
additional disclosure related to the variable interest entities.





Imaging
business revenue:





We
recognize our imaging services revenue when the arrangement is evidenced, the
price of the imaging service is fixed or determinable, the service has been
delivered and the amount is considered to be collectible. As a result, imaging
services revenue is generally recorded when the service is performed. We have
certain contractual arrangements with health care providers that provide for
usage of our imaging equipment over a contractually defined period. These
revenues are recorded as they are earned, which is generally over the term of
the arrangement.





As with
many healthcare services providers, we have agreements with third-party payors
that provide for payments at amounts that differ from our established rates. Net
imaging services revenue is reported at the estimated net realizable amounts
from these payors based upon our contracts, our historical experience rate by
payor class, and all other available information. Adjustments to these
estimates, which have been insignificant during the periods reported, are
recorded in the period that the account is settled with the payor.





On
February 8, 2006, the Deficit Reduction Act of 2005 was signed into law by
President George W. Bush. Certain provisions of the Deficit Reduction Act
(“DRA”) were aimed at reducing the Medicare payment rates for the technical
component of imaging services provided in physicians’ offices and other
non-hospital outpatient based setting under the Medicare Part B program
beginning January 1, 2007. In addition, the Medicare Physician Fee Schedule
(PFS) under the Medicare Part B program underwent changes that affected imaging
reimbursement for those providers billing for both the technical component and
professional component, known as billing “globally”, effective January 1,
2007.






45





The DRA
imposed certain caps on the reimbursement for the technical component of an
imaging service.  The technical component includes the cost of
clinical staff, equipment and supplies to perform a service or procedure. Two
separate reimbursement cuts were made under DRA to the technical component of
imaging services.





The first
provision limits the reimbursement for the technical component to the lesser of
the current reimbursement or the reimbursement currently paid in the outpatient
hospital setting under the Prospective Payment System (PPS). Commonly called the
“HOPPS” reduction, this decrease makes up the largest single cut to date in
Medicare reimbursement, at a projected $8.1 billion saving to Medicare over the
next ten years.  This provision had its greatest effect on almost all
advanced imaging services including: PET/CT, PET, MRI, MRA, CT, and
CTA.





The
second provision of the DRA affected imaging reimbursement by reducing the
technical component when multiple scans are performed on contiguous body parts
during a single scanning session. The DRA initially called for a graduated
reduction over two years of 25% then 50% on the technical component of the scan
that had the lower reimbursement.  The Centers for Medicare and
Medicaid Services (“CMS”) eventually announced that it would maintain the
reduction at 25% off the technical component of the secondary scan and did not
implement the greater 50% reduction slated for 2008. While this part of the DRA
reduction did not have tremendous impact on our revenue, the greater impact came
from our other insurance carriers (Blue Cross, United Healthcare, etc.)
implementing the full 50% reduction.





At the
same time, the DRA provisions were implemented, changes to the 2007 Physician
Fee Schedule (“PFS”) were made that further negatively affected the
reimbursement for imaging services. Due to regularly scheduled review of the
factors that comprise the PFS, further adjustments to the work relative value
unit (RVU) and practice expense RVU were made. These adjustments affected both
the technical component of imaging services as well as the professional
component of imaging services that had not been targeted by the
DRA.  The professional component represents the physician component of
a service or procedure and includes the physician work, associated overhead and
professional liability insurance costs.





CMS
estimated that imaging centers would experience a minimum 25% overall decrease
in Medicare payments in 2007 alone due to the DRA provisions and the proposed
multiple PFS decreases to the conversion factor, work relative value unit (RVU),
and practice expense RVU of the fee schedule.  The amount of decrease
any given company experienced depended heavily on the services provided, with
PET, MRI, and CT services set to experience the most significant
drops.











46







The
following chart demonstrates the actual decreases experienced from 2006 to 2007
in our highest volume services:





2006
      Global
            
            
            2007
      Global
            
            
            DifferencePET/CT
            
            $
            2,714.44
            
            
            $
            1,027.24
            
            
            $
            (1,687.20
            )PET
            
            $
            2,188.04
            
            
            $
            913.32
            
            
            $
            (1,274.72
            )MRI
            
            $
            1,068.15
            
            
            $
            587.10
            
            
            $
            (481.05
            )MRA
            
            $
            916.75
            
            
            $
            556.28
            
            
            $
            (360.47
            )CT
            
            $
            394.18
            
            
            $
            349.19
            
            
            $
            (44.99
            )CTA
            
            $
            539.37
            
            
            $
            368.29
            
            
            $
            (171.08
            )











The
effects of the Medicare reimbursement reductions had further consequences for
our financial position. In this region most of our private payor contractual
rates are based on a percentage of the Medicare fee schedule. As Medicare
imaging reimbursements fell, so did our reimbursements from other third party
payors such as Blue Cross, United Healthcare, Aetna and CIGNA.





Impairments:





Our
property and equipment is significant, representing 66% of our total assets as
of September 30, 2008. As a result, we are required to review our property and
equipment for impairments whenever events or changes in circumstances indicate
that the carrying amount of the long-lived asset may not be recoverable. As
reflected in our consolidated statements of operations, we incurred a net loss
from our continuing operations amounting to ($1,196,062), and ($3,423,821) for
the three months and nine months ended September 30, 2008, respectively. In
addition, as of September 30, 2008, we have a working capital deficiency of
($2,156,478) and our bank line of credit facility, with an outstanding balance
of ($1,924,154), has expired and is due. In addition to raising doubt about our
ability to continue as a going concern for a reasonable period, these are the
conditions that would also give rise to doubt surrounding our ability to recover
the carrying values of our property and equipment.





Impairment
charges generally arise when the fair value of the respective asset or group of
assets is less than its carrying value. As an initial step, though, we are
required to compare the undiscounted cash flow generated from the respective
asset or group of assets to the carrying values. Since our projected
undiscounted cash flow is currently sufficient to recover our carrying values,
no further considerations are necessary for the periods presented. The
projection of future financial results requires the development of subjective
estimates. Our prospective information is prepared by competent employees under
Management’s supervision. Notwithstanding, any estimate is subject to change due
to unforeseen future events. Therefore, actual results will likely differ from
our estimates. We are required to continue to evaluate our asset recoverability
in future periods and our analyses may give rise to impairments in those
periods.








47





Recent
accounting standards:





We have
reviewed accounting pronouncements and interpretations thereof that have
effectiveness dates during the periods reported and in future periods. We
believe that the following impending standards may have an impact on our future
filings. However, the applicability of any standard is subject to the formal
review of our financial management and certain standards are under
consideration.





·
            In
      February 2006, the Financial Accounting Standards Board (the “FASB”)
      issued SFAS No. 155, “Accountingfor Certain Hybrid Financial
      Instruments an amendment of FASB Statements No. 133 and 140” (“SFAS No.
      155”). SFAS No. 155 permits fair value re-measurement for any
      hybrid financial instrument that contains an embedded derivative that
      otherwise would require bifurcation, clarifies which interest-only strips
      and principal-only strips are not subject to the requirements of SFAS No.
      133, establishes a requirement to evaluate interests in securitized
      financial assets to identify interests that are freestanding derivatives
      or that are hybrid financial instruments that contain an embedded
      derivative requiring bifurcation, clarifies that concentrations of credit
      risk in the form of subordination are not embedded derivatives, and amends
      SFAS No. 140 to eliminate the prohibition on a qualifying special purpose
      entity from holding a derivative financial instrument that pertains to a
      beneficial interest other than another derivative financial
      instrument.  SFAS No. 155 is effective for all financial
      instruments acquired or issued after the beginning of an entity’s first
      fiscal year that begins after September 15, 2006. SFAS No. 155 did not
      have a material impact on our consolidated financial position, results of
      operations or cash flows because we do not have any hybrid financial
      instruments that are within the scope of this
  standard.





·
            In
      March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
      Financial Assets - an amendment to FASB Statement No. 140” (“SFAS
      No. 156”).  SFAS No. 156 requires that an entity recognize a
      servicing asset or servicing liability each time it undertakes an
      obligation to service a financial asset by entering into a service
      contract under certain situations.  The new standard is
      effective for fiscal years beginning after September 15,
      2006.  SFAS No.156 did not have a material impact on our
      consolidated financial position, results of operations or cash flows
      because we have no servicing arrangements that are subject to the scope of
      this standard.





·
            In
      July 2006, the FASB issued Interpretation No. 48, “Accountingfor Uncertainty in Income
      Taxes” (“FIN No. 48”).  FIN No. 48 clarifies the
      accounting for Income Taxes by prescribing the minimum recognition
      threshold a tax position is required to meet before being recognized in
      the financial statements. It also provides guidance on derecognition,
      measurement, classification, interest and penalties, accounting in interim
      periods, disclosure and transition and clearly scopes income taxes out of
      SFAS No. 5, “Accounting
      for Contingencies”. FIN No. 48 was effective for fiscal years
      beginning after December 15, 2006. Accordingly, we have implemented FIN 48
      by summarizing and evaluating all potential uncertain tax positions. As a
      result of our implementation, FIN No. 48 did not have a material impact on
      our consolidated financial position, results of operations or cash
      flows.








48








·
            In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements”.  The objective of SFAS No. 157 is to
      increase consistency and comparability in fair value measurements and to
      expand disclosures about fair value measurements.  SFAS No. 157
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles, and expands disclosures about
      fair value measurements.  SFAS No. 157 applies under other
      accounting pronouncements that require or permit fair value measurements
      and does not require any new fair value measurements. The provisions of
      SFAS No. 157 are effective for fair value measurements made in fiscal
      years beginning after November 15, 2007. In February 2008, the FASB issued
      FASB Staff Position (“FSP”) 157-2,“Effective Date of FASB Statement
      No.157”(“FSP 157-2), which delayed the
      effective date of SFAS No. 157 for all non-financial assets and
      liabilities, except those that are recognized or disclosed at fair value
      in the financial statements on a recurring basis, until January 1, 2009.
      We have adopted the applicable sections of SFAS No. 157. The most
      significant area of application was in connection with our Convertible
      Note and Warrant Financing Arrangement, during 2008, where we applied
      Accounting Principles Opinion No. 14 Accounting for Debt with Detachable
      Warrants. In applying APB 14, we were required to allocate the proceeds
      from the financing to the debt and warrants based upon their relative fair
      values. In applying SFAS No. 157 to the determination of fair values, we
      do not believe that the amounts would have been materially different than
      those reflected in our financial statements under previous
      standards.





·
            In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans, an amendment of
      FASB Statements No. 87, 88, 106 and132(R)” (“SFAS No.
      158”).  SFAS No. 158 improves financial reporting by requiring
      an employer to recognize the overfunded or underfunded status of a defined
      benefit postretirement plan (other than a multiemployer plan) as an asset
      or liability in its statement of financial position and to recognize
      changes in that funded status in the year in which the changes occur
      through comprehensive income of a business entity or changes in
      unrestricted net assets of a not-for-profit organization. SFAS No. 158
      also improves financial reporting by requiring an employer to measure the
      funded status of a plan as of the date of its year-end statement of
      financial position, with limited exceptions.  The effective date
      for an employer with publicly traded equity securities is as of the end of
      the fiscal year ending after December 15, 2006.  The adoption of
      SFAS No. 158 did not have a material impact on our consolidated financial
      position, results of operations or cash flows because we do not have a
      defined benefit plan for our
employees.





·
            In
      December 2006, the FASB issued FSP EITF 00-19-2, “Accounting for Registration
      Payment Arrangements” (“FSP 00-19-2”) which addresses accounting
      for registration payment arrangements. FSP 00-19-2 specifies that the
      contingent obligation to make future payments or otherwise transfer
      consideration under a registration payment arrangement, whether issued as
      a separate agreement or included as a provision of a financial instrument
      or other agreement, should be separately recognized and measured in
      accordance with SFAS No. 5, “Accounting for
      Contingencies”.  FSP 00-19-2 further clarifies that a
      financial instrument subject to a registration payment arrangement should
      be accounted for in accordance with other applicable generally accepted
      accounting principles without regard to the contingent obligation to
      transfer consideration pursuant to the registration payment
      arrangement.  For registration payment arrangements and
      financial instruments subject to those arrangements that were entered into
      prior to the issuance of EITF 00-19-2, this guidance shall be
      effective for financial statements issued for fiscal years beginning after
      December 15, 2006 and interim periods within those fiscal years. The
      adoption of EITF 00-19-02 did not have a material impact on our
      consolidated financial position, results of operations or cash flows,
      because we have no transactions that embody Registration Payment
      Arrangements, as defined in the
standard.





·
            In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets
      and Financial Liabilities–Including an Amendment of
      FASB Statement No. 115 ” (“SFAS No. 159”).  SFAS No. 159
      permits entities to choose to measure many financial instruments and
      certain other items at fair value.  Most of the provisions of
      SFAS No. 159 apply only to entities that elect the fair value option.
      However, the amendment to SFAS No. 115 “Accounting for Certain
      Investments in Debt and Equity Securities” applies to all entities
      with available-for-sale and trading securities.  SFAS No. 159 is
      effective as of the beginning of an entity’s first fiscal year that begins
      after November 15, 2007.  Early adoption is permitted as of the
      beginning of a fiscal year that begins on or before November 15, 2007,
      provided the entity also elects to apply the provision of SFAS No.
      157, “Fair Value
      Measurements”.  The adoption of SFAS No. 159 is not
      expected to have a material impact on our consolidated financial position,
      results of operations or cash flows, as we currently do not believe the
      election of fair value measurement will enhance the usefulness of our
      financial statements. However, we will continue to consider its
      application as new financial instruments and other relevant assets and
      liabilities arise in our business.





·
            In
      June 2007, the Accounting Standards Executive Committee issued Statement
      of Position 07-1, “Clarification of the Scope of
      the Audit and Accounting Guide Investment Companies and Accounting by
      Parent Companies and Equity Method Investors for Investments in Investment
      Companies” (“SOP 07-1”). SOP 07-1 provides guidance for determining
      whether an entity is within the scope of the AICPA Audit and Accounting
      Guide Investment Companies (the “Audit Guide”). SOP 07-1 was originally
      determined to be effective for fiscal years beginning on or after December
      15, 2007, however, on February 6, 2008, FASB issued a final Staff Position
      indefinitely deferring the effective date and prohibiting early adoption
      of SOP 07-1 while addressing implementation
  issues.





·
            In
      June 2007, the FASB ratified the consensus in EITF Issue No. 07-3,“Accounting for Nonrefundable
      Advance Payments for Goods or Services to be Used in Future Research and
      Development Activities”(EITF 07-3), which
      requires that nonrefundable advance payments for goods or services that
      will be used or rendered for future research and development (R&D)
      activities be deferred and amortized over the period that the goods are
      delivered or the related services are performed, subject to an assessment
      of recoverability.  EITF 07-3 will be effective for fiscal years
      beginning after December 15, 2007.  The adoption of EITF 07-3
      did not have a material impact on our consolidated financial position,
      results of operations or cash flows because we have no arrangements within
      the scope of this standard.





·
            In
      December 2007, the FASB issued SFAS No. 141(R),"Business Combinations"
      ("SFAS No. 141(R)"), which establishes principles and requirements for how
      an acquirer recognizes and measures in its financial statements the
      identifiable assets acquired, the liabilities assumed, and any
      non-controlling interest in an acquiree, including the recognition and
      measurement of goodwill acquired in a business
      combination.  SFAS No. 141R is effective as of the beginning of
      the first fiscal year beginning on or after December 15, 2008. Earlier
      adoption is prohibited and we are currently evaluating the effect, if any
      that the adoption will have on our consolidated financial position results
      of operations or cash flows.








49





·
            In
      December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
      Consolidated Financial Statements Liabilities–an Amendment of ARB No.
      51”.  This statement amends ARB No. 51 to establish
      accounting and reporting standards for the Non-controlling interest in a
      subsidiary and for the deconsolidation of a subsidiary.  SFAS
      No. 160 will change the classification and reporting for minority interest
      and non-controlling interests of variable interest
      entities.  Following the effectiveness of SFAS No. 160, the
      minority interest and non-controlling interest of variable interest
      entities will be carried as a component of stockholders’ equity.
      Accordingly, upon the effectiveness of this statement, we will begin to
      reflect non-controlling interest in our consolidated variable interest
      entities as a component of stockholders’ equity.  This statement
      is effective for fiscal years and interim periods within those fiscal
      years, beginning on or after December 15, 2008 and earlier adoption is
      prohibited. As more fully discussed in the Sensitive Accounting Policies,
      we have Variable Interest Entities consolidated in our financial
      statements. Upon adoption of this standard on January 1, 2009, the
      non-controlling interests in these variable interest entities will be
      classified as a component of stockholders’
  equity.





·
            In
      December 2007, the FASB ratified the consensus in EITF Issue No. 07-1,
      “Accounting for Collaborative
      Arrangements” (EITF 07-1). EITF 07-1 defines collaborative
      arrangements and requires collaborators to present the result of
      activities for which they act as the principal on a gross basis and report
      any payments received from (made to) the other collaborators based on
      other applicable authoritative accounting literature, and in the absence
      of other applicable authoritative literature, on a reasonable,
      rational and consistent accounting policy is to be
      elected.  EITF 07-1 also provides for disclosures regarding the
      nature and purpose of the arrangement, the entity’s rights and
      obligations, the accounting policy for the arrangement and the income
      statement classification and amounts arising from the agreement. EITF 07-1
      will be effective for fiscal years beginning after December 15, 2008, and
      will be applied as a change in accounting principle retrospectively for
      all collaborative arrangements existing as of the effective
      date.  We have not yet evaluated the potential impact of
      adopting EITF 07-1 on our consolidated financial position, results of
      operations or cash flows, because we are not a party to arrangements that
      are within the scope of this
standard.





·
            In
      March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
      Instruments and Hedging Activities–an amendment to FASB
      Statement No. 133”(“SFAS No.
      161”).  SFAS No.
      161 is intended to improve financial standards for derivative instruments
      and hedging activities by requiring enhanced disclosures to enable
      investors to better understand their effects on an entity's financial
      position, financial performance, and cash flows.  Entities are
      required to provide enhanced disclosures about: (a) how and why an entity
      uses derivative instruments; (b) how derivative instruments and related
      hedged items are accounted for under SFAS No. 133 and its related
      interpretations; and (c) how derivative instruments and related hedged
      items affect an entity’s financial position, financial performance, and
      cash flows. It is effective for financial statements issued for fiscal
      years beginning after November 15, 2008, with early adoption encouraged.
      We are currently evaluating the impact of SFAS No. 161, if any, will have
      on our consolidated financial position, results of operations or cash
      flows. However, we currently do not have derivative financial instruments
      that are recorded as liabilities in our financial
    statements.









50








·
            In
      April 2008, the FASB issued FSP No. FAS 142-3,“Determination of the Useful
      Life of Intangible Assets”. This FSP amends the factors that should
      be considered in developing renewal or extension assumptions used to
      determine the useful life of a recognized intangible asset under SFAS No.
      142,“Goodwill and Other Intangible
      Assets”. The Company is required to adopt FSP 142-3 on January
      1, 2009.  The guidance in FSP 142-3 for determining the useful
      life of a recognized intangible asset shall be applied prospectively to
      intangible assets acquired after adoption, and the disclosure requirements
      shall be applied prospectively to all intangible assets recognized as of,
      and subsequent to, adoption. The Company is currently evaluating the
      impact of FSP 142-3 on its consolidated financial position, results of
      operations or cash flows.





·
            In
      May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
      Accepted Accounting Principles" ("SFAS No.
      162").  SFAS No. 162 identifies the sources of accounting
      principles and the framework for selecting the principles used in the
      preparation of financial statements of nongovernmental entities that are
      presented in conformity with generally accepted accounting principles (the
      GAAP hierarchy). SFAS No. 162 will become effective 60 days following
      the SEC's approval of the Public Company Accounting Oversight Board
      amendments to AU Section 411, "The Meaning of Present Fairly
      in Conformity With Generally Accepted Accounting Principles." The
      Company does not expect the adoption of SFAS No. 162 will have a material
      effect on its consolidated financial position, results of operations or
      cash flows.





·
            In
      May 2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1
      "Accounting for
      Convertible Debt Instruments That May Be Settled in Cash upon Conversion
      (Including Partial Cash Settlement)" ("FSP
      APB 14-1"). FSP APB 14-1 requires the issuer of certain convertible
      debt instruments that may be settled in cash (or other assets) on
      conversion to separately account for the liability (debt) and equity
      (conversion option) components of the instrument in a manner that reflects
      the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is
      effective for fiscal years beginning after December 15, 2008 on a
      retroactive basis. The Company is currently evaluating the potential
      impact, if any, of the adoption of FSP APB 14-1 on its consolidated
      financial position, results of operations or cash
  flows.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on our present or future consolidated
financial statements.








51





Off-balance
sheet arrangements:





We lease
real estate and certain of our equipment under operating leases. We also lease
real estate that we own to tenants under operating leases. As of September 30,
2008, non-cancelable future minimum lease rentals under the operating leases
with our landlords (payments) and our tenants receipts are as
follows:




Lease
              Payments
            
            
            Lease
              ReceiptsThree
      months ending December 31, 2008
            
            $
            ( 358,068
            )
            
            $
            56,521Years
      ending December 31:2009
            
            
            (1,721,922
            )
            
            
            202,4472010
            
            
            (1,352,736
            )
            
            
            165,9322011
            
            
            (1,262,772
            )
            
            
            170,9102012
            
            
            (1,252,788
            )
            
            
            176,0382013
            
            
            (1,096,091
            )
            
            
            181,319Thereafter
            
            
            (1,077,092
            )
            
            
            123,273$
            (8,121,469
            )
            
            $
            1,076,440











52





Comparison
of our consolidated statements of operations information for the three-months
ended September 30, 2008 to September 30, 2007:





Imaging
revenue:





Our
consolidated imaging revenue decreased by $357,948 or 13% from $2,825,556 for
the three months ended September 30, 2007 compared to $2,467,608 for the three
months ended September 30, 2008. The net reduction in revenues is directly
attributable to the current economic downturn and the loss of a referring group.
As it relates to the economy, typically the first and second calendar quarters
have been our highest producing quarters. However, both the first and second
quarters of 2008 saw a marked reduction in substantially all businesses in our
service area directly attributable to the economic downturn. Also, one of our
referring groups purchased two PET/CT mobile units that provide services in all
three of our service areas, which had the result of decreasing our revenue in
the 2008 quarters.





Our
business and, therefore our revenues, experience cycles. Traditionally, we have
experienced higher revenues in the first and second quarters of each
year.





Real
estate revenue:





Our
consolidated real estate revenues increased by $25,771 or 43% from $59,882 for
the three months ended September 30, 2007 compared to $85,653 for the three
months ended September 30, 2008. We currently lease approximately 70% of our
Bradenton, Florida building under operating leases with two unrelated tenants
that expire in July 2009 and September 2014. Our leases provide for rent
escalation clauses and reimbursement of common area maintenance
charges.





Labor and
related costs:





Labor and
related costs, which are principally attributable to our imaging segment,
decreased by $6,594, or 1%, from $878,461 for the three months ended September
30, 2007 to $871,867 for the three months ended September 30, 2008. Although our
headcount is greater from period to period, during the quarter ended September
30, 2008 we decreased our total labor costs with hiring freezes and the
suspension of incentive compensation.





Medical
equipment rental and maintenance:





Our
equipment and maintenance costs, which are principally attributable to our
imaging segment increased by $41,995 or 6%, from $692,075 for the three months
ended September 30, 2007 compared to $734,070 for the three months September 30,
2008. This increase is primarily attributable to the additional equipment
agreements.





Subsequent
to the quarterly period ended September 30, 2008, we successfully restructured
certain of our equipment rental agreements, which are accounted for as operating
leases, resulting in a reduction of our projected expense.  On a
pro-forma basis, had these modifications been effective on January 1, 2008, our
Medical equipment rental and maintenance expense would have been $224,819 and
$674,456 for the three and nine months ended September 30, 2008. On a pro-forma
basis, applying the same assumptions, our Medical equipment rental and
maintenance expense would have been lower by $82,358 and $247,075 during the
three and nine months ended September 30, 2008, when compared with the same
periods of the prior year.








53








Radiology
costs:





Our
radiology costs increased by $197,931 or 59%, from $337,262 for the three months
ended September 30, 2007 compared to $535,193 for the three months ended
September 30, 2008. In 2008, we were going through a transition in our
radiologists that required the use of outside reading fees and locum tenens
radiology coverage. This activity caused additional cost and expense that is
reflected in the increase in this category of expense.





Merger
and related consulting:





Merger
and related consulting expense amounted to $588,869 for the three months ended
September 30, 2008 (none in 2007). This caption represents direct and indirect
incremental costs associated with our merger with USI on May 2, 2008, consulting
services related to the development of future financing options and other
consulting related to our ongoing strategic initiatives, such as business
acquisition activities. Our expense also includes $441,615 of amortization of
deferred consulting costs, which in the aggregate amounted to $883,230 during
May, related to the fair value of common stock issues to strategic consultants.
The deferred consulting arrangements expired in October 2008 and, accordingly,
we will amortize the remaining deferred consulting costs, amounting to $147,205,
to this caption during the next fiscal quarter. The remaining composition of
this expense category related to direct and indirect incremental costs incurred
in connection with the merger, including auditing and consulting services
related to the historical financial statements of USI, that are payable in cash.
We intend to continue to use consultants in connection with our strategic
business activities and we may compensate consultants with share-based
arrangements, which will be measured using fair values of the financial
instruments issued. We do not, however, currently anticipate incurring the level
of merger and related consulting costs that are reflected in the current
period’s operating results.





General
and administrative costs:





General
and administrative costs increased by $142,879 or 75%, from $189,561 for the
three months ended September 30, 2007 compared to $332,440 for the three months
ended September 30, 2008. We anticipate the continuation of these levels in
future periods principally related to the incremental costs of being a public
reporting company, such as in the areas of accounting, auditing, and legal fees
and the undertaking to evaluate internal controls under the Sarbanes-Oxley
legislation.





Depreciation
and amortization:





Our
depreciation and amortization expense decreased by $7,287 or 3% from $262,116
for the three months ended September 30, 2007 compared to $269,403 for the three
months ended September 30, 2008. This decrease is largely attributable to lower
average balances in depreciable property and equipment during the more current
period.





Medical
and other supplies:





Our
medical and other supplies costs decreased by $39,618 or 22%, from $178,805 for
the three months ended September 30, 2007 compared to $139,187 for the three
months ended September 30, 2008. This decrease is primarily attributable to our
reduction in film expense due to the use of our digital imaging
system.








54











Facility
costs:





Our
facility costs increased by $4,104 or 2%, from $182,021 for the three months
ended September 30, 2007 compared to $186,125 for the three months ended
September 30, 2008. Facility costs increased due to increases in real estate
taxes, cleaning and maintenance, escalation of rent and utilities.





Advertising
costs:





Our
advertising costs increased by $13,039 or 32%, from $40,863 for the three months
ended September 30, 2007 compared to $53,902 for the three months ended
September 30, 2008. The increase reflects cost of additional advertising efforts
designed to generate additional revenue.





Interest
expense:





Our
interest expense increased by $118,920 or 75%, from $158,801 for the three
months ended September 30, 2007 compared to $277,721 for the three months ended
September 30, 2008. The increase is primarily due to (i) increased average
borrowings under our aggregate long-term debt, long-term debt—related parties,
capital lease obligations and bank credit facilities and (ii) the issuance, on
May 2, 2008, of a highly-discounted, $1,000,000 face value convertible note
payable. As it relates to item (ii), on May 2, 2008, we issued a $1,000,000 face
value convertible note payable with detachable warrants, wherein, we allocated
$147,093 of the proceeds to the convertible note balance, $426,453 to the
warrants and $426,454 to a beneficial conversion feature. The proceeds allocated
to the warrants and beneficial conversion feature are recorded as a component of
stockholders’ equity. The resulting discount to the face value of the
convertible note, plus deferred financing costs, are being amortized to interest
expense over the two-year term of the convertible note. Amortization of the
discount and the financing costs amounted to $46,718 and $15,953, respectively,
during the three-months ended September 30, 2008. We expect that our interest
expense will further increase in future periods due to increasing amortization
of the remaining unamortized discount and deferred financing costs associated
with the convertible note payable, amounting to $780,714 and $101,037,
respectively, at September 30, 2008.





During
the three months ended September 30, 2008, we received a judgment related to a
past-due note. The judgment requires us to pay a higher default interest rate
and, accordingly, we have recorded the additional cost of $43,832 in interest
expense.





Non-controlling
interests in income (loss) of variable interest entities:





Non-controlling
interests in income of variable interest entities increased by $33,182 or 186%,
from $17,842 for the three months ended September 30, 2007 compared to $51,024
for the three months ended September 30, 2008. These amounts reflect the changes
in the operating activities of variable interest entities that we
consolidate.





Income
taxes:





Our
income tax benefit amounted to $332,400 for the three months ended September 30,
2008 (none in 2007). Our income tax benefit gives effect to (i) the recognition
of deferred tax benefits of $566,111 representing the tax benefit on post-merger
operating losses during the three months ended September 30, 2008 and (ii) the
recognition of valuation allowances of $233,711 to adjust our net deferred tax
assets zero. We are required to provide these valuation allowances because
losses in recent years constitute sufficient negative evidence related to the
recovery of the benefits in future periods.






55







Discontinued
operations:





We
disposed of a business during the quarterly period ended September 30, 2007 that
constituted an identifiable component and the arrangement provided for no
material ongoing involvement. Accordingly, the component is accounted for as a
discontinued operation. Our income from discontinued operations includes a gain
of $238,907 on the sale of the business. Ongoing costs are minimal.





Net
(loss) income:





Net loss
increased by $1,396,575 or 698% from net income of $200,171 for the three months
ended September 30, 2007 compared to net loss of $1,196,404 during the three
months ended September 30, 2008. The increase in our net loss is reflective of
the preceding matters. Net loss from continuing operations increased by
$1,149,758 or 2,483% from net loss of $46,304 during the three months ended
September 30, 2007 compared to net loss of $1,196,062 during the three months
ended September 30, 2008.





(Loss)
earnings per share:





Loss per
share increased by $0.02 from earnings per share of $0.00 for the three months
ended September 30, 2007 to loss per share of $0.02 for the three months ended
September 30, 2008. Our basic and diluted (loss) income per share gives effect
to the recapitalization arising from the merger on May 2, 2008 for all periods
presented in our consolidated financial statements. Our loss per share for the
three months ended September 30, 2008 does not give effect to the common shares
indexed to the convertible note and warrants issued in connection with our
convertible note financing arrangement because they have an anti-dilutive effect
by application of the treasury-stock method and the if-converted method,
respectively.





Comparison of our
consolidated statements of operations information for the nine months ended
September 30, 2008 to September 30, 2007:





Imaging
revenue:





Our
consolidated imaging revenue decreased by $617,595 or 7% from $9,072,367 for the
nine months ended September 30, 2007 compared to $8,454,772 for the nine months
ended September 30, 2008. The net reduction in revenues is directly attributable
to the current economic downturn and the loss of a referring group. As it
relates to the economy, typically the first and second calendar quarters have
been our highest producing quarters. However, the first and second quarter of
2008 saw a marked reduction in substantially all businesses in our service area
directly attributable to the economic downturn. Also, one of our referring
groups purchased two PET/CT mobile units that provide services in all three of
our service areas, which had the result of decreasing our revenue in the
2008.





Our
business and, therefore our revenues, experience cycles. Traditionally, we have
experienced higher revenues in the first and second quarters of each
year.





Real
estate revenue:





Our
consolidated real estate revenues increased by $79,309 or 44% from $179,646 for
the nine months ended September 30, 2007 compared to $258,955 for the nine
months ended September 30, 2008. We currently lease approximately 70% of our
Bradenton, Florida building under operating leases with two unrelated tenants
that expire in July 2009 and September 2014. Our leases provide for rent
escalation clauses and reimbursement of common area maintenance
charges.






56











Labor and
related costs:





Labor and
related costs, which are principally attributable to our imaging segment,
decreased by $60,036 or 2%, from $2,716,414 for the nine months ended September
30, 2007 to $2,656,378 for the nine months ended September 30, 2008. Although
our headcount is greater from period to period, during the nine months ended
September 30, 2008 we decreased our total labor costs with hiring freezes and
the suspension of incentive compensation.





Medical
equipment rental and maintenance:





Our
equipment and maintenance costs, which are principally attributable to our
imaging segment increased by $91,857 or 4%, from $2,269,802 for the nine months
ended September 30, 2007 compared to $2,361,659 for the nine months ended
September 30, 2008. This increase is primarily attributable to the increased
costs necessary to support the increased level of equipment related to the
imaging services segment with the maturation of our Sarasota imaging
center.





Subsequent
to the quarterly period ended September 30, 2008, we successfully restructured
certain of our equipment rental agreements, which are accounted for as operating
leases, resulting in a reduction of our projected expense.  On a
pro-forma basis, had these modifications been effective on January 1, 2008, our
Medical equipment rental and maintenance expense would have been $224,819 and
$674,456 for the three and nine months ended September 30, 2008. On a pro-forma
basis, applying the same assumptions, our Medical equipment rental and
maintenance expense would have been lower by $82,358 and $247,075 during the
three and nine months ended September 30, 2008, when compared with the same
periods of the prior year.





Radiology
costs:





Our
radiology costs increased by $741,571 or 83%, from $891,989 for the nine months
ended September 30, 2007 compared to $1,633,560 for the nine months ended
September 30, 2008. In 2008, we were going through a transition in our
radiologists that required the use of outside reading fees and locum tenens
radiology coverage. This activity caused additional cost and expense that is
reflected in the increase in this category of expense.





Merger
and related consulting:





Merger
and related consulting expense amounted to $1,418,265 for the nine months ended
September 30, 2008 (none in 2007). This caption represents direct and indirect
incremental costs associated with our merger with USI on May 2, 2008, consulting
services related to the development of future financing options and other
consulting related to our ongoing strategic initiatives, such as business
acquisition activities. Our expense includes $141,862 related to the fair value
of common stock issued to our legal counsel for services related to the merger.
Our expense also includes $736,025 of amortization of deferred consulting costs,
which in the aggregate amounted to $883,230, related to the fair value of common
stock issues to strategic consultants. The deferred consulting arrangements
expired in October 2008 and, accordingly, we will amortize the remaining
deferred consulting costs, amounting to $147,205, to this caption during the
next fiscal quarter. The remaining composition of this expense category related
to direct and indirect incremental costs incurred in connection with the merger,
including auditing and consulting services related to the historical financial
statements of USI, that are payable in cash. We intend to continue to use
consultants in connection with our strategic business activities and we may
compensate consultants with share-based arrangements, which will be measured
using fair values of the financial instruments issued. We do not, however,
currently anticipate incurring the level of merger and related consulting costs
that are reflected in the current period operating results.






57









General
and administrative costs:





General
and administrative costs increased by $315,327 or 43%, from $731,320 for the
nine months ended September 30, 2007 compared to $1,046,647 for the nine months
ended September 30, 2008. We anticipate increase in future periods in these
categories principally related to the incremental costs of being a public
reporting company, such as in the areas of accounting, auditing, legal fees and
the undertaking to evaluate internal controls under the Sarbanes-Oxley
legislation.





Depreciation
and amortization:





Our
depreciation and amortization expense increased by $279,499 or 55% from $512,280
for the nine months ended September 30, 2007 compared to $791,779 for the nine
months ended September 30, 2008. This increase is largely attributable to higher
average balances in depreciable property and equipment during the more current
period.





Medical
and other supplies:





Our
medical and other supplies costs decreased by $39,192 or 6%, from $615,104 for
the nine months ended September 30, 2007 compared to $575,912 for the nine
months ended September 30, 2008. We incurred these cost savings due to a
reduction in film expense with the use of our digital imaging
system.





Facility
costs:





Our
facility costs increased by $56,836 or 11%, from $502,389 for the nine months
ended September 30, 2007 compared to $559,225 for the nine months ended
September 30, 2008. Facility costs increased due to several factors. These
include real estate taxes, cleaning and maintenance, escalation of rent and
utilities.





Advertising
costs:





Our
advertising costs decreased minimally by $1,210 or 1%, from $135,560 for the
nine months ended September 30, 2007 compared to $134,350 for the nine months
ended September 30, 2008. The decrease reflects cost reduction
efforts.





Interest
expense:





Our
interest expense increased by $190,790 or 34%, from $567,916 for the nine months
ended September 30, 2007 to $758,706 for the nine months ended September 30,
2008. The increase is primarily due to (i) increased average borrowings under
our aggregate long-term debt, long-term debt—related parties, capital lease
obligations and bank credit facilities and (ii) the issuance, on May 2, 2008, of
a highly-discounted, $1,000,000 face value convertible note payable. As it
relates to item (ii), on May 2, 2008, we issued a $1,000,000 face value
convertible note payable with detachable warrants, wherein, we allocated
$147,093 of the proceeds to the convertible note balance, $426,453 to the
warrants and $426,453 to a beneficial conversion feature. The proceeds allocated
to the warrants and beneficial conversion feature are recorded as a component of
stockholders’ equity. The resulting discount to the face value of the
convertible note, plus deferred financing costs, are being amortized to interest
expense over the two-year term of the convertible note. Amortization of the
discount and the financing costs amounted to $72,193 and $26,589, respectively,
during the nine-months ended September 30, 2008. We expect that our interest
expense will further increase in future periods due to increasing amortization
of the remaining unamortized discount and deferred financing costs associated
with the convertible note payable, amounting to $780,714 and $101,037,
respectively, at September 30, 2008.






58





During
the three months ended September 30, 2008, we received a judgment related to a
past-due note. The judgment requires us to pay a higher default interest rate
and, accordingly, we have recorded the additional cost of $43,832 in
expense.





Interest
income:





We earned
and received $5,375 and $16,146 in interest income during the nine months ended
September 30, 2008 and 2007, respectively. We do not anticipate material levels
of interest income in future periods.





Non-controlling
interests in income (loss) of variable interest entities:





Non-controlling
interests in income of variable interest entities increased by $99,164 or 156%,
from $63,446 for the nine months ended September 30, 2007 compared to $162,610
for the nine months ended September 30, 2008. These amounts reflect the
interests of the non-controlling equity owners in the income (loss) of variable
interest entities, of which we consolidate three. Consistent with the principles
of consolidation, we do not record benefits for losses of variable interest
entities whose members’ equity has been depleted, because the non-controlling
member interest holders are not obligated in any way to fund those
deficiencies.





Income
taxes:





Our
provision for income taxes amounted to $-0- for the nine months ended September
30, 2008 (none in 2007). Our income tax provision gives effect to (i) the
establishment of $969,635 in deferred tax liabilities related to our USI
subsidiary when it became a taxable entity on May 2, 2008, (ii) the recognition
of deferred tax benefits of $735,924 representing the tax benefit on post-merger
operating losses and, (iii) the recognition of valuation allowances of $233,711
to adjust our net deferred tax assets zero. The establishment of our deferred
tax liabilities was a one-time accounting event that arose when we merged with
USI and it lost its pass-through tax status. The income tax benefit relates to
the benefits associated with utilizing our net operating losses to reduce income
taxes in future periods, however, we are required to provide the valuation
allowances because losses in recent years constitute sufficient negative
evidence related to the recovery of the benefits in future periods.





Discontinued
operations:





We
disposed of a business during the quarterly period ended September 30, 2007 that
constituted an identifiable component and the arrangement provided for no
material ongoing involvement. Accordingly, the component is accounted for as a
discontinued operation. Net loss from our discontinued business segment
increased by $261,703, from net income of $260,515 during the nine months ended
September 30, 2007 compared to net loss of ($1,188) during the nine months ended
September 30, 2008. Our income from discontinued operations includes a gain of
$238,907 on the sale of the business. Ongoing costs are expected to be
minimal.











59


Net
(loss) income:
 
 Net loss
increased by $3,947,463 or 756% from net income of $522,454 for the nine months
ended September 30, 2007 compared to net loss of $3,425,009 during the nine
months ended September 30, 2008. The increase in our net loss is reflective of
the preceding matters. Net loss from continuing operations increased by
$3,658,760 or 1,407% from net income of $261,939 during the nine months ended
September 30, 2007 compared to net loss of $3,423,821 during the nine months
ended September 30, 2008.


(Loss)
earnings per share:





Loss per
share increased by $0.09 from earnings per share of $0.02 for the nine months
ended September 30, 2007 to loss per share of $0.07 for the nine months ended
September 30, 2008. Our basic and diluted (loss) income per share gives effect
to the recapitalization arising from the merger on May 2, 2008 for all periods
presented in our consolidated financial statements. Our loss per share for the
nine months ended September 30, 2008 does not give effect to the common shares
indexed to the convertible note and warrants issued in connection with our
convertible note financing arrangement because they have an anti-dilutive
effect.








60





Liquidity
and capital resources





General:





We
incurred a net loss from our continuing operations amounting to $1,196,062 and
$3,423,821 for the three and nine months ended September 30, 2008, respectively.
In addition, as of September 30, 2008, we have a working capital deficiency of
$2,156,478 and our bank line of credit facilities with an outstanding balance of
$1,924,154, which expired and are in default on October 28, 2008. These
conditions raise substantial doubt surrounding our ability to continue as a
going concern for a reasonable period.





Our
management is executing certain plans to alleviate the negative trends and
conditions described above. In May 2008, we entered into a merger and financing
transaction that provided $1,000,000 in proceeds to the post-merger combined
companies, from the sale of convertible notes and warrants. Subsequent to
September 30, 2008, we sold 1,143,750 shares of our common stock for net
proceeds of $366,000. In addition, subsequent to September 30, 2008, we
successfully restructured certain of our operating leases that will result in a
net decrease our operating expenses. Our management is currently negotiating
with financial institutions to restructure our current indebtedness to extend
existing terms as well as provide additional term and revolving credit. Finally,
our management is currently reviewing our operating and cost structure and
believes that there are additional opportunities for cost
curtailment.





Our
ability to continue as a going concern is dependent on our creditor’s
willingness to extend and restructure our existing bank line of credit or our
ability to obtain alternative financing under terms and conditions that our
suitable to our management. There can be no assurances that the creditors will
not call as due and payable the bank line of credit or that our management will
be successful in identifying and closing new financing arrangements. Ultimately,
our ability to continue as a going concern is dependent upon the achievement of
profitable operations. The accompanying financial statements do not include any
adjustments that arise from this uncertainty.








61





Comparison of our
consolidated cash flows information for the nine months ended September 30, 2008
and September 30, 2007 and our significant operating assets and liabilities at
September 30, 2008:





Operating
activities:





We used
$741,394 less cash in our operations during the nine months ended September 30,
2008 compared to the nine months ended September 30, 2007. Cash used in
operating activities during the nine months ended September 30, 2008 amounted to
$130,949, compared to $872,343 during the same period in the prior year. Cash
used in operations is significantly affected by our net income, non-cash charges
and changes in our operating assets and liabilities. The most significant change
from period to period related to our accounts receivable. During the nine months
ended September 30, 2007, our accounts receivable reflected significant growth,
amounting to $1,988,799 related to opening our Sarasota Imaging Center.
Subsequent accounts receivable balances reflect less change attributable to
stabilizing of the Sarasota Imaging Center. During the nine months ended
September 30, 2008, we have deferred payments on many of our accounts payable
which reflected a net increase of $692,181. Finally, we recorded material
share-based payment arrangements (amounting to $877,888) to our operations
during the nine months ended September 30, 2008. Share based payments do not
require the use of our cash.





Our
imaging accounts receivable amounts to $3,402,121 and represents 85% of our
consolidated current assets at September 30, 2008 (compared to $3,746,464 or 90%
at December 31, 2007) and are highly concentrated among third party payors. The
following table illustrates the gross imaging receivable by payor and patient
obligations as a percent of the total.





September
      30,
              2008
            December
      31,
              2007Medicare
            42%
            42%Other
      third-party payors
            28%
            27%Blue
      Cross and Blue Shield
            15%
            17%Workers’
      Compensation
            12%
            11%Patient
      obligations
            3%
            3%100%
            100%





Credit
losses on our accounts receivable have increased from zero during the nine
months ended September 30, 2007 to $61,977 during the nine months ended
September 30, 2008 which amount gives effect to the current economic downturn in
our industry. Further, the loss or curtailment of business within the
third-party payor groups could have a material adverse affect on our
operations.





Our trade
accounts payable and accrued liabilities amount to $2,124,287 and represents 34%
of our consolidated current liabilities at September 30, 2008 (compared to
$1,432,107 or 28% at December 31, 2007). Our trade accounts payable and our
accrued liabilities are currently being extended where possible to preserve our
capital resources during the downturn in our business. The balance of our
current liabilities is largely attributable to current maturities of financing
arrangements, discussed below.





Investing
activities:





We
generated $113,295 in cash from our investing activities during the nine months
ended September 30, 2008, compared to $197,742 during the same period in the
prior year. During the nine months ended September 30, 2007, we sold a business
for cash of $202,641 and three notes receivable of $314,259. Collections on
the notes receivable amounted to $124,026 and $38,421 during the nine months
ended September 30, 2008 and 2007, respectively. We currently anticipate further
collections of $45,481 on the outstanding notes receivable.








62





During
the nine months ended September 30, 2008, we purchased $313,013 of fixed assets
under capital lease arrangements that did not require cash and $10,831 for cash.
During the nine months ended September 30, 2007, we purchased $2,729,634 of
fixed assets under capital lease arrangements and $103,710 for cash. We will
continue to use leasing facilities to purchase our medical and certain other
equipment. These lines currently do not provide for the extension of funds for
working capital.





We
currently have no material commitments for the purchase of property and
equipment.





Financing
activities:





We
generated $148,196 of cash in our financing activities during the nine months
ended September 30, 2008 ($624,133 was generated during the nine months ended
September 30, 2007). Our 2008 amounts represented $695,803 of payments on our
debt (including related parties debt), credit facilities and capital leases,
offset by loan proceeds of $845,000 from our sale on May 2, 2008 of convertible
notes and warrants. During the nine months ended September 30, 2007, we
increased our borrowings on our credit facilities by $565,959 and received
proceeds from long term debt in the amount of $1,225,138, offset by payments on
long term debt, related party debt and credit facilities of
$1,156,944.





Our bank
credit facilities, current maturities of long-term debt, capital leases and
related party obligations amount to $3,411,327 and represents 55% of our
consolidated current liabilities as of September 30, 2008 ($3,227,346 or 64% at
December 31, 2007). Total bank credit facilities, long-term debt, capital lease
obligations, related party obligations and convertible notes amount to
$10,636,678 and represents 79% of our total liabilities at September 30, 2008
($10,755,350 or 85% at December 31, 2007). We have significant indebtedness that
will require the use of our cash in current and future periods unless our
indebtedness can be restructured. In addition, our bank line of credit
facilities with an outstanding balance of $1,924,154 expired in February 2008
and are now due. While the creditor has not called the notes for payment, it has
the right to do so. Our management is currently negotiating with the creditor
and other financial institutions to restructure our current indebtedness to
extend existing terms as well as provide additional term and revolving credit.
There can be no assurances that the creditors will not call the bank line of
credit for immediate payment or that our management will be successful in
identifying and closing new financing arrangements or
modifications.





We
currently have no availability on any credit facility. Our three bank credit
facilities with Amegy Bank National Association (“Amegy”) expired in February
2008. As of September 30, 2008 and December 31, 2007 we owed, in the aggregate,
$1,924,154 and $1,984,002, respectively, on these credit facilities. The
facilities are guaranteed by our subsidiaries and the former members of our
subsidiary, US Imaging Holding LLC.





On August 29,
2008, we entered into a Modification of Promissory Note Agreement
(“Modification”) with Amegy amending the terms of the promissory notes. Pursuant
to the Modification, the Company agreed to make all interest payments on the
28th of each month until all amounts are paid in full, make two $10,000 payments
on August 28, 2008 and September 28, 2008 and pay all principal and interest in
full on October 28, 2008. As of the date of this filing, we have made the
required payments, but did not pay in-full the balance of the principal and
interest on October 28, 2008. Accordingly, on that date, we are in default on
this indebtedness.








63





In
connection with the August 29, 2008 Modification, we concluded that the
modification did not meet the definition of “substantial” for purposes of
applying EITF 96-19, “Debtor’s
Accounting for a Modification or Exchange of Debt Instruments”.
Generally, “substantial” modifications to debt instruments are based upon the
present value of cash flows and require extinguishment accounting, where the
instrument is effectively extinguished and replaced with the new instrument, at
fair value. These transactions give rise to gains and losses on debt
extinguishment. While the August 29, 2008 modification was not substantial, a
future modification or exchange, if any, could give rise to an extinguishment
and, accordingly, recognition of a loss or gain.





While
Amergy has the right to require immediate payment of amounts outstanding, they
have not done so. Our management is currently negotiating with the lender to
extend, restructure or replace the credit facilities. However, there can be no
assurances that our management will be successful in these negotiations or that
the lender will not call the balance as immediately payable.





Subsequent
to September 30, 2008, on October 6, 2008, we completed the sale of 1,143,750
shares of our common stock for net proceeds of $366,000. The Private Offering
Memorandum and Subscription agreements underlying these shares do not include
redemption requirements of any nature and the arrangement does not extend
registration rights to the investors. We will record the sale of these shares of
common stock in the period that the sale is complete and the cash is
collected.






64








Item 3.
Quantitative and Qualitative Disclosures about Market Risk.





Smaller
reporting companies, as defined by Item 10(f)(1) of Regulation S-K, such as us,
are not required to provide the information required by this Item, as provided
in Item 305 (e).






65








Item 4T.
Controls and Procedures.





As of the
end of the period covered by this report, our principal executive officer and
principal financial officer carried out an evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures. This
evaluation was carried out under the supervision and with the participation of
the Company’s management, including the Company’s Chief Executive Officer and
Chief Financial Officer who concluded that the Company’s disclosure controls and
procedures were effective as of the date of the evaluation.





There
were no changes in internal controls during the quarterly period ended September
30, 2008 that have materially affected, or are reasonably likely to have
materially affected, our internal controls subsequent to the date we carried out
our evaluation.





Disclosure
controls and procedures are controls and other procedures that are designed to
provide reasonable assurance that information required to be disclosed in the
Company’s reports filed or submitted under the Securities Exchange Act of 1934
(“Exchange Act”) is recorded, processed, summarized and reported, within the
time periods specified in the Securities and Exchange Commission’s rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to provide reasonable assurance that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, as appropriate, to allow timely
decisions regarding required disclosure.






66





PART
II—OTHER INFORMATION





Item 1.
Legal Proceedings.





One
action has been filed against us by Advanced Data Systems Corporation (“ADS”) in
the form of a demand for AAA Arbitration. The nature of the dispute is for
breach of contract and specific performance. The claim is for $134,100. The
allegation relates to the installment by ADS of software for medical practice
management systems. We have defended on the basis of a violation of express
warranties and implied warranties. We also claimed a right to offset against any
amount allegedly remaining due, with offset was reflected in the cost to
purchase a replacement system at $143,160. Finally, we have instituted a
counterclaim in the amount of $15,149 representing the down payment and the
lease fee paid to the finance company. The pleadings have been closed and the
parties have agreed to refer this to private arbitration. A hearing date of
April 20, 21, and 22, 2009 has been scheduled. Management intends to
contest this matter vigorously if an out of court settlement cannot be
reached. Management asserts that there are valid defenses against the claim,
which should yield a favorable outcome.





We are
otherwise subject to other legal proceedings and claims, which arise in the
ordinary course of its business. Although occasional adverse decisions or
settlements may occur, we believe that the final disposition of such matters
should not have a material adverse effect on our consolidated financial
position, results of operations or liquidity.





On May 2,
2008, USI merged with Firstway pursuant to a Share Exchange Agreement (the
“Exchange Agreement”). The Exchange Agreement provided for the exchange of all
of the membership interest of USI for 40,952,189 of Firstway’s post-merger
common shares. As set forth in the Exchange Agreement, the former majority
shareholders (the “Former Shareholders”) of the Company made various
representations and warranties to USI and the members of USI regarding the
status and affairs of the Company. USI is presently evaluating potential claims
against the Former Shareholders resulting from a breach of such representations
stemming from the Company’s filing of its quarterly report for the three months
ended March 31, 2008 without obtaining the required auditor review.











67


Item 1A.
Risk Factors.


RISK
FACTORS





Our limited operating history makes
it difficult for us to evaluate our future business prospects and make decisions
based on those estimates of our future performance.





Although
our management team has been engaged in the medical imaging business for an
extended period of time, we did not begin operations of our current business
concept until 2002. We have a limited operating history.  As a
consequence, it is difficult, if not impossible, to forecast our future results
based upon our historical data.  Reliance on the historical results of our
acquisition targets may not be representative of the results we will achieve,
particularly in our combined form.  Because of the uncertainties related to
our lack of historical operations, we may be hindered in our ability to
anticipate and timely adapt to increases or decreases in revenues and
expenses.  If we make poor budgetary decisions as a result of unreliable
historical data, we could be less profitable or incur losses, which may result
in a decline in our stock price.





Our
results of operations have not been consistent, and we may not be able to
achieve profitability.





We
incurred a net loss from our continuing operations amounting to $1,196,062 and
$3,423,821 for the three and nine months ended September 30, 2008, respectively.
In addition, as of September 30, 2008, we have a working capital deficiency of
$2,156,478 and our bank line of credit facilities with an outstanding balance of
$1,924,154 have expired and are due. These conditions raise substantial doubt
surrounding our ability to continue as a going concern for a reasonable period.
If we incur additional significant operating losses, our stock price, if we
begin to trade publicly, may decline, perhaps significantly.





Our
management is developing plans to alleviate the negative trends and conditions
described above. In May 2008, we entered into a merger and financing transaction
that provided $1,000,000 in gross proceeds to the post-merger combined
companies, from the sale of convertible notes and warrants. In addition, our
management is currently negotiating with financial institutions to restructure
our current indebtedness to extend existing terms as well as provide additional
term and revolving credit. Finally, our management is currently reviewing our
operating and cost structure and believes that there are opportunities for cost
curtailment. Our business plan is speculative and unproven and there is no
guarantee that we will be able to restructure our current indebtedness or
curtail our operating expenses.  Further, there is no assurance that
we will be successful in executing our business plan or that even if we
successfully implement our business plan, that we will be able to curtail our
losses now or in the future.





Changes in the rates or methods of
third-party reimbursements for our services could result in reduced demand for
our services or create downward pricing pressure, which would result in a
decline in our revenues and adversely affect our financial condition and results
of operations.





For the
year ended December 31, 2007 and the nine months ended September 30, 2008, we
derived approximately 87% and 87%, respectively, of our net patient revenues
from direct billings to patients and third-party payors such as Medicare,
Medicaid, managed care and private health insurance companies. Changes in the
rates or methods of reimbursement for the services we provide could have a
significant negative impact on those revenues.





Certain
third-party payors have proposed and implemented initiatives which have the
effect of substantially decreasing reimbursement rates for diagnostic imaging
services provided at non-hospital facilities, and third-party payors are
continuing to monitor reimbursement for diagnostic imaging services. A
third-party payor has instituted a requirement of participation that
freestanding imaging center providers to offer multi-modality imaging services
and not simply offer one type of diagnostic imaging service. Other third-party
payors have instituted specific credentialing requirements on imaging center
providers and physicians performing interpretations and providing supervision.
Similar initiatives enacted in the future by numerous additional third-party
payors may have a material adverse impact on our financial condition and results
of operations.








68





Under
Medicare’s prospective payment system for hospital outpatient services, or
HOPPS, a hospital is paid for outpatient services on a rate per service basis
that varies according to the ambulatory payment classification, or APC, to which
the service is assigned rather than on a hospital’s costs. Each year the Centers
for Medicare and Medicaid Services, or CMS, publish new APC rates that are
determined in accordance with the promulgated methodology. Multi-modality and
certain fixed-site centers which are freestanding and not hospital-based
facilities are not directly affected by HOPPS. Under the final rule for HOPPS
effective January 1, 2008, which was released on November 1, 2007, CMS is
packaging many radiology and radiation oncology services and drugs into
procedural codes, thereby paying one consolidated payment for a service that
commonly involves several coding components. The practical overall effect in
many cases is to decrease the total reimbursement received by hospitals for
certain outpatient radiological services, including PET/CT. Because unfavorable
reimbursement policies constrict the profit margins of the mobile customers we
bill directly, we have and may continue to lower our fees to retain existing PET
and PET/CT customers and attract new ones. Although CMS continues to expand
reimbursement for new applications of PET and PET/CT, expanded application is
unlikely to significantly offset the anticipated overall reductions in PET and
PET/CT reimbursement. Any modifications under HOPPS further reducing
reimbursement to hospitals may adversely impact our financial condition and
results of operations since hospitals will seek to offset such
modifications.





In
addition, in August 2005, CMS published proposed regulations that apply to
hospital outpatient services that significantly decrease the reimbursement for
diagnostic procedures performed together on the same day. Under the proposed new
methodology, CMS identified families of imaging procedures by imaging modality
and contiguous body area. Medicare would pay 100% of the technical component of
the higher-priced procedure and 50% for the technical component of each
additional procedure for procedures involving contiguous body parts within a
family of codes when performed in the same session. Prior to the effectiveness
of the proposed regulations, Medicare paid 100% of the technical component of
each procedure. In November 2006, CMS published final regulations that delay the
implementation of this reimbursement methodology for an indefinite period of
time. If third-party payors reduce the amount of their payments to our
customers, our customers will likely seek to reduce their payments to us or seek
an alternate supplier of diagnostic imaging services. Because unfavorable
reimbursement policies have constricted and may continue to constrict the profit
margins of physician groups and other healthcare providers that we bill
directly, we have lowered and may continue to need to lower our fees to retain
existing customers and attract new ones. These reductions have had a significant
adverse effect on our financial condition and results of operations by
decreasing demand for our services or creating downward pricing
pressure.





Services
provided in non-hospital based freestanding facilities, including independent
diagnostic testing facilities, are paid under the Medicare Part B fee
schedule. In November 2005, CMS published final regulations, which would
implement the same multi-procedure methodology rate reduction proposed for
hospital outpatient services, for procedures reimbursed under the Medicare
Part B fee schedule. CMS proposed phasing in this rate reduction over two
years, 25% in 2006, and another 25% in 2007. The first phase of the rate
reduction was effective January 1, 2006; however, under final regulations
released in November 2006, CMS did not implement the second phase of the rate
reduction in 2007. CMS has not yet stated whether it will implement the second
phase. If, in the future, CMS ultimately implements the second phase reduction,
it will have a material effect on our imaging revenue.








69





The
Deficit Reduction Act of 2005, or DRA, became effective January 1, 2007 and has
resulted in significant reductions in reimbursement for radiology services for
Medicare beneficiaries. The DRA provides, among other things, that reimbursement
for the technical component for imaging services (excluding diagnostic and
screening mammography) in non-hospital based freestanding facilities will be the
lesser of HOPPS or the Medicare Part B fee schedule. Implementation of the
reimbursement reductions in the DRA has had, and we believe will continue to
have, a material adverse effect on our financial condition and results of
operations.





We do not
know to what extent other third-party payors may propose reimbursement
reductions similar to the DRA. Several significant third-party payors
implemented the reduction for multiple images on contiguous body parts (as
currently in effect under CMS regulations), and additional payors may implement
this reduction as well. If CMS implements the second phase of the rate reduction
for multiple images on contiguous body parts, third-party payors may follow CMS
practice and implement a similar reduction. Such reduction would further
negatively affect our financial condition and results of
operations.





Finally,
Medicare reimbursement rates under the Medicare Part B fee schedule are
calculated in accordance with a statutory formula. As a result, for calendar
years 2005, 2006 and 2007, CMS published regulations decreasing the Part B
reimbursement rates by 3.3%, 4.3% and 5.0% respectively. In each instance,
Congress enacted legislation preventing the decreases from taking effect. We
anticipate that CMS will continue to release regulations for decreases in
reimbursement rates under the Medicare Part B fee schedule until the
statutory formula is changed through enactment of new legislation. In fact,
there was a proposed decrease under the Medicare Part B fee schedule of 10.1%
for calendar 2008; however, this decrease did not go into
effect.  Effective January 1, 2008 there will be an increase of
0.5% in the Medicare Part B fee schedule for the first nine months of the
calendar year. If there are decreases in the Medicare Part B fee schedule
in the future it may have a material adverse effect on our financial condition
and results of operations.





All of
the congressional and regulatory actions described above reflect industry-wide
cost-containment pressures that we believe will continue to affect healthcare
providers for the foreseeable future.





Our
centers depend on physician referrals and contractual arrangements with
insurance carriers for their business.





Our
centers are principally dependent on our ability to attract referrals from
physicians and other healthcare providers representing a variety of specialties.
In order to attract patients with commercial insurance coverage from these
referral sources, we must maintain a contractual relationship with their
insurance carrier or managed care organization.  Consistent with
industry standards, a substantial number of our payor contracts permit payors to
unilaterally change their fee schedules that are used to determine the amounts
we are reimbursed. A significant decline in referrals through the loss of
contracts with commercial payors, or otherwise, would have a material adverse
effect on our business, financial condition and results of operations. In
addition, if our referral sources purchase their own diagnostic imaging
equipment and compete against us, our referrals may be temporarily or
permanently reduced.





Our
net revenues are significantly impacted by estimates of contractual allowances
and the collectability of claims.





We bill
the majority of our payors a gross amount for the diagnostic imaging services we
provide. These gross charges are reduced by estimated allowances for contractual
adjustments, since we are reimbursed at an agreed upon rate that is
significantly lower than the gross rate we charge. Our gross charges are also
reduced by doubtful accounts, or uncollectible amounts. Due to the extended
period of time over which our claims are adjudicated, our management must
estimate the allowance for contractual adjustments and doubtful accounts. These
estimates are significant in amount and are complicated by our payor mix and the
extended period of time between our provision of services and when we are
actually reimbursed by the payor. These estimates are further impacted by trends
toward increased patient pay, which is more difficult to collect, and secondary
insurance. If we are forced to revise our estimates for contractual adjustments
or doubtful accounts, or our existing reserves are not adequate, our financial
results will be adversely affected.








70





We
compete with other diagnostic imaging companies, referral physicians and
hospitals and this competition could adversely affect our revenue and our
business.





The
overall diagnostic imaging services market is highly competitive, with services
provided in a variety of settings and by several different types of providers.
We compete principally on the basis of our reputation for delivering high
quality images and radiologist reports in a timely manner, the comfort and care
we provide to patients in our centers and price. We compete with other
fixed-site, outpatient diagnostic imaging providers, non-radiologist physician
practices, radiologists that own their own equipment, hospitals that own their
own equipment and others, including leasing companies that own and operate
diagnostic imaging equipment. Our major industry competitors include Healthsouth
Corporation, Radiologix, Inc., InSight Health Services Corp. and Alliance
Imaging, Inc. Our local competition includes hospitals, medical clinics and
physician groups that provide diagnostic imaging services by leasing mobile
diagnostic imaging equipment on a full or part-time basis. Some of our
competitors that provide diagnostic imaging services may now or in the future
have access to greater financial resources than we do and the ability to acquire
newer, more advanced equipment. Finally, we face competition from providers of
competing technologies that we do not offer, and may face competition from
providers of new technologies in the future. If we are unable to successfully
compete, our customer base would decline and our business, financial condition
and results of operations would be harmed.





Certain
hospitals, particularly larger hospitals, may directly acquire and operate
on-site diagnostic imaging equipment as part of their overall inpatient
servicing capability. There have been periods in the recent past when there has
been significant excess capacity in the diagnostic imaging business in the
United States, which can negatively affect utilization and
reimbursement.





In
addition, we believe there is a growing trend of non-radiologist physician
practices establishing their own diagnostic imaging centers within their group
practices, pursuant to exceptions to physician self-referral legislation, which
is an increasing source of competition.





An
inability to meet our capital expenditure needs could adversely affect our
ability to build and maintain our business.





We
operate in a capital intensive, high fixed-cost industry that requires
significant amounts of capital to fund operations, particularly the initial
start-up and development expenses of newcenters and the
acquisition of additional businesses and new imaging equipment. As the
technology used in diagnostic imaging continues to advance, and as we continue
to open or acquire new centers, our capital expenditures will remain
substantial. We incur capital expenditures to, among other things:





 ̈
            open
      new centers and acquire centers;


 ̈
            upgrade
      our imaging equipment and its
software;


 ̈
            make
      leasehold improvements;


 ̈
            upgrade
      information technology systems;


 ̈
            purchase
      equipment upon termination of operating leases;
  and


 ̈
            replace
      underperforming or outdated
equipment;


 ̈
            maintenance
      contracts;








71





Inadequate
equipment can be a competitive disadvantage, particularly if local market
competitors have installed significantly more advanced equipment. To the extent
we are unable to generate sufficient cash from our operations, funds are no
longer available under our senior credit facility or we are unable to secure
additional financing on acceptable terms, or at all, we may be unable to fund
our capital expenditure requirements. Furthermore, there is no assurance that we
will be able to raise any necessary additional funds through bank financing or
the issuances of equity or debt securities on terms acceptable to us, if at
all.





We may be unable to effectively maintain our equipment or
generate revenue when our equipment is not working.





Timely,
effective service is essential to maintaining our reputation and high
utilization rates on our imaging equipment. Repair of a piece of diagnostic
imaging equipment can take a week or more and causes a loss of revenue. Our
warranties, maintenance contracts and business interruption insurance may not
fully compensate us for loss of revenue when our equipment is out of service.
The principal components of our operating costs include depreciation, salaries
paid to technologists, annual equipment maintenance costs and insurance costs.
Because such a large portion of these expenses are fixed, a reduction in the
number of scans performed due to out-of-service equipment will result in lower
revenue and margins. Repairs of our equipment are performed for us by the
equipment manufacturers or by parties with whom we contract for service. These
manufacturers may not be able to perform repairs or supply needed parts in a
timely manner. Thus, if we experience greater than anticipated equipment
malfunctions or if we are unable to promptly obtain the service necessary to
keep our equipment functioning effectively, our revenue could decline and our
ability to provide services would be harmed.





We
may be subject to professional liability risks which could be costly and could
negatively impact our business and financial results.





We may be
subject to professional liability claims. Although there currently are no known
hazards associated with diagnostic imaging or our other imaging technologies
when used properly, hazards may be discovered in the future. Furthermore, there
is a risk of harm to a patient during an MRI or CT scan. Patients are carefully
screened to safeguard against this risk, but screening may nevertheless fail to
identify the hazard. We may also be subject to malpractice claims for the work
of our radiologists. To protect against the impact of possible professional
liability, we maintain professional liability insurance. However, if we are
unable to maintain insurance in the future at an acceptable cost, or at all, or
if our insurance does not fully cover us and a successful claim is made against
us, we could be exposed to liability. While we require our non-employee
radiologists to obtain their own malpractice insurance policies, we may be
subject to malpractice claims related to the work of our non-employee
radiologists. Any claim made against us not fully covered by our insurance
policies could be costly to defend, result in a substantial damage award against
us and divert the attention of our management from our operations, which could
negatively impact our business and financial results.





Technological
change in our industry could reduce the demand for our services and require us
to incur significant costs to upgrade or replace our equipment.





Technological
change in the diagnostic imaging services industry may accelerate in the future.
The effect of technological change could significantly impact our business. The
development of new imaging technology or new diagnostic applications for
existing technology may require us to adapt our existing technology or acquire
new or technologically improved equipment in order to successfully compete. In
the future, however, we may not have the financial resources to adequately
upgrade our technology, particularly given our indebtedness. The development of
new technologies or refinements of existing ones might make our existing
equipment technologically or economically obsolete, or cause a reduction in the
value of, or reduce the need for, our equipment.






72





Our
revenue may fluctuate or be unpredictable and this may harm our financial
results.





The
amount and timing of revenue that we may derive from our business will fluctuate
based on:





 ̈
            changes
      in the number of days of service we can offer with respect to a given
      diagnostic imaging equipment due to equipment
  downtime;


 ̈
            patient
      pay and deductible obligations; and


 ̈
            seasonal
      and weather factors; and


 ̈
            changes
      in government regulations, agencies, including IRS as to booking income /
      revenue; and


 ̈
            availability
      of radiologists





We derive
a portion of our revenues from patient pay and deductible obligations. These
obligations are often greater in the beginning of the calendar year, and thus
our revenue related to such patient pay may fluctuate from quarter to quarter.
We also experience seasonality and other fluctuations in the volume of our
services. Referral source and patient vacation schedules, events and population
movements specific to certain of our operating regions and inclement weather may
affect our revenues. As a result, our revenue may significantly vary from
quarter to quarter, and our quarterly results may be below market expectations.
We may not be able to reduce our expenses, including our debt service obligations, quickly enough to respond to these
fluctuations in revenue, which would make our business difficult to operate and
would harm our financial results.





Some
of our imaging services involve the handling of hazardous materials and wastes,
including the use and disposal of radioactive materials, which could subject us
to regulation, related costs and delays and potential liabilities for violations
of environmental, health and safety laws.





We are
subject to federal, state and local regulations governing storage, use and
disposal of hazardous materials and medical, radioactive and other waste
products. Our diagnostic centers generate small amounts of medical wastes or
other hazardous materials, and some of our imaging services involve the use of
radioactive materials. Although we believe that our procedures for storing,
handling and disposing of these hazardous materials comply with the standards
prescribed by law and adequately provide for the safety of our patients,
employees and the environment, we cannot completely eliminate the risk of
accidental releases, contamination or injury associated with such materials. In
the event of an accident, we could be held liable for any damages that result,
and any liability could exceed the limits or fall outside the coverage of our
insurance. We may not be able to maintain insurance on acceptable terms, or at
all. We could incur significant costs and the diversion of our management's
attention in order to comply with current or future environmental, health and
safety laws and regulations.





We
depend upon key personnel and need additional personnel





Our
success depends on the continuing services of Dr. Stephen Miley, our sole
executive officer, and the existing management of each of our
centers.  The loss of any of these individuals could have a material
and adverse effect on our business operations.






73





Additionally,
the success of the Company’s operations will largely depend upon its ability to
successfully attract and maintain competent and qualified key management
personnel. As with any company with limited resources, there can be no guaranty
that the Company will be able to attract such individuals or that the presence
of such individuals will necessarily translate into profitability for the
Company.  Our inability to attract and retain key personnel may
materially and adversely affect our business operations.





We
conduct business in a heavily regulated industry and if we fail to comply with
these laws and government regulations, we could suffer penalties or be required
to make significant changes to our operations.





We are
subject to extensive regulation at both federal and state levels for those
states in which we conduct our business. The laws that directly or indirectly
affect our ability to operate our business include the following:





• the
federal Medicare and Medicaid Anti-Kickback Law;


• federal
and state billing and claims submission laws and regulations;


• the
federal Health Insurance Portability and Accountability Act of
1996;


• the
federal physician self-referral prohibition commonly known as the Stark Law and
state equivalents of the Stark Law;


• state
laws that prohibit the practice of medicine by non-physicians and prohibit
fee-splitting arrangements involving physicians; and


• federal
and state laws governing the diagnostic imaging equipment we use in our business
concerning patient safety, equipment operating specifications and radiation
exposure levels.





If our
operations are found to be in violation of any of the laws and regulations
described in this risk factor or the other governmental regulations which govern
our activities, we may be subject to the applicable penalty associated with the
violation, including civil and criminal penalties, damages, fines or the
curtailment of our operations. Any material penalties, damages, fines or
curtailment of our operations, individually or in the aggregate, would adversely
affect our ability to operate our business and our financial results. The risk
of our being found in violation of these laws and regulations is increased by
the fact that many of them have not been fully interpreted by the regulatory
authorities or the courts, and their provisions are open to a variety of
interpretations. Any action against us for violation of these laws or
regulations, even if we successfully defend against it, could cause us to incur
significant legal expenses and divert our management's attention from the
operation of our business.





In
addition, healthcare laws and regulations may change significantly in the
future. We continually monitor these developments and modify our operations from
time to time as necessary and in response to changes in the regulatory
environment. There is no assurance, however, that any new healthcare laws or
regulations will not adversely affect our business. There is no assurance that a
review of our business by judicial or regulatory authorities will not result in
a determination that could adversely affect our operations or that the
healthcare regulatory environment will not change in a way that restricts our
operations.





If
we fail to comply with various licensure, certification and accreditation
standards, we may be subject to loss of licensure, certification or
accreditation, which would adversely affect our operations.





Ownership,
construction, operation, expansion and acquisition of diagnostic imaging centers
are subject to various federal and state laws, regulations and approvals
concerning licensing of centers, personnel, other required certificates for
certain types of healthcare centers and major medical equipment. In addition,
independent diagnostic imaging centers that provide services outside of a
physician's office must be enrolled by Medicare as an IDTF to bill the Medicare
program. Medicare fiscal intermediaries have discretion in applying the IDTF
requirements and therefore the application of these requirements may vary from
jurisdiction to jurisdiction. We may not be able to receive the required regulatory approvals for any future acquisitions,
expansions or replacements, and the failure to obtain these approvals could
limit the opportunity to expand our services.






74





Our
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with the various standards necessary
for licensure and certification. If any facility loses its certification under
the Medicare program, then the facility will be ineligible to receive
reimbursement from the Medicare and Medicaid programs.  A change in
the applicable license or enrollment status of one of our facilities could
adversely affect our other facilities, and in turn, us as a whole. We intend to
conduct our operations in compliance with applicable federal, state, and local
laws and we monitor developments in healthcare law so that we can modify our
operations from time to time as the business and regulatory environment
changes.





If
we fail to successfully implement, integrate and secure our information systems
at our facilities, we could suffer penalties, be required to make significant
changes to our operations and our cash flows could be negatively
affected.





The
Administrative Simplification Provisions of HIPAA required HHS to adopt
standards to protect the security and privacy of health related information.
Although HHS issued proposed rules in 1998 concerning the security standards,
final rules were not adopted until February 20, 2003. The security standards
contained in the final rules do not require the use of specific technologies
(e.g., no specific hardware or software is required), but instead require health
plans, healthcare clearinghouses and healthcare providers to comply with certain
minimum security procedures in order to protect data integrity, confidentiality
and availability.





The HIPAA privacy standards contain detailed requirements
regarding the use and disclosure of individually identifiable health
information. Improper use or disclosure of identifiable health information
covered by the HIPAA privacy regulations can result in the following fines
and/or imprisonment: (i) civil money penalties for HIPAA privacy violations
are $100 per incident, up to $25,000, per person, per year, per standard
violated; (ii) a person who knowingly and in violation of the HIPAA privacy
regulations obtains individually identifiable health information or discloses
individually identifiable health information to another person may be fined up
to $50,000 and imprisoned up to one year, or both; (iii) if the offense is
committed under false pretenses, the fine may be up to $100,000 and imprisonment
for up to five years; and (iv) if the offense is done with the intent to sell,
transfer, or use individually identifiable health information for commercial
advantage, personal gain, or malicious harm, the fine may be up to $250,000 and
imprisonment for up to ten years.





HIPAA
also required HHS to adopt national standards establishing electronic
transaction standards that all healthcare providers must use when submitting or
receiving certain healthcare transactions electronically. Although these
standards were to become effective October 2002, Congress extended the
compliance deadline until October 2003 for organizations, such as ours,
that submitted a request for an extension. We believe we are in material
compliance with the HIPAA electronic transaction standards.





We
may engage in acquisitions, which will consume resources and may be unsuccessful
or unprofitable.





We have
pursued, and we intend to continue to pursue, a strategy of acquiring medical
imaging centers that fit within our business model.  However, acquisitions
are not always successful or profitable.  Any future acquisitions could
expose us to risks, including risks associated with assimilating new operations
and personnel; diversion of resources from our existing businesses; inability to
generate revenues sufficient to offset associated acquisition costs; and risks
associated with the maintenance of uniform standards, controls, procedures and
policies.  Acquisitions may also result in additional expenses from
amortizing acquired intangible assets.  If we attempt an acquisition and
are unsuccessful in its completion, we will likely incur significant expenses
without any benefit to our company.  If we are successful in completing an
acquisition, the risks and other problems we face may ultimately make the
acquisition unprofitable.  Failed acquisition transactions and
underperforming completed acquisitions would burden us with significant costs
without any corresponding benefits to us, which could cause our stock price to
decrease, perhaps significantly.








75





We
have not paid dividends in the past and do not expect to pay dividends in the
future.  Any return on investment may be limited to the value of our
common stock





We have
never paid cash dividends on our common stock and do not anticipate paying cash
dividends in the foreseeable future. The payment of dividends on our common
stock will depend on earnings, financial condition and other business and
economic factors affecting it at such time as the board of directors may
consider relevant. If we do not pay dividends, our common stock may be less
valuable because a return on your investment will only occur if its stock price
appreciates.





The
issuance of shares upon conversion of the convertible debenture and exercise of
outstanding Series A and Series B Warrants issued to the investor may cause
immediate and substantial dilution to the Company’s existing
stockholders.





The
issuance of shares upon conversion of the convertible debenture and exercise of
warrants may result in substantial dilution to the interests of other
stockholders since the investor may ultimately convert and sell the full amount
issuable on conversion. Although the investor may not convert their convertible
debenture if such conversion would cause them to own more than 4.99% of the
Company’s outstanding common stock, this restriction does not prevent the
investor from converting and/or exercising some of their holdings and then
converting the rest of their holdings. In this way, the investor could sell more
than their limit while never holding more than this limit.





We
have not voluntary implemented various corporate governance measures, in the
absence of which, shareholders may have more limited protections against
interested director transactions, conflict of interest and similar
matters.





Recent
Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in
the adoption of various corporate governance measures designed to promote the
integrity of the corporate management and the securities markets. Some of these
measures have been adopted in response to legal requirements. Others have been
adopted by companies in response to the requirements of national securities
exchanges, such as the NYSE or the NASDAQ Stock Market, on which their
securities are listed. Among the corporate governance measures that are required
under the rules of national securities exchanges are those that address board of
directors' independence, audit committee oversight, and the adoption of a code
of ethics. While we intend to adopt certain corporate governance measures such
as a code of ethics and established an audit committee, Nominating and Corporate
Governance Committee, and Compensation Committee of our board ofdirectors, we presently do not have any independent directors.
We intend to expand our board membership in future periods to include
independent directors. It is possible that if we were to have independent
directors on our board, stockholders would benefit from somewhat greater
assurances that internal corporate decisions were being made by disinterested
directors and that policies had been implemented to define responsible conduct.
For example, in the absence of audit, nominating and compensation committees
comprised of at least a majority of independent directors, decisions concerning
matters such as compensation packages to our senior officers and recommendations
for director nominees may be made by our sole director who has an interest in
the outcome of the matters being decided. Prospective investors should bear in
mind our current lack of corporate governance measures and independent directors
in formulating their investment decisions.








76





We
may be exposed to potential risks relating to our internal controls over
financial reporting and our ability to have those controls attested to by our
independent auditors.





As
directed by Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"), the
Securities and Exchange Commission adopted rules requiring smaller reporting
companies, such as our company, to include a report of management on the
company's internal controls over financial reporting in their annual reports for
fiscal years ending on or after December 15, 2007. We did not include a
management report or an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting for the year
ended December 31, 2007 pursuant to temporary rules of the Securities and
Exchange Commission that do not require us to provide the management's report or
attestation report in that annual report. We will be required to include the
management report in the annual report for the year ending December 31, 2008. In
addition, for our fiscal year ending December 31, 2009 the independent
registered public accounting firm auditing our financial statements must also
attest to and report on management's assessment of the effectiveness of our
internal controls over financial reporting as well as the operating
effectiveness of our internal controls. In the event we are unable to receive a
positive attestation from our independent auditors with respect to our internal
controls, investors and others may lose confidence in the reliability of our
financial statements and our ability to obtain financing as needed could
suffer.





There
is no public market for our common stock and our shares of common stock are
subject to significant restrictions on their transferability.





There is
currently no public market for the shares of our common stock. While we intend
to seek a broker dealer who will file an application with the OTC Bulletin Board
and make a market in our securities, there is no assurance that a broker dealer
will be interested in making a market in our stock or that an active market in
our stock will ever develop. In addition, all the shares of common stock have
not been registered under the Securities Act or under the securities laws of any
state or other jurisdiction. As a result, such securities can be transferred
without registration under the Securities Act or, if applicable, the securities
laws of any state or other jurisdiction only if such registration is not then
required because of an applicable exemption there from. Compliance with the
criteria for securing exemptions under the Securities Act and the securities
laws of various states is extremely complex. While we have no requirement to
register the shares of our common stock under the Securities Act so as to permit
the public resale thereof, we intend to file a registration statement under the
Securities Act with the Securities and Exchange Commission in order to register
the resale of shares of our Common Stock. Accordingly, an investment in our
company is suitable only for persons who have no need for liquidity in the
investment, and can afford to hold unregistered securities for an indefinite
period of time.





If
a public market for our common stock develops, trading will be limited under the
SEC’s penny stock regulations, which will adversely affect the liquidity of our
common stock.





In the
event we are able to obtain a quotation of our common stock on the OTC Bulletin
Board and the trading price of our common stock is less than $5.00 per share,
our common stock would be considered a "penny stock," and trading in our common
stock would be subject to the requirements of Rule 15g-9 under the Exchange Act.
Under this rule, broker/dealers who recommend low-priced securities to persons
other than established customers and accredited investors must satisfy special
sales practice requirements. Generally, the broker/dealer must make an
individualized written suitability determination for the purchaser and receive
the purchaser's written consent prior to the transaction.




SEC
regulations also require additional disclosure in connection with any trades
involving a "penny stock," including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and its
associated risks. These requirements severely limit the liquidity of securities
in the secondary market because few brokers or dealers are likely to undertake
these compliance activities. In addition to the applicability of thepenny stock rules, other risks associated with trading in penny
stocks could also be price fluctuations and the lack of a liquid market. An
active and liquid market in our common stock may never develop due to these
factors.




77










Item 2.
Unregistered Sales of Equity Securities





Sale of Common Stock
(Subsequent Event)





On
October 6, 2008, we completed the sale of 1,143,750 shares of our common stock
for net proceeds of $366,000 (or $0.32 per common share). We did not incur
investment banking fees or discounts in connection with this sale.





The
aforementioned sale was made pursuant to a Private Offering Memorandum that
provided for the sale of up to 7,812,500 common shares at $0.32 per common
share. The Private Offering Memorandum and the related Subscription Agreements
do not include redemption requirements of any nature and the arrangement does
not extend registration rights to the investors.





US Imaging
Acquisition





On May 2,
2008, we entered into and closed a securities exchange agreement with US
Imaging, and each of US Imaging’s members (the “Purchase Agreement”). Pursuant
to the Purchase Agreement, we acquired all of the issued and outstanding
membership interest of US Imaging from the US Imaging members in exchange for
40,952,189 shares of common stock.





Service
Agreements





On May 2,
2008, we entered into consulting agreements with Searchlight Partners, LLC
(“Searchlight”) and Cypress Advisors, LLC (“Cypress”).  Searchlight
agreed to provide general corporate development and strategic planning advice
including various funding initiatives, the filing of a registration statement
with the Securities Exchange Commission, if needed, and obtaining a listing with
the OTCBB. In consideration of the services rendered and to be rendered by
Searchlight we issued to Searchlight 3,758,749 shares of the Company’s common
stock which shares have piggyback registration rights.  The other
consulting agreement is with Cypress Advisors, LLC (“Cypress”) where Cypress
agreed to provide advice on capital raising and undertook to contact and present
information regarding our company to persons or entities capable of providing
such services.  In consideration of the services rendered and to be
rendered by Cypress we granted to Cypress 2,273,438 shares of our common stock;
provided, however, that 750,235 of these shares were agreed to be held by a
third party and delivered to Cypress upon the closing of a financing in excess
of $2,000,000 resulting from Cypress’ efforts at terms that are acceptable to
us.  The 2,273,438 shares of common stock issued under that agreement
have piggyback registration rights.  In addition, pursuant to a
retainer agreement entered with for legal services with the Law Offices of
Stephen M. Fleming, PLLC (“Fleming”) we issued 788,125 shares of our common
stock for services rendered.





Convertible Note and Warrant
Financing





On May 2,
2008, we entered into agreements relating to the May 2008 Financing. In
connection with the May 2008 financing, we issued the following securities to
the investor:





·
            A
      face value $1,000,000 convertible note payable (the “May 2008
      Note”);


·
            Series
      A Warrants; and


·
            Series
      B Warrants.





The May
2008 Note bears interest at 12% per annum, matures two years from the date of
issuance, and is convertible into our common stock, at the investor’s option, at
$0.18 per share. Based on this conversion price, the May 2008 Note, excluding
interest, is convertible into 5,555,555 shares of our common stock. The
conversion price is subject to adjustment in the event that we issue securities
at a per share price less than the conversion price unless such transaction is a
permitted transaction which is defined as the issuance of common stock or
options to employees, officers, consultants or directors of the Company pursuant
to any stock or option plan duly adopted by the Board of Directors of the
Company, securities issued in connection with acquisitions or strategic
transactions or securities issued as equity enhancements in connection with
standard non convertible debt transactions.  In the event that we
raise in excess of $5,000,000 in one or a series of transactions, then we are
required to pay off the amount owed in under the May 2008 Note.






78





The
Series A Warrants and the Series B Warrants are exercisable for a period of four
years at an exercise price of $0.24 and $0.30 per share, respectively. In the
event that the shares of common stock underlying the Series A Warrants and the
Series B Warrants are not registered by November 2009, then the Series A
Warrants and the Series B Warrants are exercisable on a cashless basis under a
formula that explicitly limits the number of shares issuable.





We
granted the investor piggyback registration rights with respect to the shares of
common stock underlying the May 2008 Notes, the Series A Warrants and the Series
B Warrants.





The
investor has contractually agreed to restrict its ability to convert its
securities and receive shares of our common stock such that the number of shares
held by it and its affiliates after such conversion does not exceed 4.99% of our
then issued and outstanding shares of common stock.





This
issuance of these above securities is exempt from the registration requirements
under Rule 4(2) of the Securities Act of 1933, as amended, and/or Rule 506 as
promulgated under Regulation D.






80





Item 3.
Defaults Upon Senior Securities.





Our three
bank credit facilities with Amegy Bank National Association (“Amegy”) expired in
February 2008. As of September 30, 2008 and December 31, 2007 we owed, in the
aggregate, $1,924,154 and $1,984,002, respectively, on these credit facilities.
The facilities are guaranteed by our subsidiaries and the former members of our
subsidiary, US Imaging Holding LLC.





On August 29,
2008, we entered into a Modification of Promissory Note Agreement
(“Modification”) with Amegy amending the terms of the promissory notes. Pursuant
to the Modification, the Company agreed to make all interest payments on the
28th of each month until all amounts are paid in full, make two $10,000 payments
on August 28, 2008 and September 28, 2008 and pay all principal and interest in
full on October 28, 2008. As of the date of this filing, we have made the
required payments, but did not pay in-full the balance of the principal and
interest on October 28, 2008. Accordingly, on that date, we are in default on
this indebtedness.





While the
lender has the right to require immediate payment of amounts outstanding, they
have not done so. Our management is currently negotiating with the lender to
extend, restructure or replace the credit facilities. However, there can be no
assurances that our management will be successful in these negotiations or that
the lender will not call the balance as immediately payable.








81





Item 4.
Submission of Matters to Vote of Security Holders.





None.






82





Item 5. Other
Information.




Effective October 1,
2008,  Kay Daniel Carter was engaged by the Company to serve as the Chief
Financial Officer of the Company.




83





Item 6.
Exhibits





Number
            
            Description3.1
            
            Certificate
      of Ownership of Firstway Enterprises, Inc. and Axcess Medical Imaging
      Corporation (1)3.2
            
            By-laws
      of Firstway Enterprises, Inc.(2)3.3
            
            Certificate
      of Incorporation (2)4.1
            
            Securities
      Purchase Agreement entered into by and between Firstway Enterprises, Inc.
      and Steven Posner Irrevocable Trust, U/T/A (3)4.2
            
            Convertible
      Note Issued to Steven Posner Irrevocable Trust, U/T/A
  (3)4.3
            
            Series
      A Warrant issued to Steven Posner Irrevocable Trust, U/T/A
    (3)4.4
            
            Series
      B Warrant issued to Steven Posner Irrevocable Trust, U/T/A
    (3)10.1
            
            Securities
      Exchange Agreement by and among Firstway Enterprises, Inc. U.S. Imaging
      Holding LLC and the Members of U.S. Imaging Holding LLC, dated May 2,
      2008(3)10.2
            
            Consulting
      Agreement by and between Firstway Enterprises, Inc. and Searchlight
      Partners, LLC, dated May 2, 2008 (3)10.3
            
            Consulting
      Agreement by and between Firstway Enterprises, Inc. and Cypress Advisors,
      LLC, dated May 2, 2008 (3)10.4
            
            Form
      of Modification of Promissory Note entered with Amegy Bank National
      Association (5)16.1
            
            Letter
      from Kenne Ruan, CPA, P.C. (4)31
            
            Certification
      by Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley
      Act of 200231.1
            
            Certification
      by Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley
      Act of 200232
            
            Certification
      by Principal Executive Officer pursuant to Section 906 of Sarbanes-Oxley
      Act of 200232.1
            
            Certification
      by Principal Financial Officer pursuant to Section 906 of Sarbanes-Oxley
      Act of 2002




(1)
            Included
      as an Exhibit to Firstway Enterprise’s Form8-K filed with the SEC on
      September 13, 2008.


(2)
            Included
      as an Exhibit to Firstway Enterprise’s Form 10SB12 filed with the SEC on
      April 13, 2007.


(3)
            Included
      as an Exhibit to our Form 8-K filed with the SEC on September 18,
      2008.


(4)
            Included
      as an Exhibit to our Form 8-K Current Report filed with the SEC on July
      17, 2008(5)
            Included
      as an Exhibit to our Form 8-K Current Report filed with the SEC on
      September 11, 2008








84





SIGNATURES





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





Axcess
      Medical Imaging Corporation(Registrant)November
      14, 2008
            
            /s/
      Stephen Miley, MD(Date)
            
            (Signature)Stephen
      Miley, Chief Executive Officer, Secretary and Director(Name
      and Title)


/s/ Kay
      Carter(Signature)Kay
      Carter, Chief Financial Officer(Name
      and Title)








85