Edgar Filing: FONAR CORP

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14 (a) OF THE SECURITIES
EXCHANGE ACT OF 1934

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[ ] Soliciting Material Pursuant to (ss.) 240.14a-12

FONAR CORPORATION
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(Name of Registrant as Specified In Its Charter)

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(Name of Person (s) Filing Proxy Statement, if other than the Registrant)

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FONAR CORPORATION
110 Marcus Drive
FONAR CORPORATION

Proxy - Annual Meeting of Stockholders - June 14, 2004

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned, a stockholder of Fonar Corporation (the "Company"), hereby
revoking any proxy heretofore given, does hereby appoint Raymond V. Damadian,
David B. Terry, and Kurt Reimann, and each of them, proxies with full power of
substitution, for and in the name of the undersigned to attend the Annual
Meeting of the Stockholders of the Company to be held at Ramada Inn, junction of
Interstate 295 and Route 13, New Castle, Delaware on June 14, 2004 at 10:00
a.m., local time, and at any adjournment(s) thereof, and there to vote upon all
matters specified in the notice of said meeting, as set forth herein, and upon
such other business as may properly and lawfully come before the meeting, all
shares of stock of the Company which the undersigned would be entitled to vote
if personally present at said meeting.

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, SUCH SHARES WILL BE VOTED
FOR ALL PROPOSALS.

No. 1. ELECTION OF DIRECTORS

For All Nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary to vote for all
nominees below) listed below

+-------------+ +-------------+
/ / / /
/ / / /
+-------------+ +-------------+

(INSTRUCTION: To withhold authority to vote for any individual nominee strike a
line through the nominee's name in the list below.)

Raymond V. Damadian, Claudette J. V. Chan, Robert J. Janoff, Charles N. O'Data
and Robert Djerejian.

No. 2. To ratify the adoption of (a) the Company's 2003 Supplemental Stock Bonus
Plan and (b) the Company's 2004 Stock Bonus Plan.

FOR AGAINST ABSTAIN

+----------+ +----------+ +----------+
/ / / / / /
/ / / / / /
+----------+ +----------+ +----------+

No. 3. To ratify the selection of Marcum & Kliegman LLP as the Company's
independent auditors for the fiscal year ended June 30, 2004.

FOR AGAINST ABSTAIN

+----------+ +----------+ +----------+
/ / / / / /
/ / / / / /
+----------+ +----------+ +----------+

No. 4. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.

AUTHORITY AUTHORITY
GRANTED WITHHELD

+-------------+ +-------------+
/ / / /
/ / / /
+-------------+ +-------------+

Dated: ______________________, 2004

__________________________________
Signature

__________________________________
Signature if jointly held

Please sign your name(s) EXACTLY as
your name(s) appear(s) on this
proxy. All joint tenants must sign.
When signing as attorney, executor,
administrator, guardian or corporate
officer, please provide your FULL
title.

The Board of Directors requests that you fill in, date and sign the Proxy and
return it in the enclosed envelope.

FONAR CORPORATION
110 Marcus Drive
Melville, New York 11747
(631) 694-2929

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
June 14, 2004

To The Stockholders:

The Annual Meeting of the stockholders of Fonar Corporation will be held at the
Ramada Inn, junction of Interstate 295 and Route 13, New Castle, Delaware, June
14, 2004, at 10:00 a.m. local time for the following purposes:

1. To elect five Directors to the Board of Directors.

2. To ratify the adoption of (a) the Company's 2003 Supplemental Stock Bonus
Plan and (b) the Company's 2004 Stock Bonus Plan.

3. To ratify the selection of Marcum & Kliegman LLP as the Company's auditors
for the fiscal year ended June 30, 2004.

4. To transact such other business as may properly come before the meeting.

Only stockholders of record at the close of business on April 16, 2004 are
entitled to notice of, and to vote at, this meeting. A list of such stockholders
will be available for examination by any stockholder for any purpose germane to
the meeting, during normal business hours, at the principal office of the
Company, 110 Marcus Drive, Melville, New York, for a period of ten days prior to
the meeting.

Whether or not you expect to attend in person, we urge you to sign, date, and
return the enclosed Proxy at your earliest convenience. Sending in your Proxy
will not prevent you from voting your stock at the meeting if you desire to do
so, as your Proxy is revocable at your opinion.

BY ORDER OF THE BOARD OF DIRECTORS

/s/ David B. Terry

David B. Terry
Vice President and Secretary

PROXY STATEMENT
FOR ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD JUNE 14, 2004

This proxy statement, which is first being mailed to shareholders on or about
May 3, 2004, is furnished in connection with the solicitation of proxies by the
Board of Directors of Fonar Corporation (the "Company"), to be voted at the
annual meeting of the stockholders of the Company to be held at 10:00 a.m. on
June 14, 2004 and any adjournment(s) thereof for the purposes set forth in the
accompanying Notice of Annual Meeting of Stockholders. Stockholders who execute
proxies retain the right to revoke them at any time prior to the exercise of the
powers conferred thereby, by delivering a signed statement to the Secretary of
the Company at or prior to the annual meeting or by executing another proxy
dated as of a later date. The cost of solicitation of proxies is to be borne by
the Company.

Only stockholders of record at the close of business on April 16, 2004 will be
entitled to vote at the meeting. Shares of Common Stock are entitled to one vote
per share, shares of Class B Common Stock are entitled to ten votes per share
and shares of Class C Common Stock are entitled to twenty-five votes per share.
At the close of business on April 16, 2004, there were 94,555,637 shares of
Common Stock held of record by 4,677 stockholders, 4,153 shares of Class B
Common Stock held of record by 11 stockholders and 9,562,824 shares of Class C
Common Stock held of record by 4 stockholders. The shares of Class A Nonvoting
Preferred Stock, 7,836,286.75 shares held of record by 4,044 stockholders at the
close of business on April 16, 2004, are not entitled to vote.

Any proxy may be revoked at any time before it is exercised by delivery of a
written instrument of revocation or a later dated proxy to the principal
executive office of the Company or, while the meeting is in session, to the
Secretary of the meeting, without, however, affecting any vote previously taken.
The presence of a stockholder at the meeting will not operate to revoke his
proxy. The casting of a ballot by a stockholder who is present at the meeting,
however, will revoke his proxy, but only as to the matters on which the ballot
is cast and not as to any matters on which he does not cast a ballot or as to
matters previously voted upon.

Proxies received by management will be voted at the meeting or any adjournment
thereof. EACH PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATIONS MADE
THEREIN BY THE PERSON GIVING THE PROXY. TO THE EXTENT NO CHOICE IS SPECIFIED,
HOWEVER, THE PROXY WILL BE VOTED FOR MANAGEMENT'S PROPOSALS. All of management's
proposals have been unanimously approved by the Board of Directors.

1. ELECTION OF DIRECTORS AND MANAGEMENT INFORMATION

Five directors are to be elected at the annual meeting, to hold office until the
next annual meeting of stockholders and until their successors are elected and
qualified. It is intended that the accompanying proxy will be voted in favor of
the following nominees to serve as directors unless the stockholder indicates to
the contrary on the proxy. Management expects that each of the nominees will be
available for election, but if any of them is not a candidate at the time the
election occurs, it is intended that such proxy will be voted for the election
of another nominee to be designated by the Board of Directors to fill any such
vacancy.

DIRECTORS AND OFFICERS

Raymond V. Damadian, M.D. (age 68), a nominee for Director, has been the
Chairman of the Board and President of FONAR since its inception and Treasurer
since February, 2001. Dr. Damadian received an M.D. degree in 1960 from Albert
Einstein College of Medicine, New York, and a B.S. degree in mathematics from
the University of Wisconsin in 1956. In addition, Dr. Damadian conducted
post-graduate work at Harvard University, where he studied extensively in the
fields of physics, mathematics and electronics. Dr. Damadian is a 1988 recipient
of the National Medal of Technology and in 1989 was inducted into the National
Inventors Hall of Fame, for his contributions in conceiving and developing the
application of magnetic resonance technology to medical applications including
whole body scanning and diagnostic imaging. Dr. Damadian is also the director,
President and Treasurer of the Company's subsidiary, Health Management
Corporation of America ("HMCA").

Claudette J.V. Chan (age 66), a nominee for Director, has been a Director of
FONAR since October 1987. Mrs. Chan has been employed since 1992 by HMCA and its
predecessor, Raymond V. Damadian, M.D. MR Scanning Centers Management Company,
as "site inspector," in which capacity she is responsible for supervising and
implementing standard procedures and policies for MRI scanning centers. From
1989 to 1994 Mrs. Chan was employed by St. Matthew's and St. Timothy's
Neighborhood Center, Inc., as the director of volunteers in the "Meals on
Wheels" program, a program which cares for the elderly. She received a bachelor
of science degree in nursing from Cornell University in 1960. Mrs. Chan is the
sister of Raymond V. Damadian.

Robert J. Janoff (age 76), a nominee for Director, has been a Director of FONAR
since February, 1989. Mr. Janoff has been a self-employed New York State
licensed private investigator for more than thirty-five years and was a Senior
Adjustor in Empire Insurance Group for more than 15 years until retiring from
that position on July 1, 1997. Mr. Janoff also served, from June 1985 to June
1991, as President of Action Data Management Strategies, Ltd., a supplier of
computer programs for use by insurance companies. Mr. Janoff is a member of the
Board of Directors of Harmony Heights of Oyster Bay, New York, which is a
nonprofit residential school for girls with learning disabilities.

Charles N. O'Data (age 68), a nominee for Director, has been a Director of FONAR
since February, 1998. From 1968 to 1997, Mr. O'Data was the Vice President for
Development for Geneva College, a liberal arts college located in western
Pennsylvania. In that capacity, he acted as the College's chief investment
officer. His responsibilities included management of the College's endowment
fund and fund raising. In July 1997, Mr. O'Data retired from Geneva College
after 36 years of service to assume a position of National Sales Executive for
SC Johnson Company's Professional Markets Group (a unit of SC Johnson Wax), and
specialized in healthcare and education sales, a position he held until the
spring of 1999. Mr. O'Data presently acts an independent financial consultant.
He founded The Beaver County Foundation, a Community Foundation, in 1992, and
serves as its President. Mr. O'Data is listed as a finance associate in the
Middle States Association Commission on Higher Education, which is the formal
accrediting body for higher education in the eastern region of the country. In
this capacity he evaluates the financial aspects of educational organizations.
Mr. O'Data is a graduate of Geneva College, where he received a B.S. degree in
Economics in 1958.

Robert Djerejian (72), a nominee for Director, has been a Director of Fonar
since June, 2002. Since 1996 Mr. Djerejian has served as a senior consultant for
Haines, Lundberg & Waehler International, an architecture, design and
engineering firm, which among other specialties designs hospitals and
laboratories. Prior to that time he was the senior managing partner of the firm.
Mr. Djerejian serves on the Board of Trustees of Pratt Institute, where he is
also Vice Chairman of the Executive Committee and on the Board of Directors of
the Delaware College of Art and Design, of which he was one of the founding
directors. He is a graduate of Pratt Institute, where he received a B.A. in
Architecture in 1955.

David B. Terry (55) is the Vice President of Administration and Secretary of the
Company. Mr. Terry has been serving as Vice President since December 1998 and as
Secretary since May, 1990. Previously, he served as Treasurer from May 1990 to
December, 1998, as Secretary from July 1978 through June 1987 and as Treasurer
from August 1981 through June 1987. From July 1978 through June 1987, he was
also a Director of the Company.

INFORMATION REGARDING THE BOARD AND ITS COMMITTEES

The five nominees will be elected to hold office for the ensuing year or until
their respective successors are elected and qualified.

During the year ended June 30, 2003 the Board of Directors unanimously consented
to take action in lieu of a meeting on seven occasions, and the audit committee
met four times.

Dr. Damadian receives no cash compensation for serving on the Board. The other
directors are each paid $20,000 per year in their capacities as directors.

The Company's Board of Directors has an audit committee. There is no standing
compensation committee or nominating committee.

In accordance with the Nasdaq Marketplace Rules, the Board of Directors adopted
a written charter for the audit committee which took effect in June, 2001. All
of the directors on the audit committee are independent.

AUDIT COMMITTEE

The Audit Committee, which is comprised of independent directors, is governed by
a Board approved charter that contains, among other things, the Committee's
membership requirements and responsibilities. The audit committee oversees the
Company's accounting, financial reporting process, internal controls and audits,
and consults with management and the independent public accountants on, among
other items, matters related to the annual audit, the published financial
statements and the accounting principals applied. As part of its duties, the
audit committee appoints, evaluates and retains the Company's independent public
accountants. It also maintains direct responsibility for the compensation,
termination and oversight of the Company's independent public accountants and
evaluates the independent public accountants' qualifications, performance and
independence.

Financial Expert on Audit Committee: The Board has determined that Mr. O'Data,
who currently is a financial consultant and finance associate in the Middle
States Association, and who previously was the Vice President for Development
for Geneva College, is the audit committee financial expert. The Board made a
qualitative assessment of Mr. O'Data's level of knowledge and experience based
on a number of factors, including his formal education and experience.

AUDIT COMMITTEE REPORT

The audit committee has (a) reviewed and discussed the audited financial
statements with management, (b) discussed with the independent auditors the
matters required to be discussed by SAS 61 and (c) has received the written
disclosures and the letter from the independent accountants required by
Independence Standards Board, Standard No. 1 and has discussed with the
independent accountants the independent accountant's independence.

Based on the foregoing review and discussions, the audit committee recommended
to the Board of Directors that the audited financial statements be included in
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2003.

The members of the audit committee are Messrs. Charles N. O'Data, Robert J.
Janoff and Mr. Robert Djerejian. Messrs. O'Data, Janoff and Djerejian are
independent directors, as defined in the Nasdaq Market Place Rules.

VOTE REQUIRED AND BOARD RECOMMENDATION

The directors will be elected by the vote of a plurality of the votes
represented at the meeting. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL OF
THE NOMINEES FOR DIRECTOR.

INFORMATION REGARDING BENEFICIAL OWNERSHIP OF PRINCIPAL STOCKHOLDERS, DIRECTORS,
AND MANAGEMENT

The following table sets forth information regarding the beneficial ownership of
the Company's common shares by the nominees for directors, the Company's Chief
Executive Officer, and the directors and executive officers as a group as of
April 16, 2004.

Name and Address of Shares Percent
Beneficial Owner (1) Beneficially Owned of Class

Raymond V. Damadian, M.D.
c/o FONAR Corporation
Melville, New York
Director, President
CEO, 5% + Stockholder
Common Stock 2,488,274 2.63%
Class C Stock 9,561,174 99.98%
Class A Preferred 477,328 6.09%

Claudette Chan
Director
Common Stock 2,648 *
Class A Preferred 800 *

Robert J. Janoff
Director
Common Stock 80,000 *
Class A Preferred 1,999 *

Charles N. O'Data
Director
Common Stock 700 *

Robert Djerejian
Director
Common Stock 0 *

All Officers, Directors and Nominees
as a Group (6 persons) (2) (3)
Common Stock 2,590,843 2.74%
Class C Stock 9,561,174 99.98%
Class A Preferred 480,165 6.13%
___________________________
* Less than one percent

1. Address provided for each beneficial owner owning more than five percent of
the voting securities of the Company.

2. Includes 101 shares of the Company's Common Stock and 19 shares of the
Company's Class A Non-voting Preferred Stock held by an officer jointly with his
wife, 2,000 shares of the Company's Common Stock held individually by the
officer and 192 shares of the Company's Common Stock and 38 shares of the
Company's Class A Non-voting Preferred Stock held in trust by an officer for his
children.

3. Includes options to purchase 16,928 shares of Common Stock held by an
officer.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See Item 13, "Certain Relationships and Related Transactions" of the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2003 which is
specifically incorporated by reference herein. A copy of the Form 10-K is
included in the Annual Report to Stockholders which is being sent to the
Company's stockholders with this Proxy Statement.)

The Company believes that each of the related transactions described therein
were on terms at least as favorable to the Company as were available from
non-affiliated parties.

COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.

With the exception of the Chief Executive Officer, Dr. Raymond V. Damadian, the
compensation of the Company's executive officers is based on a combination of
salary and bonuses based on performance. The Chief Executive Officer's
compensation consists only of a salary which has remained constant for more than
the past three fiscal years. The Board of Directors does not have a compensation
committee. Dr. Raymond V. Damadian, President, Chief Executive Officer and
Chairman of the Board, is the only executive officer who is a member of the
Board of Directors. Dr. Damadian participates in the determination of executive
compensation for the Company's officers.

As noted above, the Company's compensation policy is primarily based upon the
practice of pay-for-performance. Section 162(m) of the Internal Revenue Code
imposes a limitation on the deductibility of nonperformance-based compensation
in excess of $1 million paid to the Chief Executive Officer. No officer of the
Company received compensation in excess of $1 million in fiscal 2002 or in any
previous fiscal year. The Board currently believes that the Company should be
able to continue to manage its executive compensation program for others so as
to preserve the related federal income tax deductions.

The following table discloses compensation received for the three years ended
June 30, 2003 by the Company's Chief Executive Officer.

Name and Long-Term
Principal Position Annual Compensation Compensation All Other
Position Year Salary Other Awards Compensation
------------------- ---- ---------- ----- ------------ ------------
Raymond V. Damadian 2003 $86,799.96 0 0 0
Chairman of the; 2002 $86,799.96 0 0 0
Board; President;
Chief Executive
Officer; 2001 $86,779.96 0 0 0
Director

Compensation Pursuant to Stock Options and SAR Grants

No stock options or stock appreciation rights were granted to the Company's
Chief Executive Officer during fiscal 2003.

Option/SAR Exercises and Year End Values

No options or stock appreciation rights were exercised by the Company's Chief
Executive Officer during fiscal 2003. The Company's Chief Executive Officer did
not hold any unexercised stock options or stock appreciation rights at the end
of fiscal 2003.

Performance Graph

The following graph compares the annual change in the Company's cumulative total
shareholder return on its Common Stock during a period commencing on June 30,
1998 and ending on December 31, 2003 (as measured by dividing (i) the sum of (A)
the cumulative amount of dividends for the measurement period, assuming dividend
reinvestment and (B) the difference between the Company's share price at the end
and the beginning of the measurement period; by (ii) the share price at the
beginning of the measurement period) with the cumulative total return of each
of: (a) the CRSP Total Return Index for Nasdaq U.S. companies ("Nasdaq"); (b)
the CRSP Total Return Index for Nasdaq Medical Device Manufacturers ("Nas-MDM");
and (c) the CRSP Total Return Index for Nasdaq Health companies ("Nas-Hea.")
during such period, assuming a $100 investment on June 30, 1998. The stock price
performance on the graph below is not necessarily indicative of future price
performance.

(Performance Graph Appears Here)

Relative Dollar Values

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6/30/98 6/30/99 6/30/00 6/29/01 6/28/02 6/30/03 12/31/03
Fonar Common ------- ------- ------- ------- ------- ------- --------
Stock $100.00 $49.32 $91.76 $85.05 $86.37 $56.99 $50.42
NASDAQ-US $100.00 $143.60 $212.29 $123.25 $78.52 $87.18 $107.47
NAS-MDM $100.00 $133.53 $153.79 $144.13 $130.90 $140.25 $176.14
NAS-Hea. $100.00 $94.11 $72.64 $103.65 $98.02 $107.34 $133.84
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2. RATIFICATION OF STOCK BONUS PLANS

On May 1, 2003 the Board of Directors adopted the Company's 2003 Supplemental
Stock Bonus Plan (the "2003 Supplemental Bonus Plan") and on February 5, 2004
adopted the 2004 Stock Bonus Plan (the "2004 Bonus Plan"), which are sometimes
referred to collectively as the "Plans". The stockholders are being asked to
ratify the adoption of the Plans.

The 2003 Supplemental Stock Bonus Plan covers 5,000,000 shares of the Company's
Common Stock, and the 2004 Bonus Plan covers 2,000,000 shares of the Company's
Common Stock.

The 2003 Supplemental Stock Bonus Plan permits the granting of stock bonuses
until April 30 , 2013, in the discretion of the Stock Bonus Committee or the
Board of Directors of the Company, to employees, directors, advisors and
consultants for services rendered or to be rendered to the Company or any of its
subsidiaries.

The 2004 Stock Bonus Plan permits the granting of stock bonuses until February
4, 2014, in the discretion of the Stock Bonus Committee or the Board of
Directors of the Company, to employees, directors, advisors and consultants for
services rendered or to be rendered to the Company or any of its subsidiaries.

The purpose of the Plans is to enable persons performing valuable services for
the Company to acquire a proprietary interest in the Company through the
ownership of its Common Stock. Management believes that such ownership provides
such persons with a more direct stake in the future welfare of the Company and
encourages them to remain in the service of the Company or its subsidiaries and
that the Plans will assist the Company in obtaining and retaining the services
of such persons.

Restrictions may be imposed on resale (by officers, directors and 10%
stockholders) of the shares of Common Stock purchased under the Plans by the
provisions of Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). In addition, any participant who may be deemed an affiliate of
the Company, as defined by the Securities and Exchange Commission, may be
required to utilize a separate prospectus to reoffer or resell such shares
unless an exemption is applicable. The Stock Bonus Committee or Board of
Directors may impose restrictions on shares of Common Stock issued pursuant to
the Bonus Plans.

THE PLANS

The following is a summary of certain provisions of the Plans. The summary does
not purport to be complete and is qualified in its entirety by reference to the
provisions of the Plans. Copies of the 2003 Supplemental Stock Bonus Plan and
2004 Stock Bonus Plan are attached hereto as Exhibit A.

The Plans are administered by Committees appointed by the Board of Directors of
the Company, consisting of individuals who serve at the discretion of the Board
and who are eligible to receive stock bonuses under the Plans. In the absence of
any Committees, the Plans will be administered directly by the Board of
Directors. The Committees determine, among other things, who will receive stock
bonuses, when the options or stock bonuses will be received and the number of
shares covered by each stock bonus. The two members of the Committees are
officers of the Company, and Dr. Raymond V. Damadian, one of the members of the
Committees, is also Chairman of the Board of Directors and the principal
stockholder of the Company.

Bonus stock awards granted under the Plans are not assignable except by will or
the laws of descent and distribution. There are no restrictions on the
recipient's transfer of the shares, however, once he or she receives the shares.

The Plans will remain in effect until the earlier of such time as all shares
covered by the Bonus Plans have been issued or April 30, 2013 in the case of the
2003 Stock Supplemental Bonus Plan and February 4, 2014 in the case of the 2004
Stock Bonus Plans. No stock bonuses may be granted under the Bonus Plans after
those dates. Common Stock covered by the Plans may be either treasury shares or
authorized and unissued shares.

The Board of Directors has the right to amend, suspend or terminate the Plans at
any time, except that it may not, without stockholder approval, increase the
maximum number of shares covered by the Plans or change the maximum period
during which stock awards may be granted under the Plans.

In the event of stock dividends, stock splits and similar changes involving the
Common Stock of the Company, the Committees shall take such action as in their
judgment is necessary to change the aggregate number of shares of Common Stock
or other securities or property available under Plans to reflect such changes in
the Common Stock. The determination of the Committees will be conclusive and
binding upon the participants in the Plans.

The Plans are not subject to any provisions of the Employee Retirement Income
Security Act of 1974, as amended, nor do the Plans qualify under Section 401(a)
of the Code.

Federal and Tax Consequences. The grant of stock bonuses under the 2003
Supplemental Stock Bonus Plan and 2004 Stock Bonus Plan will result in
compensation to the employee which must be recognized as ordinary income on the
date the stock bonus is granted. The amount of income will be the fair market
value of the stock on the date the stock bonus is granted. The Company will be
entitled to a deduction (provided applicable withholding or reporting
requirements are met) for Federal income tax purposes at the same time in the
same amount as the employee is required to recognize income.

Upon a subsequent sale or taxable exchange of the shares acquired as a result of
stock bonuses, an employee will realize long or short-term capital gain or loss
equal to the difference between the amount realized on the sale and the amount
of income recognized on the grant of the stock bonus (his tax basis).

The foregoing is only a brief summary of the applicable federal income tax laws
and should not be relied upon as being a complete statement. The federal tax
laws are complex, and they are subject to legislative changes and new or revised
judicial or administrative interpretations. In addition to the federal income
tax consequences described herein, the grant of stock awards under the Plans may
also have state and local tax consequences.

The affirmative vote of shares holding a majority of the votes represented at
the meeting is required to ratify the adoption of the Plans. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL.

3. RATIFICATION OF SELECTION OF AUDITORS

The Board of Directors has selected Marcum & Kliegman LLP, as the Company's
independent auditors for the fiscal year ending June 30, 2004. The stockholders
will be asked to ratify this action by the Board. Grassi & Co., CPA's, P.C. were
the Company's auditors for the fiscal year ended June 30, 2001. The Company
changed accounting firms when the individual accountants handling the Company's
matters moved to Marcum & Kliegman LLP. Marcum & Kliegman LLP were the Company's
auditors for the fiscal years ended June 30, 2002 and June 30, 2003..

The Company's previous auditors, Tabb, Conigliaro & McGann, P.C., merged into
Grassi & Co., CPAs, P.C. Tabb, Conigliaro & McGann were the Company's auditors
for the fiscal years ending June 30, 1990 through June 30, 2000.

One or more representatives of Marcum & Kliegman LLP, are expected to be present
at the Meeting with the opportunity to make a statement if they desire to do so,
and to be available to respond to appropriate questions.

The affirmative vote of shares holding a majority of the votes represented at
the meeting is required to ratify the selection of auditors by the Board of
Directors. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL.

AUDIT FEES

The aggregate fees billed by Marcum & Kliegman LLP for the audit of the
Company's annual financial statements for the fiscal year ended June 30, 2003
and the reviews of the financial statements included in the Company's Forms 10-Q
for the fiscal year ended June 30, 2003 were $460,805.

The aggregate fees billed by Marcum & Kliegman for the audit of the Company's
annual financial statements for the fiscal year ended June 30, 2002 and the
reviews of the financial information included in the Company's Forms 10-Q for
the fiscal year ended June 30, 2002 were $411,020.

FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION

No fees were billed by Marcum & Kliegman LLP for the fiscal years ended June 30,
2003 or June 30, 2002 for designing, operating, supervising or implementing any
of the Company's financial information systems or any hardware or software
systems for the Company's financial information.

TAX FEES

The aggregate fees billed by Marcum & Kliegman LLP for tax compliance, tax
advise and tax planning in the fiscal year ended June 30, 2003 were $189,094.

The aggregate fees billed by Grassi & Co., CPAs, P.C. for tax compliance, tax
advise and tax planning in the fiscal year ended June 30, 2002 were $194,922.

ALL OTHER FEES

The aggregate fees billed by Marcum & Kliegman LLP for all other services
rendered by them during the fiscal years ended June 30, 2003 and June 30, 2002
were $124,417 and $190,111, respectively, which included services in connection
with the registration of securities, internal control reviews, employee benefit
plan audits and reviews and procedures that the Company requested Marcum &
Kliegman to undertake to provide assurances on matters not required by laws or
regulations.

Since January 1, 2003, the audit committee has adopted policies and procedures
for pre-approving all non-audit work performed by its auditors. Specifically,
the committee must pre-approve the use of the auditors for all such services.

The Company's audit committee believes that the provision by Marcum & Kliegman
LLP of services in addition to audit services in fiscal 2003 and 2002 were
compatible with maintaining their independence.

All persons performing work on behalf of Marcum & Kliegman LLP in connection
with their engagement to audit the Company's financial statements for the fiscal
year ended June 30, 2002 had been full-time permanent employees of Grassi & Co.,
CPAs, P.C.

PROPOSALS OF STOCKHOLDERS

Proposals of stockholders intended to be presented at the 2005 annual meeting of
stockholders must be received by the Company no later than February 4, 2005 to
be included in the Company's proxy statement and form of proxy related to that
meeting.

SOLICITATION OF PROXIES

The proxy accompanying this Proxy Statement is solicited by the Board of
Directors of the Company. Proxies may be solicited by officers, directors, and
regular supervisory and executive employees of the Company, none of whom will
receive any additional compensation for their services. Such solicitations may
be made personally, or by mail, e-mail, facsimile, telephone, telegraph, or
messenger. The Company will pay persons holding shares of common stock in their
names or in the names of nominees, but not owning such shares beneficially, such
as brokerage houses, banks, and other fiduciaries, for the expense of forwarding
solicitation materials to their principals. All of the costs of solicitation of
proxies will be paid by the Company.

VOTING TABULATION

The election of the Company's directors requires a plurality of the votes
represented in person or by proxy at the meeting. The ratification of the Plans
and the selection of auditors requires the affirmative vote of a majority of the
votes represented in person or by proxy at the meeting. Votes cast by proxy or
in person at the meeting will be tabulated by the Company.

A stockholder who abstains from voting on any or all proposals will be included
in the number of shareholders present at the meeting for the purpose of
determining the presence of a quorum. Abstentions will not be counted either in
favor of or against the election of the nominees or other proposals. Under the
rules of the National Association of Securities Dealers, brokers holding stock
for the accounts of their clients who have not been given specific voting
instructions as to a matter by their clients may vote their clients' proxies in
their own discretion. Where a proposal requires a majority of the votes present
for its passage, an abstention or non-vote will have the same effect as a
negative vote.

OTHER MATTERS

The Board of Directors does not intend to bring any other business before the
meeting, and so far as is known to the Board, no matters are to be brought
before the meeting except as specified in the notice of the meeting. However, as
to any other business which may properly come before the meeting, it is intended
that proxies, in the form enclosed, will be voted in respect thereof in
accordance with the judgment of the persons voting such proxies.

DATED: Melville, New York, April 27, 2004

A COPY OF THE COMPANY'S FORM 10-K REPORT FOR FISCAL YEAR 2003, CONTAINING
INFORMATION ON OPERATIONS, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, IS
AVAILABLE UPON REQUEST. PLEASE WRITE TO:

INVESTOR RELATIONS DEPARTMENT
FONAR CORPORATION
110 MARCUS DRIVE
MELVILLE, NEW YORK 11747

EXHIBIT A

2003 SUPPLEMENTAL STOCK BONUS PLAN

1. Purposes of the Plan.

The purpose of this Stock Bonus Plan (the "Plan") is to assist FONAR
Corporation, a Delaware corporation (the "Corporation"), and its subsidiaries
(as hereinafter defined) in attracting and retaining the services of key
employees, non-employee directors, officers, advisors and consultants, and to
secure for the Corporation and its subsidiaries the benefits of the incentive
inherent in ownership of the Corporation's equity securities by parties who are
responsible for the continuing growth and success of the Corporation and its
subsidiaries.

For the purposes of this plan, the term "subsidiary" and/or "subsidiaries"
shall mean any corporation of which the majority of the outstanding voting stock
is owned directly or indirectly by the Corporation.

2. Shares Subject to the Plan.

Subject to the provisions of Section 7 of the Plan, an aggregate of
5,000,000 shares of Common Stock, par value $.0001 per share, of the Corporation
("Common Stock"), are available for the issuance under the Plan as compensation
for services to the Corporation ("Bonus Stock").

The shares to be issued as Bonus Stock under the Plan may be authorized but
unissued shares of Common Stock or issued shares of Common Stock which are held
in the treasury of the Corporation.

3. Term of the Plan.

Subject to the provisions of Section 8 and 10, the Plan shall commence
effective as of May 1, 2003, and Bonus Stock awarded under the Plan must be
issued no later than April 30, 2013.

4. Administration of the Plan.

The Plan shall be administered by a committee which shall consist of two or
such greater or lesser number of members, as determined by the Board of
Directors from time to time, who shall be appointed by the Board of Directors of
the Corporation (the "Committee") or, in the absence of such a Committee, by the
Board of Directors of the Corporation. Directors of the Corporation who are
either eligible to receive Bonus Stock, or to whom Bonus Stock has been granted,
may vote on any matters affecting the administration of the plan or the granting
of Bonus Stock under the Plan. Any action of the Committee may be taken by a
written instrument signed by a majority of the members of the Committee then in
office. Members of the Committee need not be members of the Board of Directors.

Subject to the express provisions of the Plan, the Committee or the Board
or Directors, as the case may be, shall have the authority, in its discretion:
(i) to determine the parties to receive Bonus Stock, the times when they shall
receive such awards, the number of shares to be issued, and the time, terms and
conditions of the issuance of any such shares; (ii) to construe and interpret
the terms of the Plan; (iii) to establish, amend and rescind rules and
regulations for the administration of the Plan; and (iv) to make all other
determinations necessary or advisable for administering the Plan. The
determinations of the Committee or the Board of Directors, as the case may be,
on the matters referred to in this Section 4 shall be final and conclusive.

5. Eligibility and Selection.

The Committee or the Board of Directors, as the case may be, shall have
sole and absolute discretion to issue Bonus Stock under the Plan to reward
employees, non-employee directors, advisors and consultants for services
rendered or to be rendered to or for the benefit of the Corporation, or any of
its subsidiaries (the grant of Bonus Stock under this Plan shall be referred to
as a "Bonus Stock Award"). In determining the parties to whom Bonus Stock Awards
shall be granted under the Plan and the number of shares of Common Stock which
may be granted to such persons, the Committee or the Board of Directors, as the
case may be, shall consider the duties of the parties, their present and
potential contributions to the success of the Corporation, and such other
factors as the Committee or the Board of Directors deems relevant in furthering
the purposes of the granting of such Bonus Stock and the interests of the
Corporation. A party may receive more than one Bonus Stock Award under the Plan.

6. Bonus Stock Awards.

(a) The Committee or the Board of Directors, as the case may be, shall
determine for each party chosen to participate in the Plan ("Participant") the
number of shares of Common Stock to be covered by each Bonus Stock Award and the
installments, if any, in which the Bonus Stock will be granted.

(b) The Committee or the Board of Directors shall determine the terms,
conditions and restrictions, if any, to which such Bonus Stock or its issuance
will be subject. Any restrictions imposed shall be evidenced by a written
agreement executed by the Participant. Such agreement shall also include any
terms and conditions required by applicable securities laws.

(c) The Corporation shall deliver to the Participant on the date specified,
or as soon thereafter as is practicable, the number of shares of Common Stock
specified in such Participant's Bonus Stock Award, subject to and in accordance
with the Bonus Stock Award.

(d) Bonus Stock Awards shall not be transferable other than by the last
will and testament of the holder of the Bonus Stock Award or the applicable laws
of descent and distribution. Bonus Stock Awards may not be assigned, sold,
transferred, pledged, hypothecated or disposed of in any way (whether by
operation of law or otherwise) except to the extent expressly provided for in
the Plan and shall not be subject to execution, attachment or similar process.

7. Dilution and Other Adjustments.

In the event of any change in the outstanding Common Shares by reason of
any stock dividend or split, recapitalization, merger, consolidation,
reorganization, combination or exchange of shares of Common Stock, or other
similar corporate change, the Committee or the Board of Directors, as the case
may be, shall make such adjustments as it, in its absolute discretion, deems
equitable in the number of kind of shares of Common Stock authorized by the Plan
and, with respect to outstanding shares of Common Stock covered by Stock Bonus
Awards but not yet issued, in the number of kind of stock covered by Stock Bonus
Awards made under the Plan.

8. Termination and Amendment of the Plan.

Unless sooner terminated, as hereinafter provided, this Plan shall
terminate at 11:59 p.m. on April 30, 2013, and no Bonus Stock shall be granted
hereunder after that date. The Board of Directors may terminate or amend this
Plan at any time without notice, or make such modifications of this Plan as it
shall deem advisable. No termination, amendment or modification of the Plan may
adversely affect the rights of any party to whom a Bonus Stock Award has been
made without such party's consent.

9. Indemnification.

In addition to such other rights of indemnification as they may have as
directors or as members of the Committee, the members of the Committee and the
Board of Directors shall be indemnified by the Corporation against the
reasonable expenses, including attorney's fees actually and necessarily incurred
in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan or any Bonus Stock Award granted thereunder, and against all amounts paid
by them in settlement thereof (provided that such settlement is approved by the
Corporation) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudicated in such action, suit or proceeding that such Committee member or
director, as the case may be, is liable for negligence or misconduct in the
performance of his duties; provided that within 10 days after institution of any
such action, suit, or proceeding a Committee member or director, as the case may
be, shall offer the Corporation in writing the opportunity, at its own expense,
to handle and defend the same.

10. Effectiveness of the Plan.

The Plan shall become effective on May 1, 2003.

2004 STOCK BONUS PLAN

1. Purposes of the Plan.

2. Shares Subject to the Plan.

Subject to the provisions of Section 7 of the Plan, an aggregate of
2,000,000 shares of Common Stock, par value $.0001 per share, of the Corporation
("Common Stock"), are available for the issuance under the Plan as compensation
for services to the Corporation ("Bonus Stock").

The shares to be issued as Bonus Stock under the Plan may be authorized but
unissued shares of Common Stock or issued shares of Common Stock which are held
in the treasury of the Corporation.

3. Term of the Plan.

Subject to the provisions of Section 8 and 10, the Plan shall commence
effective as of February 4, 2004, and Bonus Stock awarded under the Plan must be
issued no later than February 3, 2014.

4. Administration of the Plan.

5. Eligibility and Selection.

6. Bonus Stock Awards.

7. Dilution and Other Adjustments.

8. Termination and Amendment of the Plan.

Unless sooner terminated, as hereinafter provided, this Plan shall
terminate at 11:59 p.m. on February 3, 2014, and no Bonus Stock shall be granted
hereunder after that date. The Board of Directors may terminate or amend this
Plan at any time without notice, or make such modifications of this Plan as it
shall deem advisable. No termination, amendment or modification of the Plan may
adversely affect the rights of any party to whom a Bonus Stock Award has been
made without such party's consent.

9. Indemnification.

10. Effectiveness of the Plan.

The Plan shall become effective on February 4, 2004.

ANNUAL REPORT 2003

PRESIDENT'S MESSAGE TO STOCKHOLDERS
Reports Most Recent Calendar Quarter of Unit Sales at 16 Stand-Up MRIs

Dear Stockholders:

I am pleased to report to you that Fonar is finally becoming the success that
our stockholders have patiently been waiting for and our employees have been so
diligently working towards.

Booming Sales and Installations

In last year's shareholder letter, I reported to you that we had at that point
sold 38 Stand-Up MRIs and installed 18. Now I am pleased to deliver the good
news that we have, in just one year's time, doubled those numbers. As of the
March 31, 2004, the end of the 3rd Quarter of Fiscal 2004, we had sold 76
Stand-Up(TM) MRIs and installed 40. Some of these sales have not been previously
announced.

A chart and table of the Stand-Up(TM) MRI sales is provided. Notice the cyclical
nature of sales during the year with the April 1 to June 30 quarter being
greatest, followed by the January 1 to March 31 quarter.

FONAR CORPORATION
Stand-Up(TM) MRI Unit Sales per Quarter
---------------------------------------
2000-'01 2001-'02 2002-'03 2003-'04
Jul-Sep ** 1 6 8
Oct-Dec 1 2 2 5
Jan-Mar 1 4 4 16
Apr-Jun 6 9 11 ***

** This period is prior to commencement of Stand-Up MRI sales
*** Current period

(Chart provided in 2003 Annual Report)

The Stand-Up(TM) MRI - The World's Only Position Imaging MRI Scanner

Seeing Pathology that Lie-Down MRIs Miss

There are three major reasons for the success of the Stand-Up MRI product.
First, the Stand-Up(TM) MRI detects pathology that lie-down MRI scanners can
miss. The importance of this feature to physicians must not be underestimated.
Certain medical problems manifest themselves only when patients are in a
particular position. Every one of our competitors' whole-body MRI scanners can
only scan patients lying down. If the problem can only be seen, say, when the
patient is sitting up, then a recumbent-only scanner will miss it. Only the
Stand-Up(TM) MRI will detect it. With the Stand-Up(TM) MRI, patients can be
scanned in any position, including sitting, standing, bending, in flexion and
extension, or lying down. We call this unique ability Position Imaging(TM)
(pMRI(TM)). The ability of the Stand-Up MRI to scan a patient in a
weight-bearing position or in any other position in which the patient
experiences pain or other symptoms has enabled it to detect pathologies that
went undetected on conventional lie-down (recumbent) MRI scanners.

Dr. Francis Smith, a researcher at the University of Aberdeen in Scotland
scanned 63 patients with unexplained low back pain on the University's Stand-Up
MRI. In the scientific paper he delivered at the November 2003 meeting of the
Radiological Society of North America in Chicago, Dr. Smith reported that he
found that 10% of the patients had a previously unsuspected spinal instability.
He also discovered "in 56 cases there was obvious prolapse of the intervertebral
disc, whose degree of prolapse changed between the neutral position and either
flexion or extension."

This is key information. The National Center for Health Statistics reports that
"14% of new patient visits to physicians each year are due to low back pain, and
almost 13 million physician visits per year occur because of chronic low back
pain." Back pain is second only to the common cold as a cause of lost time from
work. Accordingly, it comes as no surprise that roughly half of all MRI scans
performed today are of the spine. Thus Position Imaging(TM) provides a very
important contribution to the practice of medicine.

Regarding surgeons and lie-down-only MRIs, multiple Stand-Up MRI owner Dr.
Manuel Rose said, "Relying solely on an MRI exam of a supine patient is
inadequate. Through no fault of their own, surgeons are at a serious
disadvantage that could consequently result in failed surgeries. With the
Stand-Up(TM) MRI, the surgeon can, for the first time, visualize pathology in
both the supine and upright positions, allowing him to accurately evaluate the
full extent of the problem." It is no wonder that the Stand-Up(TM) MRI continues
to be the most exciting and talked-about advancement in the field of MRI.

Extraordinary Quality

The second reason for the success of this product is that the Stand-Up(TM) MRI
is built upon a proven platform of 0.6 Tesla technology, which means the
Stand-Up(TM) MRI produces images of exceptional quality. FONAR introduced
high-field Open MRI and remains the most experienced provider of this
technology.

Our R&D scientists and engineers constantly strive to improve the product. For
example, tremendous strides have been made over the past year in the development
of RF receiver coils. Our ever-expanding offering of quadrature and planar
receiver coils improve the quality of images and allow for more accurate
diagnoses. I am pleased that our staff of scientists and engineers is equipped
and eager to continue to advance the opportunities offered by the only
whole-body diagnostic machine in the world that is capable of scanning patients
in virtually any position.

An Unparalleled Level of Patient Comfort

The third reason for the success of this product is that it is simply the most
Patient-Friendly(TM) MRI scanner in the world. We hear it from our users all the
time, "Patients love the Stand-Up(TM) MRI." What a welcome difference from the
highly claustrophobic and noisy "tube," or "tunnel," MRIs that the public has
unfortunately become accustomed to!

Stand-Up(TM) MRI patients typically sit and watch a 42-inch flat screen TV
throughout their scans. Patients anxious about the confining space of MRI
scanners and their noise who had repeatedly failed to tolerate other MRIs,
including "open" MRIs, are regularly scanned at Stand-Up(TM) MRI centers. These
patients are invariably relieved and extremely grateful to finally have their
problems addressed and to be able to proceed with their treatment plans.
Moreover the rising obesity problem in the U.S. has generated a remarkable
increase in patients that are too large to be scanned in any MRI other than the
Fonar Stand-Up(TM) MRI. The record to date for a Fonar upright scan is 492 lbs.

Marketing Events

In the past, our major marketing event has been our exhibition at the
November/December annual meeting of the Radiological Society of North America
(RSNA) in Chicago. Attended by 60,000, it is the largest medical meeting in the
world. Our targeted customers at RSNA are primarily independent radiology groups
and hospitals.

Surgeons, particularly spine surgeons, comprise another very important market
for our product, because the Stand-Up(TM) MRI is the only diagnostic modality
that can give surgeons the complete picture of their patients' problems. Only
the Stand-Up(TM) MRI can enable the evaluation of pathology in different
positions and under weight-bearing and non-weight-bearing conditions, providing
key information that surgeons need to optimize their surgical results and reduce
the risk of failed surgeries.

Accordingly, we are actively addressing the surgical marketplace by presenting
the Stand-Up(TM) MRI at surgery and surgery-related meetings throughout the
year. In October, 2003, we attended the 18th annual meeting of the North
American Spine Society (NASS) in San Diego, California. Attended by 2500 spine
surgeons, the FONAR's first-time exhibit was the 5th largest of the 130 exhibits
on the floor of the show. In March, 2004, we exhibited at the 71st annual
meeting of the American Academy of Orthopedic Surgeons (AAOS) in San Francisco,
California. Attended by 30,000, including 14,000 orthopedic surgeons and related
healthcare professionals, FONAR's 2nd-time exhibit was among the larger of some
400 technical exhibits. Our attendance at RSNA, NASS and AAOS has produced a
substantial number of qualified sales leads. In May 2004, we will be attending,
for the first time, the annual meeting of the America Association of
Neurological Surgeons (AANS) in Orlando, Florida. Estimated attendance for that
meeting is approximately 3000 neurosurgeons and related healthcare professionals

HMCA

Health Management Corporation of America (HMCA), our wholly-owned physician and
diagnostic services management subsidiary, has undergone some very positive
changes. With the opening of Stand-Up MRI of Boca Raton, P.A., we now have four
HMCA-managed Stand-Up(TM) MRI scanning centers in operation. In March, 2004, our
Islandia, New York facility, the first HMCA-managed Stand-Up(TM) MRI facility,
completed over 450 scans. This center produced $1.1 million in operating income
in fiscal 2003. Our Bensonhurst, New York facility, the second HMCA-managed
Stand-Up MRI facility, completed over 400 scans for the first time; and the
Staten Island, New York facility, our third, completed over 200 scans.

Our plan is to complete Stand-Up(TM) MRI upgrades at as many HMCA-managed sites
as possible. At present, HMCA manages 10 diagnostic imaging centers, primarily
in New York and Florida, and plans to expand the number of its Stand-Up(TM) MRI
centers as quickly as capital allows. We are now in the process of installing a
Stand-Up(TM) MRI in East Elmhurst, New York, which will become the HMCA's 5th
Stand-Up MRI facility.

HMCA has completed the process of closing poor-performers, including some
multi-specialty practices and MRI scanning facilities, and we are planning to
upgrade all the remaining HMCA scanning centers with new FONAR scanners. While
the closing down of poor performers results in a temporary loss of management
revenues, the savings in expenses will more than compensate and thereby
ultimately add to Fonar's profitability.

Revenues Growing

FONAR has also experienced eight (8) consecutive years of growth in total
revenue, from under $14M in Fiscal 1996 to approximately $52.9M in Fiscal 2003.
I am pleased to report that results from the first two quarters of Fiscal 2004
show that the trend is continuing.

Total Revenues Table for the Past 3 1/2 Years
---------------------------------------------
Fiscal 2001 $42,273,000
Fiscal 2002 $43,161,000
Fiscal 2003 $52,892,000
1st 6 Months of Fiscal 2004 $31,191,000

My Sincere Thanks to Our Stockholders and Employees

We are becoming successful. Revenues are on the increase and sales are up. We
now have over 76 Stand-Up(TM) MRI sales, more than twice the number we had at
this time last year. Most of our sales have been to multiple-unit purchasers;
perhaps the most potent endorsement of our product.

I believe that our decision to focus our time, energy and resources on the
development, sales and marketing of the Stand-Up(TM) MRI is finally delivering
the results that we have all so diligently been working towards.

I remain grateful to FONAR employees and stockholders, especially the ones who
have stood by us for so many years.

It's been said, "A rising tide lifts all boats." I see Upright Imaging(TM),
which only the Stand-Up(TM) MRI can provide, on the rise. Interest is
continually growing. Among physicians of all specialties, orthopedic surgeons,
neurosurgeons, radiologists, hospitals, and independent diagnostic centers. I
believe as the tide of Upright Imaging(TM) continues to rise, it will be Fonar
customers and their patients, FONAR employees, and FONAR stockholders that will
rise along with it.

Sincerely,

Raymond V. Damadian
President and Chairman

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
---------------------

FORM 10-K
---------------------

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required] For the fiscal year ended June 30, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 [No Fee Required] For the transition
period from _____________ to _____________

Commission File No. 0-10248
---------------------------

FONAR CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 11-2464137
(State of incorporation) (IRS Employer Identification Number)

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

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

_____________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of Class)
______________________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes ___X___ No _______

Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Regulation S-K (ss.229.405 of this Chapter), is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
10-K or any amendment to the Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

Yes ___X___ No _______

As of September 3, 2003, 85,890,712 shares of Common Stock, 4,153 shares of
Class B Common Stock, 9,562,824 shares of Class C Common Stock and 7,836,287
shares of Class A Non-voting Preferred Stock of the registrant were outstanding.
The aggregate market value of the approximately 83,301,869 shares of Common
Stock held by non-affiliates as of such date (based on the closing price per
share on September 3, 2003 as reported on the NASDAQ System) was approximately
$144,945,252 million. The other outstanding classes do not have a readily
determinable market value.

DOCUMENTS INCORPORATED BY REFERENCE
None

PART I
ITEM 1. BUSINESS
GENERAL

FONAR Corporation (the "Company" or "FONAR") is a Delaware corporation which was
incorporated on July 17, 1978. The Company's address is 110 Marcus Drive,
Melville, New York 11747 and its telephone number is (631) 694-2929. FONAR also
maintains a WEB site at www.fonar.com.

FONAR is engaged in the business of designing, manufacturing, selling and
servicing magnetic resonance imaging ("MRI" or "MR") scanners which utilize MRI
technology for the detection and diagnosis of human disease. FONAR's founders
built the first scanner in 1977 and FONAR introduced the first commercial MRI
scanner in 1980. FONAR is the originator of the iron-core non-superconductive
and permanent magnet technology.

FONAR's iron frame technology made FONAR the originator of "open" MRI scanners.
FONAR introduced the first "open" MRI in 1980. It has concentrated since on
further application of its "open" MRI, introducing the Stand-Up(TM) Brand MRI
scanner, the QUAD(TM) MRI, the Open Sky(TM) MRI and its works in progress MRI
operating room.

The product we are now most vigorously promoting is our Stand-Up(TM) MRI. The
Stand-Up(TM) MRI is unique in the industry in that it allows patients to be
scanned in a fully weight-bearing condition, such as standing, sitting or
bending in any position that causes symptoms. This means that an abnormality or
injury, such as a slipped disk can be visualized where it may not be visualized
with the patient lying down.

Health Management Corporation of America (formerly U.S. Health Management
Corporation and hereinafter sometimes referred to as "HMCA") was formed by the
Company in March 1997 as a wholly-owned subsidiary in order to enable the
Company to expand into the business of providing comprehensive management
services to medical providers. HMCA provides management services, administrative
services, office space, equipment, repair and maintenance service and clerical
and other non-medical personnel to physicians and other medical providers,
including diagnostic imaging centers.

See Note 20 to the Financial Statements for separate financial information
respecting the Company's medical equipment and physician and diagnostic
management services segments.

FORWARD LOOKING STATEMENTS.

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

RECENT DEVELOPMENTS AND OVERVIEW.

The Company's products and works-in-progress are intended to significantly
improve the Company's competitive position. The Company's products are the
Stand-Up(TM) MRI, the Fonar 360(TM), the QUAD(TM) MRI scanner and the Echo(TM)
MRI scanner.

The Stand-Up(TM) MRI permits, for the first time, MRI diagnoses to be made in
the weight-bearing state. The Stand-Up(TM) MRI is the only MRI scanner which
allows patients to be scanned while standing, sitting or reclining, either
horizontally or at an angle. This means that an abnormality or injury, such as a
slipped disk, will be able to be scanned under full weight-bearing conditions,
or, more often than not, in the position in which the patient experiences pain.
An elevator built into the floor brings the patient to the desired height in the
scanner. An adjustable bed allows the patients to stand, sit or lie on their
backs, sides or stomachs at any angle. In the future the Stand-Up(TM) MRI may
also be useful for MRI directed surgical procedures.

We are vigorously promoting sales of the Stand-Up(TM) MRI which we regard as our
most promising product. The market for the Stand-Up(TM) shows strong progress.
During the fiscal year ended June 30, 2003, we received orders for 22
Stand-Up(TM) MRI scanners as compared to 20 for the fiscal year ended June 30,
2002. Revenues recognized from the sale of Stand-Up(TM) MRI scanners increased
in fiscal 2003 by 119% over fiscal 2002 from approximately $11.1 million in
fiscal 2002 to approximately $24.3 million in fiscal 2003. The following chart
shows the revenues attributable to our different model scanners for the fiscal
years ended June 30, 2002 and June 30, 2003. Note that we recognize revenue on a
percentage of completion basis. Accordingly, revenue is recognized as each
sub-assembly of a scanner is manufactured. Consequently the revenues for a
fiscal period do not necessarily relate to orders placed in that period.

Model Revenues Recognized
2002 2003

Stand-Up(TM) $11,089,675 $24,298,460
Fonar 360(TM) 0 0
QUAD(TM) 0 0
Echo(TM) 0 0
Beta(TM)(used) $ 361,000 $ 100,000

The Fonar 360(TM), includes the Open Sky(TM) MRI. The magnet frame is
incorporated into the floor, ceiling and sidewalls of the scan room and is open.
Consequently, physicians and family members can walk inside the magnet to
approach the patient. The Open Sky(TM) version of the Fonar 360(TM) is
decoratively designed so that it is incorporated into the panoramic landscape
that decorates the walls of the scan room. The ability of the Fonar 360(TM) to
give physicians direct 360 access to patients and the availability of MRI
compatible surgical instruments will also enable the Fonar 360(TM), in its
future OR-360(TM) version, to be used for image guided surgery.

The QUAD(TM) MR scanner utilizes a electromagnet and is accessible from four
sides. The QUAD(TM) was the first "open" MRI scanner at high field. The greater
field strength of the QUAD(TM)'s magnet, when enhanced by the electronics
already utilized by the Company's scanners, produces images of a quality and
clarity competitive with high field superconductive magnets. The QUAD(TM)
scanner magnet is among the highest field "open MRI" scanners in the industry.

In addition, the Company offers a low cost, low-field strength open MRI scanner,
the Echo(TM).

The Company's current "works in progress" include the QUAD-S(TM) which combines
many of the features of the QUAD(TM) scanners with a superconducting magnet.
(See "Works in Progress".)

The Company's "works in progress" also include an in-office, weight-bearing
extremities scanner designed for examining the knee, foot, elbow, hand and wrist
under both weight-bearing and non-weight bearing conditions.

Fonar has an internal sales force of approximately 17 persons, concentrating on
domestic sales. Fonar continues to use manufacturer's representatives and
distributors for its foreign sales efforts. Fonar has also expanded its website
to a full-scale interactive product information desk for reaching new customers
and assisting existing customers. Fonar has been experiencing increasing scanner
sales activity originating from its website.

In March 1997, FONAR formed Health Management Corporation of America (formerly
U.S. Health Management Corporation and hereinafter sometimes referred to as
"HMCA") as a wholly-owned subsidiary for the purpose of engaging in the business
of providing comprehensive management and administrative services, office space,
equipment, repair and maintenance service for equipment and clerical and other
personnel (other than physicians) to physicians' practices and other medical
providers, including diagnostic centers.

HMCA currently is managing 11 diagnostic imaging centers, and six physical
therapy and rehabilitation practices located principally in New York State and
Florida. HMCA discontinued management of primary care offices, selling that
portion of its business in April, 2003.

PRODUCTS

The Company's principal products are its Stand-Up(TM) MRI, the Fonar 360(TM),
the QUAD(TM) scanner series and the Echo(TM).

The Stand-Up(TM) MRI is a whole-body open MRI system that enables positional MRI
(pMRI(TM)) applications, such as weight-bearing MRI studies. Operating at a
magnetic field strength of 0.6 Tesla, the scanner is a powerful, diagnostically
versatile and cost-effective Open MRI that provides a broad range of clinical
capabilities and a complete set of imaging protocols.

Patients can be scanned standing, bending, sitting, upright at an intermediate
angle or in any of the conventional recumbent positions. This multi-positional
MRI system accommodates an unrestricted range of motion for flexion, extension,
lateral bending, and rotation studies of the cervical (upper)and lumbar (lower)
spine. Previously difficult patient scanning positions can be achieved using the
system's MRI-compatible, three-dimensional, motorized patient handling system.
Patients, lying horizontally, are placed into the magnet in the conventional
manner. The system's lift and tilt functions then deliver the targeted
anatomical region to the center of the magnet. The ceiling and floor are
recessed to accommodate the full vertical travel of the table. True image
orientation is assured, regardless of the rotation angle, via computer read-back
of the table's position. Spines and extremities can be scanned in weight-bearing
states; brains can be scanned with patients either standing or sitting.

The Stand-Up(TM) MRI is exceptionally open, making it the most
non-claustrophobic whole-body MRI scanner. Patients can walk into the magnet,
stand or sit for their scans and then walk out. From the patient's point of
view, the magnet's front-open and top-open design provides an unprecedented
degree of comfort because the scanner allows the patient an unobstructed view of
the scanner room from inside the magnet, and there is nothing in front of one's
face or over one's head. The only thing in front of the patient's face during
the scan is a very large (42") panoramic TV (included with the scanner) mounted
on the wall. The bed is tilted back five degrees to stabilize a standing
patient. Special coil fixtures, a patient seat, Velcro straps, and transpolar
stabilizing bars are available to keep the patient comfortable and motionless
throughout the scanning process.

Full-range-of-motion studies of the joints in virtually any direction will be
possible, an especially promising feature for sports injuries. Full range of
motion cines, or movies, of the lumbar spine will be achieved under full body
weight.

The Stand-Up(TM) MRI will also be useful for MR-directed surgical procedures as
the surgeon would have unhindered access to the patient with no restrictions in
the vertical direction.

This easy-entry, mid-field-strength scanner should be ideal for trauma centers
where a quick MRI-screening within the first critical hour of treatment will
greatly improve patients' chances for survival and optimize the extent of
recovery.

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

The Fonar 360(TM) is presently marketed as a diagnostic scanner and is sometimes
referred to as the Open Sky(TM) MRI. In its Open Sky(TM) version, the Fonar
360(TM) serves as an open patient-friendly scanner which allows 360 access to
the patient on the scanner bed.

To optimize the patient-friendly character of the Open Sky(TM) MRI, the walls,
floor, ceiling and magnet poles are decorated with landscape murals. The patient
gap is twenty inches and the magnetic field strength, like that of FONAR's
QUAD(TM) MRI scanner, is 0.6 Tesla.

In the future, we may also develop the Fonar 360(TM) to function as an operating
room. We sometimes refer to this contemplated version of the Fonar 360(TM) as
the OR-360(TM). In its OR-360(TM) version, which is in the planning stages, the
enlarged room sized magnet and 360 access to the patient afforded by the Fonar
360(TM) would permit full-fledged surgical teams to walk into the magnet and
perform surgery on the patient inside the magnet. Most importantly the
exceptional quality of the MRI image and its exceptional capacity to exhibit
tissue detail on the image, by virtue of the nuclear resonance signal's
extraordinary capacity to create image contrast, can then be obtained real time
during surgery to guide the surgeon in the surgery. Thus surgical instruments,
needles, catheters, endoscopes and the like can be introduced directly into the
human body and guided to the malignant lesion by means of the MRI image. The
number of inoperable lesions should be greatly reduced by the availability of
this new capability. Most importantly treatment can be carried directly to the
target tissue.

A Neurosurgeon, for example, has direct access to the patient's head while the
patient is lying in the scanner and can perform image guided neurosurgery in
this magnet. The unimpeded access in the space above the patient is also useful
for surgical access, positioning of life support devises, neuro-surgical
microscopes and anaesthetic gases. It should be noted that these procedures have
not yet been performed in the scanner, although they are promising
possibilities.

With current treatment methods, therapy must always be restricted in the doses
that can be applied to the malignant tissue because of the adverse effects on
the healthy tissues. Thus chemotherapies must be limited at the first sign of
toxic side effects. The same is the case with radiation therapy. The Company
expects that with the OR-360(TM) treatment agents may be administrated directly
to the malignant tissue through small catheters or needles allowing much larger
doses of chemotherapy, x-rays, laser ablation, microwave, or if to be applied
directly and exclusively to the malignant tissue with more effective results.
Since the procedure of introducing a treatment needle or catheter under image
guidance will be minimally invasive the procedure can be readily repeated should
metastases occur elsewhere, with minimum impact on the patient beyond a
straightforward needle injection.

The presence of the MRI image during treatment will enable the operator to make
assessments during treatment if his treatment is being effective.

The interventional OR-360(TM) version of the Fonar 360(TM) is still in the
planning stages. There is not a prototype. A separate FDA submission for the
interventional 360 has not been made as yet and might not be necessary in that
it was not required of other MRI manufacturers in similar situations. We note
that other manufacturers have incorporated the use of their imaging machine for
use in interventional procedures without separate FDA submissions.

The QUAD(TM) MRI scanner utilizes a 6000 gauss (0.6 Tesla) iron core
electromagnet and is accessible from four sides. The QUAD(TM) was the first
"open" MRI scanner at high field.

In addition to the patient comfort, increased throughput and new applications
(such as MRI directed surgery and MRI breast imaging) made possible by the
QUAD(TM) scanner's open design, the QUAD(TM) is designed to maximize image
quality through an optimal combination of signal-to-noise (S/N) and
contrast-to-noise (C/N) ratios. The technical improvements realized in the
QUAD(TM)'s design over its predecessors also include increased image-processing
speed and diagnostic flexibility.

MRI directed surgery (laproscopic surgical procedures) is possible by the
QUAD(TM)'s ability to supply images to a monitor positioned next to the patient,
enabling a surgeon to view in process surgical procedure from an unlimited
number of vantage points. The openness of FONAR's QUAD(TM) scanner enables
surgeons to perform a wide range of surgical procedures inside the magnet.

Four sides are open on the QUAD(TM), thus allowing access to the scanning area
from four vantage points. In the case of breast imaging the access by a
physician permits image guided biopsy to be performed easily which is essential
once suspicious lesions are spotted. In addition to being far superior to x-ray
in detecting breast lesions because of the MRI's ability to create the soft
tissue contrast needed to see them, where x-ray is deficient in its ability to
generate the needed contrast between cancer and normal tissue, there is not the
painful compression of the breast characteristic of X-ray mammography.

The Stand-Up(TM) MRI, Fonar 360(TM) and QUAD(TM) scanners share much of the same
fundamental technology and offer the same speed, precision and image quality.
These scanners initiated the new market segment of high-field open MRI in which
the Fonar Stand-Up(TM) MRI is one of the market leaders. High-field open MRIs
operate at significantly higher magnetic field strengths and, therefore, produce
more of the MRI image-producing signal needed to make high-quality MRI images
(measured by signal-to-noise ratios, S/N).

The Stand-Up(TM) MRI, Fonar 360(TM) and QUAD(TM) scanners utilize a 6000 gauss
(0.6 Tesla field strength) iron core electromagnet. The greater field strength
of the 6000 gauss magnet, as compared to lower field open MRI scanners that
operate at 3,000 gauss (0.3 Tesla) when enhanced by the electronics already
utilized by the Company's scanners, produces images of higher quality and
clarity. Fonar's 0.6 Tesla open scanner magnets are among the highest field
"open MRI" magnets in the industry. One competitor's open scanner was recently
introduced at 0.7 Tesla field strength and differs negligibly from Fonar's 0.6
Tesla scanners.

The Stand-Up(TM) MRI, Fonar 360(TM) and QUAD(TM) scanners are designed to
maximize image quality through an optimal combination of signal-to-noise (S/N)
and contrast-to-noise (C/N) ratios. The technical improvements realized in the
scanners' design over their lower field predecessors also include increased
image-processing speed and diagnostic flexibility.

Several technological advances have been engineered into the Stand-Up(TM) MRI,
Fonar 360(TM) and QUAD(TM) scanners for extra improvements in S/N, including:
new high-S/N Organ Specific(TM) receiver coils\; new advanced front-end
electronics featuring high-speed, wide-dynamic-range analog-to-digital
conversion and a miniaturized ultra-low-noise pre-amplifier\; high-speed
automatic tuning, bandwidth-optimized pulse sequences, multi-bandwidth
sequences, and off-center FOV imaging capability.

In addition to the signal-to-noise ratio, however, the factor that must be
considered when it comes to image quality is contrast, the quality that enables
reading physicians to clearly distinguish adjacent, and sometimes minute,
anatomical structures. This quality is measured by contrast-to-noise ratios
(C/N). Unlike S/N, which increases with increasing field strength, relaxometry
studies have shown that C/N peaks in the mid-field range and actually falls off
precipitously at higher field strengths. The Stand-Up(TM) MRI, Fonar 360(TM) and
QUAD(TM) scanners operate squarely in the optimum C/N range.

The Stand-Up(TM) MRI, Fonar 360(TM) and QUAD(TM) provide various features
allowing for versatile diagnostic capability. For example, SMART(TM) scanning
allows for same-scan customization of up to 63 slices, each slice with its own
thickness, resolution, angle and position. This is an important feature for
scanning parts of the body that include small-structure sub-regions requiring
finer slice parameters. There is also Multi-Angle Oblique (MAO)(TM) imaging, and
oblique imaging.

The console for these scanners includes a mouse-driven, multi-window interface
for easy operation and a 19-inch, 1280 x 1024-pixel, 20-up, high-resolution
image monitor with features such as electronic magnifying glass and real-time,
continuous zoom and pan.

The Company also offers a low cost open scanner, the Echo(TM), which operates at
a .3 Tesla field strength. The Echo(TM) is an open upgraded version of the
Company's former principal product, the Beta(TM) MRI scanner, but open on four
sides to provide four directions for patient access instead of two.

Prior to the introduction of the Stand-Up(TM) MRI, Fonar 360(TM) and QUAD(TM)
scanners, the Ultimate(TM) 7000 scanner, introduced in 1990, was the Company's
principal product. The Ultimate(TM) scanner replaced the Company's traditional
principal products, the Beta(TM) 3000 scanner (which utilized a permanent
magnet) and the Beta(TM) 3000M scanner (which utilized an iron core
electromagnet). All of the Company's current and earlier model scanners create
cross-sectional images of the human body.

During fiscal 2003, sales of the Company's Stand-Up(TM) MRI scanners accounted
for approximately 45.9% of total revenues and 81.1% of medical equipment
revenues, as compared to 25.7% of total revenues and 68.7% of medical equipment
revenues in fiscal 2002. This dramatic increase shows the market penetration
being achieved by the Stand-Up(TM) MRI scanner and the successful reemphasis of
the Company on new product development and scanner sales.

During fiscal 2003, less than 1% of both total revenues and of medical equipment
revenues were derived from the sale of a refurbished Beta(TM) scanner and during
fiscal 2002, 1% of total revenues and 2.1% of medical equipment revenues were
derived from the sale of two refurbished Beta(TM) scanners. The Beta(TM) is an
older model scanner which the Company does not manufacture any longer.
Nevertheless, the Company can refurbish and sell used Beta(TM) scanners where
there is a demand for it.

During fiscal 2003 and fiscal 2002, sales of the Company's QUAD(TM), Fonar
360(TM) and Echo(TM) scanners accounted for none of the Company's revenues. The
Company's principal selling, marketing and advertising efforts have in the past
two years focused on the Stand-Up(TM) MRI, which it believes is a particularly
unique product, being the only MRI scanner which is both open and allows for
weight bearing imaging. Since the Company perceives that the Stand-Up(TM) MRI is
successfully penetrating the market and the Company's objective is to achieve
profitability as soon as possible, primarily through product sales, we expect to
continue our focus on the Stand-Up(TM) MRI in the immediate future. Further in
the future, the Company is optimistic that its other products and works in
progress, including the interventional or "operating room" version of the Fonar
360 (which is not yet available) and in office weight bearing extremities
scanner (one of our works in progress) will also contribute materially to
increased product sales.

The materials and components used in the manufacture of the Company's products
(circuit boards, computer hardware components, electrical components, steel and
plastic) are generally available at competitive prices. The Company has not had
difficulty acquiring such materials.

WORKS-IN-PROGRESS

All of the Company's products and works-in-progress seek to bring to the public
MRI products that are expected to provide important advances against serious
disease.

MRI takes advantage of the nuclear resonance signal elicited from the body's
tissues and the exceptional sensitivity of this signal for detecting disease.
Much of the serious disease of the body occurs in soft tissue. The principal
diagnostic modality currently in use for detecting disease, as in the case of
x-ray mammography, are diagnostic x-rays. X-rays discriminate soft tissues like
healthy breast tissue and cancerous tissue poorly because the x-ray particle
traverses the tissues almost equally thereby rendering the target film equally
exposed by the two tissues and creating healthy and cancerous shadows on the
film that differ very little in brightness. The image contrast between cancerous
and healthy tissue is poor, making the detection of breast cancers by the x-ray
mammogram less than optimal. If microscopic stones (microcalcifications) are not
present to provide the missing contrast the breast cancer goes undetected. They
frequently are not present. The maximum contrast available by x-ray with which
to discriminate disease is 4%. Brain cancers differ from surrounding healthy
brain by only 1.6% while the contrast by MRI is 25 times greater at 40%. X-ray
contrasts among the body's soft tissues are maximally 4%. Their contrast by MRI
is 32.5 times greater (130%).

On the other hand the soft tissue contrasts with which to distinguish cancers on
images by MRI are up to 180%. In the case of cancer these contrasts can be even
more marked making cancers readily visible and detectable anywhere in the body.
This is because the nuclear resonance signals from the body's tissues differ so
dramatically. Liver cancer and healthy liver signals differ by 180% for example.
Thus there is some urgency to bring to market an MRI based breast scanner that
can overcome the x-ray limitation and assure that mammograms do not miss serious
lesions. The added benefit of MRI mammography relative to x-ray mammography is
the elimination of the need for the patient to disrobe and the painful
compression of the breast typical of the x-ray mammogram. The patient is scanned
in her street clothes in MRI mammography. Moreover MRI mammogram scans the
entire chest wall including the axilla for the presence of nodes which the x-ray
mammogram cannot reach.

The Company views its Stand-Up(TM) MRI as having the potential for being the
ideal mammography machine as it permits the patient to be seated for the
examination, which would allow easy access for an MR guided breast biopsy when
needed.

The Company is developing a superconductive version of its open magnets. This
MRI scanner will combine the benefits of openess with the high field strength of
a superconducting magnet. The Company received FDA approval for its QUAD-S(TM)
product in June, 2001.

In addition, the Company's works in progress include an in-office weight bearing
extremities scanner which will be able to be used to examine the knee, foot,
elbow, hand and wrist. This scanner will allow scans to be performed in under
both weight- bearing and non-weight-bearing conditions.

PRODUCT MARKETING

The principal markets for the Company's scanners are hospitals and private
scanning centers.

Fonar's internal sales force is approximately 17 persons. Our internal sales
force handles the domestic market while we continue to use independent
manufacturer's representatives and distributors for foreign markets. In addition
to its internal domestic sales force, Fonar and General Electric Medical
Systems, a division of General Electric Company, have entered into an
arrangement pursuant to which General Electric Medical Systems acts as
independent manufacturer's representative for Fonar's Stand-Up(TM) MRI scanner.

In addition, the Company has expanded its website to include an interactive
product information desk for reaching customers. The Company plans to commence a
program for providing demonstrations of its products to potential customers on
an international basis. FONAR has been experiencing increasing scanner sales
activity originating from its website.

The Company has exhibited its new products at the annual meeting of the
Radiological Society of North America ("RSNA") in Chicago since November 1995
and plans to attend the RSNA meeting in November 2003 and future years. The RSNA
meeting is attended by radiologists from all over the world. Most manufacturers
of MRI scanners regularly exhibit at this meeting.

In 2003, the Company exhibited for the first time at the annual meeting of the
American Academy of Orthopedic Surgeons (AAOS). The Company has targeted
orthopedic surgeons as an important market for its Stand-Up(TM) MRI, and plans
to attend future AAOS meetings.

The Company is directing its marketing efforts to meet the demand for high field
open MRI scanners. Fonar plans to devote its principal efforts to marketing the
Stand-Up(TM) MRI, which is the only scanner in the industry that has the unique
capability of scanning patients under weight-bearing conditions and in various
positions of pain or other symptoms. In addition the Company will continue to
market its Fonar 360(TM), QUAD(TM) and Echo(TM) MRI scanners. Utilizing a 6000
gauss (0.6 Tesla field strength) iron core electromagnet, the Stand-Up(TM) MRI,
Fonar 360(TM) and QUAD(TM) scanner magnets are among the highest field "open
MRI" scanners in the industry.

The Company also will seek to introduce new MRI applications for its scanners
such as MRI-directed surgery, head-to-toe MRI preventive screening and an
in-office, weight-bearing, extremity MRI scanner.

The Company's areas of operations are principally in the United States. During
the fiscal year ended June 30, 2003, 3.0% of the Company's revenues were
generated by foreign sales, as compared to 5.0% and 1.7% for fiscal 2002 and
2001, respectively.

The Company is seeking to promote foreign sales and has sold scanners in various
foreign countries. Foreign sales, however, have not yet proved to be a
significant source of revenue.

SERVICE AND UPGRADES FOR MRI SCANNERS

The Company's customer base of installed scanners has been and will continue to
be an additional source of income, independent of direct sales.

Income is generated from the installed base in two principal areas namely,
service and upgrades. Service and maintenance revenues from the Company's
external installed base were approximately $2.0 million in fiscal 2001, $2.2
million in fiscal 2002 and $2.5 million in fiscal 2003.

The Company anticipates that its new line of scanners will result in upgrades
income in future fiscal years. The potential for upgrades income originates in
the versatility and productivity of the MRI technology. New medical uses for the
technology are constantly being discovered and are anticipated for the Upright
Imaging(TM) technology as well. New features can often be added to the scanner
by the implementation of little more than versatile new software packages. For
example, software can be added to existing MRI angiography applications to
synchronize angiograms with the cardiac cycle. By doing so the dynamics of blood
vessel filling and emptying can be visualized with movies. Such enhancements are
attractive to end users because they extend the useful life of the equipment and
enable the user to avoid obsolescence and the expense of having to purchase new
equipment. At the present time, however, upgrade revenue is not significant.
Upgrade revenues were approximately $386,898 in fiscal 2002 and $205,893 in
fiscal 2003.

Service and upgrade revenues are expected to increase as sales of scanners and
the size of the customer base increases.

RESEARCH AND DEVELOPMENT

During the fiscal year ended June 30, 2003, the Company incurred expenditures of
$5,955,667($791,216 of which was capitalized) on research and development, as
compared to $5,955,394 ($855,612 of which was capitalized) and
$6,621,225($754,804 of which was capitalized) incurred during the fiscal years
ended June 30, 2002 and June 30, 2001, respectively.

Research and development activities have focused principally, on the development
and enhancement of the new Stand-Up(TM) and Fonar 360(TM) MRI scanners and its
new extremities scanner. The Stand-Up(TM) MRI and Fonar 360(TM) involve
significant software and hardware development as the new products represent
entirely new hardware designs and architecture requiring a new operating
software. The Company's research activity includes developing a multitude of new
features for the upright scanning made possible by the high speed processing
power of its scanners. In addition, the Company's research and development
efforts include the development of new software, such as its "Sympulse"(TM)
software and hardware upgrade and the designing of new receiver surface coils
for the Stand-Up(TM) MRI.

BACKLOG

The Company's backlog of unfilled orders at July 1, 2003 was approximately $26.8
million, as compared to $25.5 million at July 1, 2002. Of these amounts,
approximately $4.9 million and $7.7 million had been paid to the Company as
customer advances as at July 1, 2003 and July 1, 2002, respectively. Of the
backlog amounts at July 1, 2003 and July 1, 2002, $2.5 and $6.9 million
respectively represented orders from affiliates. It is expected that the
existing backlog of orders will be filled within the current fiscal year. The
Company's contracts generally provide that if a customer cancels an order, the
customer's initial down payment for the MRI scanner is nonrefundable.

PATENTS AND LICENSES

The Company currently has numerous patents in effect which relate to the
technology and components of the MRI scanners. The Company believes that these
patents, and the know-how it developed, are material to its business.

Dr. Damadian granted an exclusive world-wide license to the Company to make, use
and sell apparatus covered by certain domestic and foreign patents in his name
relating to MRI technology. No patents covered by this license are in effect any
longer.

One of the patents, issued in the name of Dr. Damadian and covered by said
license, was United States patent No. 3,789,832, Apparatus and Method for
Detecting Cancer in Tissue (the "1974 Patent"). The development of the Beta(TM)
3000 was based upon the 1974 Patent, and Management believes that the 1974
Patent was the first of its kind to utilize MR to scan the human body and to
detect cancer. The 1974 Patent was extended beyond its original 17-year term and
expired in February, 1992. None of the recoveries with respect to the
enforcement of this patent were received by Dr. Damadian.

Historically, the patent for multiple angle oblique imaging generated
significant revenues in connection with the enforcement and settlement of our
patent litigations. As a result of these litigations and settlements, our
competitors are now entitled to use this technology as well. This patent will
expire in 2006.

The Company has significantly enhanced its patent position within the industry
and now possesses a substantial patent portfolio which provides the Company,
under the aegis of United States patent law, "the exclusive right to make, use
and sell" many of the scanner features which FONAR pioneered and which are now
incorporated in most MRI scanners sold by the industry. The Company has 84
patents issued and approximately 50 patents pending. A substantial number of
FONAR's existing patents specifically relate to protecting FONAR's position in
the high-field iron frame open MRI market. The patents further enhance Dr.
Damadian's pioneer patent (the 1974 Patent), that initiated the MRI industry and
provided the original invention of MRI scanning. The 84 issued patents expire at
various times between 2004 and 2021.

The Company has entered into a cross-licensing agreement (utilizing other than
FONAR's MRI technology) with another entity to use prior art developed for
nuclear magnetic resonance technology and has entered into a license to utilize
the MRI technology covered by the existing patent portfolio of a patent holding
company. The Company also has patent cross-licensing agreements with other MRI
manufacturers.

PRODUCT COMPETITION

MRI SCANNERS

A majority of the MRI scanners in use in hospitals and outpatient facilities and
at mobile sites in the United States are based on high field air core magnet
technology while the balance are based on open iron frame magnet technology. In
2000, the size of the MRI market in the United States was approximately $1.041
billion. In 2001, the size of the MRI market in the United States was
approximately $1.202 billion. For the first half of 2002, the size of the MRI
market in the United States was approximately $682.4 million ($1.365 annualized)
FONAR's open iron frame MRI scanners are competing principally with high-field
air core scanners. FONAR's open MRI scanners, however, utilizing a 6,000 gauss
(0.6 Tesla field strength) iron core electromagnet, were the first "open" MR
scanners at high field strength. In addition FONAR's works-in-progress include a
superconductive version of its open magnets.

FONAR believes that its MRI scanners have significant advantages as compared to
the high-field air core scanners of its competitors. These advantages include:

1. There is no expansive fringe magnetic field. High field air core scanners
require a more expensive shielded room than is required for the iron frame
scanners. The shielded room required for the iron frame scanners is intended to
prevent interference from external radio frequencies.

2. They are more open, quiet and in the case of the QUAD(TM) scanners allow for
faster throughput of patients.

3. Their annual operating costs are lower.

4. They can scan the trauma victim, the cardiac arrest patient, the
respirator-supported patient, and premature and newborn babies. This is not
possible with high- field air core scanners because their magnetic field
interferes with conventional life-support equipment.

The principal competitive disadvantage of the Company's products is that they
are not "high field strength" (1.0 Tesla +) magnets. As a general principle, the
higher field strength can produce a faster scan. In some parts of the body a
faster scan can be traded for a clearer picture. Although the Company believes
that the lower cost of its systems plus the benefits of "openness" provided by
its scanners compensate for the lower field strength, certain customers will
still prefer the higher field strength.

FONAR faces competition within the MRI industry from such firms as General
Electric Company, Philips N.V., Toshiba Corporation, Hitachi Corporation and
Siemens A.G. Most competitors have marketing and financial resources more
substantial than those available to the Company. They have in the past, and may
in the future, heavily discount the sales price of their scanners. Such
competitors sell both high field air core and iron frame products. FONAR's
current market share of the United States market for MRI scanners is under 2.0%.
FONAR introduced the first "Open MRI" in 1980. "Open MRI" was made possible by
FONAR's introduction of an MRI magnet built on an iron frame. Thus the magnetic
flux generating apparatus of the magnet (magnet coils or permanent magnet
bricks) was built into a frame of steel. The steel frame provided a return path
for the magnetic lines of force and thereby kept the magnetic lines of force
contained within the magnet. This enabled FONAR, from 1980 on, to show that the
FONAR magnet was the only magnet that allowed the patients to stretch out their
arms, the only "open" MRI.

The iron frame, because it could control the magnetic lines of force and place
them where wanted and remove them from where not wanted (such as in the
operating room where surgeons are standing), provided a much more versatile
magnet design than was possible with air core magnets. Air core magnets contain
no iron but consist entirely of turns of current carrying wire. FONAR's patented
work-in-progress superconductive iron frame magnet, however, combines the high
field capability of the air core superconductive magnets with the control and
versatility of the open iron frame magnets, thereby joining the best features of
both designs into a single magnet. Thus the air core superconductive magnets
made by Fonar's large competitors that have dominated the MRI market since 1983
remain the confining "tunnel" design that the public has generally resented.

For an 11 year period from 1983-1994, Fonar's large competitors (with one
exception) generally rejected Fonar's "open" design but by now all have added
the iron frame "open" magnet to their MRI product lines. One principal reason
for this market shift, in addition to patient claustrophobia, is the awareness
that the "open" magnet designs permit access to the patient to perform surgical
procedures under MRI image guidance, a field which is now growing rapidly and is
called "interventional MRI."

Fonar's future OR-360(TM) version of the Fonar 360(TM) explicitly addresses this
growing market reception of MRI guided surgical procedures but is not yet
available as a product. Fonar's Stand-Up(TM) and QUAD(TM) magnets do also.
Although not enabling a full operating theater as the OR-360(TM) does, the iron
frame "Open" QUAD(TM) and Indomitable designs permit ready access to the patient
from four sides and therefore enables a wide range of interventional surgical
procedures such as biopsies and needle or catheter delivered therapies to be
performed under MRI image guidance. The "tunnel" air core superconductive
scanners do not permit access to the patient while the patient is inside the
scanner.

While Fonar's current market share of the domestic MRI market is under 2.0%,
FONAR expects to be a leader in domestic open MRI market for several reasons. In
MRI, scanning speed and image quality is controlled by the strength of the
magnetic field. Fonar's Stand-Up(TM), Fonar 360(TM) and QUAD(TM) scanners
operate at 0.6 Tesla, which make them among the highest field strength open MRI
scanners. Furthermore, the Stand-Up(TM) MRI is the only MRI which allows
patients to be scanned under weight-bearing conditions. High field MRI
manufacturers convinced the marketplace for FONAR, and the marketplace accepts,
that higher field strength translates directly into superior image quality and
faster scanning speeds. No companies possess the Stand-Up(TM) MRI or Fonar
360(TM) scanners, and FONAR possesses the pioneer patents on "Open MRI"
technology.

OTHER IMAGING MODALITIES

FONAR's MRI scanners also compete with other diagnostic imaging systems, all of
which are based upon the ability of energy waves to penetrate human tissue and
to be detected by either photographic film or electronic devices for
presentation of an image on a television monitor. Three different kinds of
energy waves - X-ray, gamma and sound - are used in medical imaging techniques
which compete with MRI medical scanning, the first two of which involve exposing
the patient to potentially harmful radiation. These other imaging modalities
compete with MRI products on the basis of specific applications.

X-rays are the most common energy source used in imaging the body and are
employed in three imaging modalities:

1. Conventional X-ray systems, the oldest method of imaging, are typically used
to image bones and teeth. The image resolution of adjacent structures that have
high contrast, such as bone adjacent to soft tissue, is excellent, while the
discrimination between soft tissue organs is poor because of the nearly
equivalent penetration of x-rays.

2. Computerized Tomography ("CT") systems couple computers to x-ray instruments
to produce cross-sectional images of particular large organs or areas of the
body. The CT scanner addresses the need for images, not available by
conventional radiography, that display anatomic relationships spatially.
However, CT images are generally limited to the transverse plane and cannot
readily be obtained in the two other planes (sagittal and coronal). Improved
picture resolution is available at the expense of increased exposure to x-rays
from multiple projections. Furthermore, the pictures obtained by this method are
computer reconstructions of a series of projections and, once diseased tissue
has been detected, CT scanning cannot be focused for more detailed pictorial
analysis or obtain a chemical analysis.

3. Digital radiography systems add computer image processing capability to
conventional x-ray systems. Digital radiography can be used in a number of
diagnostic procedures which provide continuous imaging of a particular area with
enhanced image quality and reduced patient exposure to radiation.

Nuclear medicine systems, which are based upon the detection of gamma radiation
generated by radioactive pharmaceuticals introduced into the body, are used to
provide information concerning soft tissue and internal body organs and
particularly to examine organ function over time.

Ultrasound systems emit, detect and process high frequency sound waves reflected
from organ boundaries and tissue interfaces to generate images of soft tissue
and internal body organs. Although the images are substantially less detailed
than those obtainable with x-ray methods, ultrasound is generally considered
harmless and therefore has found particular use in imaging the pregnant uterus.

X-ray machines, ultrasound machines, digital radiography systems and nuclear
medicine compete with the MRI scanners by offering significantly lower price and
space requirements. However, FONAR believes that the quality of the images
produced by its MRI scanners is generally superior to the quality of the images
produced by those other methodologies.

GOVERNMENT REGULATION

FDA Regulation

The Food and Drug Administration in accordance with Title 21 of the Code of
Federal Regulations regulates the manufacturing and marketing of FONAR's MRI
scanners. The regulations can be classified as either pre-market or post-market.
The pre-market requirements include obtaining marketing clearance, proper device
labeling, establishment registration and device listing. Once the products are
on the market, FONAR must comply with post-market surveillance controls. These
requirements include the Quality Systems (QS) regulation, also known as Good
Manufacturing Practices or GMPs, and Medical Device Reporting (MDR) regulations.
The QS regulation is a quality assurance requirement that covers the design,
packaging, labeling and manufacturing of a medical device. The MDR regulation is
an adverse event-reporting program.

Classes of Products

Under the Medical Device Amendments of 1976 to the Federal Food, Drug and
Cosmetic Act, all medical devices are classified by the FDA into one of three
classes. A Class I device is subject only to certain controls, such as labeling
requirements and manufacturing practices; a Class II device must comply with
certain performance standards established by the FDA; and a Class III device
must obtain pre-market approval from the FDA prior to commercial marketing.

FONAR's products are Class II devices. Class I devices are subject to the least
regulatory control. They present minimal potential for harm to the user and are
often simpler in design than Class II or Class III devices. Class I devices are
subject to "General Controls" as are Class II and Class III devices. General
Controls include:

1.Establishment registration of companies which are required to register under
21 CFR Part 807.20, such as manufacturers, distributors, re-packagers and
re-labelers. 2.Medical device listing with FDA of devices to be marketed.
3.Manufacturing devices in accordance with the Good Manufacturing Practices
(GMP) regulation in 21 CFR Part 820. 4.Labeling devices in accordance with
labeling regulations in 21 CFR Part 801 or 809. 5.Submission of a Premarket
Notification [510(k)] before marketing a device.

Class II devices are those for which general controls alone are insufficient to
assure safety and effectiveness, and existing methods are available to provide
such assurances. In addition to complying with general controls, Class II
devices are also subject to special controls. Special controls may include
special labeling requirements, guidance documents, mandatory performance
standards and post-market surveillance.

The Company received approval to market its Beta(TM) 3000 and Beta(TM) 3000M
scanners as Class III devices on September 26, 1984 and November 12, 1985. On
July 28, 1988, the Magnetic Resonance Diagnostic Device which includes MR
Imaging and MR Spectroscopy was reclassified by the FDA to Class II status.
Consequently, Fonar's products are now classified as Class II products. On June
25, 1992, Fonar received FDA clearance to market the Ultimate(TM) Magnetic
Resonance Imaging Scanner as a Class II device. Fonar received FDA clearance to
market the QUAD(TM) 7000 in April 1995 and the QUAD(TM) 12000 in November 1995.
On March 16, 2000, Fonar received FDA clearance to market the Fonar 360(TM) for
diagnostic imaging (the Open Sky(TM) version)and on October 3, 2000 received FDA
clearance for the Stand-Up(TM) MRI. The Company received FDA clearance for the
QUAD-S(TM) on June 6, 2001 . The Company anticipates that it may need FDA
clearance for the OR-360(TM) version of the Fonar 360(TM).

Premarketing Submission

Each person who wants to market Class I, II and some III devices intended for
human use in the U.S. must submit a 510(k) to FDA at least 90 days before
marketing unless the device is exempt from 510(k) requirements. A 510(k) is a
pre-marketing submission made to FDA to demonstrate that the device to be
marketed is as safe and effective, that is, substantially equivalent (SE), to a
legally marketed device that is not subject to pre-market approval (PMA).
Applicants must compare their 510(k) device to one or more similar devices
currently on the U.S. market and make and support their substantial equivalency
claims.

The FDA is committed to a 90-day clearance after submission of a 510(k),
provided the 510(k) is complete and there is no need to submit additional
information or data.

The 510(k) is essentially a brief statement and description of the product. As
Fonar's scanner products are Class II products, there are no pre-market data
requirements and the process is neither lengthy nor expensive.

An investigational device exemption (IDE) allows the investigational device to
be used in a clinical study pending FDA clearance in order to collect safety and
effectiveness data required to support the Premarket Approval (PMA) application
or a Premarket Notification [510(k)] submission to the FDA. Clinical studies are
most often conducted to support a PMA.

For the most part, however, Fonar has not found it necessary to utilize IDE's.
The standard 90 day clearance for our new MRI scanner products classified as
Class II products makes the IDE unnecessary, particularly in view of the time
and effort involved in compiling the information necessary to support an IDE.

Quality System Regulation

The Quality Management System is applicable to the design, manufacture,
administration of installation and servicing of magnetic resonance imaging
scanner systems. The FDA has authority to conduct detailed inspections of
manufacturing plants, to establish Good Manufacturing Practices which must be
followed in the manufacture of medical devices, to require periodic reporting of
product defects and to prohibit the exportation of medical devices that do not
comply with the law.

Medical Device Reporting Regulation

Manufacturers must report all MDR reportable events to the FDA. Each
manufacturer must review and evaluate all complaints to determine whether the
complaint represents an event which is required to be reported to FDA. Section
820.3(b) of the Quality Systems regulation defines a complaint as, "any written,
electronic or oral communication that alleges deficiencies related to the
identity, quality, durability, reliability, safety, effectiveness, or
performance of a device after it is released for distribution."

A report is required when a manufacturer becomes aware of information that
reasonably suggests that one of their marketed devices has or may have caused or
contributed to a death, serious injury, or has malfunctioned and that the device
or a similar device marketed by the manufacturer would be likely to cause or
contribute to a death or serious injury if the malfunction were to recur.

Malfunctions are not reportable if they are not likely to result in a death,
serious injury or other significant adverse event experience.

A malfunction which is or can be corrected during routine service or device
maintenance still must be reported if the recurrence of the malfunction is
likely to cause or contribute to a death or serious injury if it were to recur.

Fonar has established and maintains written procedures for implementation of the
MDR regulation. These procedures include internal systems that:

provide for timely and effective identification, communication and evaluation of
adverse events;

provide a standardized review process and procedures for determining
whether or not an event is reportable; and

provide procedures to insure the timely transmission of complete reports.

These procedures also include documentation and record keeping requirements for:

information that was evaluated to determine if an event was reportable;

all medical device reports and information submitted to the FDA;

any information that was evaluated during preparation of annual
certification report(s); and

systems that ensure access to information that facilitates timely follow up
and inspection by FDA.

FDA Enforcement

FDA may take the following actions to enforce the MDR regulation:

FDA-Initiated or Voluntary Recalls

Recalls are regulatory actions that remove a hazardous, potentially hazardous,
or a misbranded product from the marketplace. Recalls are also used to convey
additional information to the user concerning the safe use of the product.
Either FDA or the manufacturer can initiate recalls.

There are three classifications, i.e., I, II, or III, assigned by the Food and
Drug Administration to a particular product recall to indicate the relative
degree of health hazard presented by the product being recalled.

Class I

Is a situation in which there is a reasonable probability that the use of, or
exposure to, a violative product will cause serious adverse health consequences
or death.

Class II

Is a situation in which use of, or exposure to, a violative product may cause
temporary or medically reversible adverse health consequences or where the
probability of serious adverse health consequences is remote.

Class III

Is a situation in which use of, or exposure to, a violative product is not
likely to cause adverse health consequences.

FONAR has initiated four Class II recalls. The recalls involved making minor
corrections to the product in the field. Frequently, corrections which are made
at the site of the device are called field corrections as opposed to recalls.

Civil Money Penalties

The FDA, after an appropriate hearing, may impose civil money penalties for
violations of the FD&C Act that relate to medical devices. In determining the
amount of a civil penalty, FDA will take into account the nature, circumstances,
extent, and gravity of the violations, the violator's ability to pay, the effect
on the violator's ability to continue to do business, and any history of prior
violations. The civil money penalty may not exceed $15,000 for each violation
and may not exceed $1,000,000 for all violations adjudicated in a single
proceeding, per person.

Warning Letters

FDA issues written communications to a firm, indicating that the firm may incur
more severe sanctions if the violations described in the letter are not
corrected. Warning letters are issued to cause prompt correction of violations
that pose a hazard to health or that involve economic deception. The FDA
generally issues the letters before pursuing more severe sanctions.

Seizure

A seizure is a civil court action against a specific quantity of goods which
enables the FDA to remove these goods from commercial channels. After seizure,
no one may tamper with the goods except by permission of the court. The court
usually gives the owner or claimant of the seized merchandise approximately 30
days to decide a course of action. If they take no action, the court will
recommend disposal of the goods. If the owner decides to contest the
government's charges, the court will schedule the case for trial. A third option
allows the owner of the goods to request permission of the court to bring the
goods into compliance with the law. The owner of the goods is required to
provide a bond (security deposit) to assure that they will perform the orders of
the court, and the owner must pay for FDA supervision of any activities by the
company to bring the goods into compliance.

Citation

A citation is a formal warning to a firm of intent to prosecute the firm if
violations of the FD&C Act are not corrected. It provides the firm an
opportunity to convince FDA not to prosecute.

Injunction

An injunction is a civil action filed by FDA against an individual or company.
Usually, FDA files an injunction to stop a company from continuing to
manufacture, package or distribute products that are in violation of the law.

Prosecution

Prosecution is a criminal action filed by FDA against a company or individual
charging violation of the law for past practices.

Foreign and Export Regulation

The Company obtains approvals as necessary in connection with the sales of its
products in foreign countries. In some cases, FDA approval has been sufficient
for foreign sales as well. The Company's standard practice has been to require
either the distributor or the customer to obtain any such foreign approvals or
licenses which may be required.

Legally marketed devices that comply with the requirements of the Food Drug &
Cosmetic Act require a Certificate to Foreign Government issued by the FDA for
export. Other devices that do not meet the requirements of the FD&C Act but
comply with the laws of a foreign government require a Certificate of
Exportability issued by the FDA. All products which Fonar sells have FDA
clearance and would fall into the first category.

Foreign governments have differing requirements concerning the import of medical
devices into their respective jurisdictions. The European Union (EU), made up of
15 individual countries, has some essential requirements described in the EU's
Medical Device Directive (MDD). In order to export to one of these countries,
FONAR must meet the essential requirements of the MDD and any additional
requirements of the importing country. The essential requirements are similar to
some of the requirements mandated by the FDA. In addition the MDD requires that
FONAR enlist a Notified Body to examine and assess our documentation (Technical
Construction File) and verify that the product has been manufactured in
conformity with the documentation. The notified body must carry out or arrange
for the inspections and tests necessary to verify that the product complies with
the essential requirements of the MDD, including safety performance and
Electromagnetic Compatibility (EMC). Also required is a Quality System
(ISO-9001) assessment by the Notified Body. Fonar was approved for ISO 9001
certification for its Quality Management System in April, 1999.

Fonar received clearance to sell the QUAD(TM) scanners in the EU in May, 1999.
Clearances for the Fonar 360(TM) and Stand-Up(TM) MRI scanners were obtained in
May, 2002.

Other countries such as China and Russia require that their own testing
laboratories perform an evaluation of our devices. This requires that we must
bring the foreign agency's personnel to the USA to perform the evaluation at
Fonar's expense before exporting.

Some countries, including many in Latin America and Africa, have very few
regulatory requirements.

Because Fonar's export sales are not material at this point, foreign regulation
does not have a material effect on Fonar. In any case, Fonar does not believe
that foreign regulation will deter its efforts to penetrate foreign markets.

Reimbursement to Medical Providers for MRI Scans

Effective November 22, 1985, the Department of Health and Human Services
authorized reimbursement of MRI scans under the Federal Medicare program. In
addition, most private insurance companies have authorized reimbursement for MRI
scans.

Anti-Kickback and Self-Referral Legislation

Proposed and enacted legislation at the State and Federal levels has restricted
referrals by physicians to medical and diagnostic centers in which they or their
family members have an interest. In addition, regulations have been adopted by
the Secretary of Health and Human Services which provide limited "safe harbors"
under the Medicare Anti-Kickback Statute. These safe harbors describe payments
and transactions which are permitted between an entity receiving reimbursement
under the Medicare program and those having an interest in or dealings with the
entity. Although the Company cannot predict the overall effect of the adoption
of these regulations on the medical equipment industry, the use and continuation
of limited partnerships (where investors may be referring physicians) to own and
operate MRI scanners could be greatly diminished.

HEALTH MANAGEMENT CORPORATION OF AMERICA (PHYSICIAN AND DIAGNOSTIC SERVICES
MANAGEMENT BUSINESS)

Health Management Corporation of America (formerly known as U.S. Health
Management Corporation and referred to as "HMCA") was organized by the Company
in March 1997. HMCA is a wholly-owned subsidiary which engages in the business
of providing comprehensive management services to physicians' practices and
other medical providers, in particular diagnostic imaging centers. The services
provided by the Company include development, administration, leasing of office
space, facilities and medical equipment, provision of supplies, staffing and
supervision of non-medical personnel, legal services, accounting, billing and
collection and the development and implementation of practice growth and
marketing strategies.

HMCA currently manages 11 MRI facilities and six physical therapy and
rehabilitation practices. In April, 2003, HMCA sold its subsidiary A&A Services,
Inc. which managed four primary care medical practices. For the 2003 fiscal
year, the revenues HMCA recognized from the MRI facilities were $13,497,837 and
the revenues recognized from the physical therapy and rehabilitation practices
were $9,435,000. The revenues recognized from the primary care medical practices
were $1,179,095 through April 9, 2003, when this part of the Company's business
was sold. These revenues have been reclassified as part of discontinued
operations in the financial statements.

HMCA GROWTH STRATEGY

HMCA's growth strategy focuses on upgrading and expanding the existing
facilities it manages and expanding the number of facilities it manages for its
clients. Our most important effort in this regard is to promote and facilitate
the replacement of existing MRI scanners with new Fonar Stand-Up(TM) MRI
scanners at the most promising locations. To date, we have installed new
Stand-Up(TM) MRI scanners at the MRI facilities we manage in Islandia, New York,
Staten Island, New York and Bensonhurst, New York. We also plan to install
Stand-Up(TM) MRI scanners at other MRI facilities we manage. The first
additional location at which we plan to install a Stand-Up(TM) MRI scanner is in
Boca Raton, Florida which will be a new site to replace the one currently
located in Deerfield Beach, Florida.

HMCA's longer range plans involve opening new MRI facilities clustered in
selected television and radio media areas in New York, Florida, Houston, Boston,
Los Angeles and Chicago, although at the present time our efforts are focused
only in the New York and Florida markets. Marketing efforts in targeted areas
include television, radio and billboard advertising.

In addition, HMCA has promoted the opening of new physical therapy and
rehabilitation offices by existing clients, expanding the number of such offices
from the initial three offices we managed in August, 1998 to the six offices we
currently manage. HMCA no longer manages any primary care offices and has no
present plans to do so. In April, 2003, HMCA sold A&A Services, Inc., a company
which it had acquired in 1998. This subsidiary managed four primary care
offices.

PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES

HMCA's services to the facilities and practices it manages encompass
substantially all of their business operations. The facilities and practices are
controlled, however, by the physician owners, not HMCA, and all medical services
are performed by the physicians and other medical personnel under their
supervision. HMCA is the management company and performs services of a
non-professional nature. These services include:

(1) Offices and Equipment. HMCA identifies, negotiates leases for and/or
provides office space and equipment to its clients. This includes
technologically sophisticated medical equipment. HMCA also provides improvements
to leaseholds, assistance in site selection and advice on improving, updating,
expanding and adapting to new technology.

(2) Personnel. HMCA staffs all the non-medical positions of its clients with its
own employees, eliminating the client's need to interview, train and manage
non-medical employees. HMCA processes the necessary tax, insurance and other
documentation relating to employees.

(3) Administrative. HMCA assists in the scheduling of patient appointments,
purchasing of medical supplies and equipment and handling of reporting,
accounting, processing and filing systems. It prepares and files the physician
portions of complex forms to enable its clients to participate in managed care
programs and to qualify for insurance reimbursement. We assist the clients to
implement programs and procedures to ensure full and timely regulatory
compliance and appropriate cost reimbursement under no-fault insurance and
workers' compensation guidelines, as well as compliance with other applicable
governmental requirements and regulations, including HIPAA and other privacy
requirements.

(4) Billing and Collections. HMCA is responsible for the billing and collection
of revenues from third-party payors including those governed by no-fault and
workers' compensation statutes.

(5) Cost Saving Programs. Based on available volume discounts, HMCA seeks to
obtain favorable pricing for medical supplies, equipment, contrast agents (such
as gadolinuim) and other inventory for its clients.

(6) Diagnostic Imaging and Ancillary Services. HMCA can offer access to
diagnostic imaging equipment through diagnostic imaging facilities it manages.
The Company is expanding the ancillary services offered in its network to
include CT-scans, x-rays, ultrasound, and other ancillary services useful to its
clients.

(7) Marketing Strategies. HMCA is responsible for developing marketing plans for
its clients.

(8) Expansion Plans. HMCA assists the clients in developing expansion plans.
Additional physicians, physical therapists and technologists have been added
where needed.

HMCA advises clients on all aspects of their businesses, including expansion
where it is a reasonable objective, on a continuous basis. HMCA's objective is
to free physicians from as many non-medical duties as is practicable. Practices
can treat patients more efficiently if the physicians can spend less time on
business and administrative matters and more time practicing medicine.

HMCA provides its services pursuant to negotiated contracts with its clients.
While HMCA believes it can provide the greatest value to its clients by
furnishing the full range of services appropriate to that client, HMCA would
also be willing to enter into contracts providing for a more limited spectrum of
management services.

In the case of contracts with the MRI facilities, fees are charged by HMCA based
on the number of procedures performed. In the case of the physical
rehabilitation and medical practices, flat fees are charged on a monthly basis.
Fees are subject to adjustment on an annual basis, but must be based on mutual
agreement. The per procedure charges to the MRI facilities range from $325 to
$1,060 per MRI scan. The monthly fees charged to the physical rehabilitation
practices range from approximately $75,000 to $285,000. No MRI facilities or
physical and rehabilitation facilities are owned by HMCA. Only one chiropractic
practice managed by HMCA, providing HMCA with management fees of approximately
$22,500 in fiscal 2003 and $180,000 in fiscal 2002, was owned by a seller in an
acquisition. HMCA discontinued management of this practice in the beginning of
the second quarter of fiscal 2003.

The practices and the facilities enter into contracts with third party payors,
including managed care companies. With the exception of some capitated health
plans in which the medical practices previously managed by HMCA up to April,
2003, participated, neither HMCA's clients nor HMCA participate in any risk
sharing arrangements. Capitated plans are those HMO programs where the provider
is paid a flat monthly fee per patient. All of the fees from capitated health
plans were attributable to medical professional corporations managed by A & A
Services, Inc., representing 48%, and 46% of their revenues in fiscal 2003 and
fiscal 2002, respectively. Since divesting itself of the A&A Services, Inc. as
of April 8, 2003, none of HMCA's clients nor HMCA have participated in any
capitated or other risk sharing arrangements.

HMCA MARKETING

HMCA's marketing strategy is to expand the business and improve the facilities
and practices which it manages. HMCA will also seek to increase the number of
locations of those facilities and practices where market conditions are
promising. HMCA will seek to promote growth of its clients' patient volume and
revenue through installing new Stand-Up(TM) MRI scanners at MRI facilities and
advertising in television, radio and other media.

HMCA's lack of capital resources has prevented HMCA from increasing the number
of clients it manages through acquisitions since it made its most recent
acquisition in August, 1998.

DIAGNOSTIC IMAGING FACILITIES AND OTHER ANCILLIARY SERVICES

Diagnostic imaging facilities managed by HMCA provide diagnostic imaging
services to patients referred by physicians who are either in private practice
or affiliated with managed care providers or other payor groups. The facilities
are operated in a manner which eliminates the admission and other administrative
inconveniences of in-hospital diagnostic imaging services. Imaging services are
performed in an outpatient setting by trained medical technologists under the
direction of physicians. Following diagnostic procedures, the images are
reviewed by the interpreting physicians who prepare a report of these tests and
their findings. These reports are transcribed by HMCA personnel and then
delivered to the referring physician.

HMCA develops marketing programs in an effort to establish and maintain
profitable referring physician relationships and to maximize reimbursement
yields. These marketing approaches identify and target selected market segments
consisting of area physicians with certain desirable medical specialties and
reimbursement yields. Corporate and facility managers determine these market
segments based upon an analysis of competition, imaging demand, medical
specialty and payor mix of each referral from the local market. HMCA also
directs marketing efforts at managed care providers.

Managed care providers have become an important factor in the diagnostic imaging
industry. To further its position, HMCA will seek to expand the imaging
modalities offered at its managed diagnostic imaging facilities.

COMPETITION (HMCA)

The physician and diagnostic management services field is highly competitive. A
number of large hospitals have acquired medical practices and this trend may
continue. HMCA expects that more competition will develop. Many competitors have
greater financial and other resources than HMCA.

With respect to the diagnostic imaging facilities managed by HMCA, the
outpatient diagnostic imaging industry is highly competitive. Competition
focuses primarily on attracting physician referrals at the local market level
and increasing referrals through relationships with managed care organizations.
HMCA believes that principal competitors for the diagnostic imaging centers are
hospitals and independent or management company-owned imaging centers.
Competitive factors include quality and timeliness of test results, ability to
develop and maintain relationships with managed care organizations and referring
physicians, type and quality of equipment, facility location, convenience of
scheduling and availability of patient appointment times. HMCA believes that it
will be able to effectively meet the competition in the outpatient diagnostic
imaging industry by installing the new Fonar Stand-Up(TM) MRI scanners at its
most promising facilities.

GOVERNMENT REGULATION APPLICABLE TO HMCA

FEDERAL REGULATION

Stark Law

Under the federal Self-Referral Law (the "Stark Law") (which is applicable to
Medicare and Medicaid patients) and the self-referral laws of various States,
certain health practitioners (including physicians, chiropractors and
podiatrists) are prohibited from referring their patients for the provision of
designated health services (including diagnostic imaging and physical therapy
services) to any entity with which they or their immediate family members have a
financial relationship, unless the referral fits within one of the specific
exceptions in the statutes or regulations. Statutory exceptions under the Stark
Law include, among others, direct physician services, in-office ancillary
services rendered within a group practice, space and equipment rental and
services rendered to enrollees of certain prepaid health plans. Some of these
exceptions are also available under the State self-referral laws.

Anti-kickback Regulation

Under the federal Anti-kickback statute, which is applicable to Medicare and
Medicaid, it is illegal, among other things, for a provider of MRI services to
pay or offer money or other consideration to induce the referral of MRI scans.
Neither HMCA nor its clients engage in this practice.

In fiscal 2003, approximately 11.8% of the revenues of HMCA's clients were
attributable to Medicare and .5% were attributable to Medicaid. In fiscal 2002,
approximately 8.8% of the revenues of HMCA's clients were attributable to
Medicare and 0.17% were attributable to Medicaid.

State Regulation

In addition to the federal self-referral law and federal Anti-kickback statute,
many States, including those in which HMCA and its clients operate, have their
own versions of self-referral and anti-kickback laws. These laws are not limited
in their applicability, as are the federal laws, to specific programs. HMCA
believes that it and its clients are in compliance with these laws.

Various States prohibit business corporations from practicing medicine. Various
States also prohibit the sharing of professional fees or fee splitting.
Consequently, HMCA leases space and equipment to clients and provides clients
with a range of non-medical administrative and managerial services for agreed
upon fees. HMCA does not engage in the practice of medicine or establish
standards of medical practice or policies for its clients in any State even
where permitted.

HMCA's clients generate revenue from patients covered by no-fault insurance and
workers' compensation programs. For the fiscal year ended June 30, 2003
approximately 57.7% of our clients' receipts were from patients covered by
no-fault insurance and approximately 11.1% of our client's receipts were from
patients covered by worker's compensation programs. For the fiscal year ended
June 30, 2002, approximately 43.2% of our clients' receipts were from patients
covered by no-fault insurance and approximately 8.7% of our clients' receipts
were from patients covered by workers compensation programs. In the event that
changes in these laws alter the fee structures or methods of providing service,
or impose additional or different requirements, HMCA could be required to modify
its business practices and services in ways that could be more costly to HMCA or
in ways that decrease the revenues which HMCA receives from its clients.

HMCA believes that it and its clients are in compliance with applicable Federal,
State and local laws. HMCA does not believe that such laws will have any
material effect on its business.

EMPLOYEES

As of July 1, 2003, the Company employed 477 persons on a full-time and
part-time basis. Of such employees, 32 were engaged in marketing and sales, 46
in research and development, 76 in prodution, 41 in customer support services,
282 in administration (including 168 on site at facilities and offices managed
by HMCA and 62 performing billing, collection and transcription services for
those facilities) and 18 professional MRI technicians on site at diagnostic
imaging centers managed by HMCA.

ITEM 2. PROPERTIES

Fonar leases approximately 135,240 square feet of office and plant space at its
principal offices in Melville, New York and at two other locations in Melville
and Farmingdale, New York at a current aggregate annual rental rate of $955,985,
excluding utilities, taxes and other related expenses. The term of one of the
leases includes options to renew up through 2008 and the terms of the other
leases extend to the beginning of 2009. Management believes that these premises
are adequate for its current needs. HMCA leases approximately 16,850 square feet
for its headquarters in Melville, New York at a current annual rental rate of
$411,805. The term of the lease extends through September, 2009. In addition,
HMCA maintains leased office premises for its clients at approximately 17 site
locations having an aggregate annual rental rate of approximately $1.6 million
under leases having various terms.

ITEM 3. LEGAL PROCEEDINGS

There is no material litigation pending, or to its knowledge, threatened against
the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

On June 9, 2003, we held our annual meeting of stockholders. The matters before
the meeting were (1) the election of directors, (2) an increase in the number of
shares of common stock the Company is authorized to issue, (3) the ratification
of certain stock bonus and stock option plans and (4) the ratification of the
selection of auditors for fiscal 2003. All nominees for directors were elected
and all other proposals were approved, including the selection of Marcum &
Kliegman LLP as the Company's auditors for fiscal 2003. All of the directors
elected, Raymond V. Damadian, Claudette J.V. Chan, Robert Janoff, Charles N.
O'Data and Robert Djerejian were sitting directors. The proposal to increase the
number of authorized shares of common stock of the Company approved by the
stockholders allows the Board of Director to increase the number of authorized
shares of common stock at any time or in increments from time to time, up to a
maximum of 150 million shares. The plans ratified by the stockholders were the
2002 and 2003 Stock Bonus Plans and the 2002 Incentive Stock Option Plan. The
table below lists the votes cast for, against or withheld, as well as
abstentions and broker non-votes.

(1) Election of Directors:

FOR WITHHELD
--- --------

Raymond V. Damadian 310,775,628 2,512,091
Claudette J.V. Chan 310,778,455 2,509,313
Robert J. Janoff 310,777,455 2,510,313
Charles N. O'Data 310,198,112 3,089,657
Robert Djerejian 310,140,572 3,147,196

(2) Proposal to Increase Number of Authorized Shares of Common
Stock:

FOR AGAINST ABSTAIN BROKER NON-VOTES
----------- --------- ------- ----------------
304,500,914 8,522,782 264,073 0

(3) Ratification of Stock Bonus and Option Plans

FOR AGAINST ABSTAIN BROKER NON-VOTES
----------- --------- ------- ----------------
252,914,571 7,488,051 429,532 52,455,615

(4) Ratification of Auditors Marcum & Kliegman LLP

FOR AGAINST ABSTAIN BROKER NON-VOTES
----------- --------- ------- -----------------
311,593,011 1,307,281 387,476 0

Part II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is traded in the Nasdaq SmallCap market under the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
symbol FONR. The following table sets forth the high and low trades reported in
NASDAQ System for the periods shown.

Fiscal Quarter
--------------
High Low
---- ----
July - September 2001 2.49 1.20
October - December 2001 1.48 1.15
January - March 2002 1.24 0.96
April - June 2002 2.15 0.95
July - September 2002 1.99 0.99
October - December 2002 1.30 0.96
January - March 2003 1.12 0.80
April - June 2003 1.45 0.81
July - September 2003 2.10 1.19

On September 3, 2003, the Company had approximately 4,728 stockholders of record
of its Common Stock, 11 stockholders of record of its Class B Common Stock, 4
stockholders of record of its Class C Common Stock and 4,032 stockholders of
record of its Class A Non-voting Preferred Stock.

At the present time, the only class of the Company's securities for which there
is a market is the Common Stock.

The Company paid cash dividends in fiscal 1998 and the first three quarters of
fiscal 1999 on monies it received from the enforcement of its patents. Except
for these dividends, the Company had not paid any cash dividends. The Company
anticipates paying one additional dividend on monies received from the
enforcement of its patents. Except for these dividends, however, it is expected
that the Company will continue to retain earnings to finance the development and
expansion of its business.

Item 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data has been extracted from the
Company's consolidated financial statements for the five years ended June 30,
2003. This consolidated selected financial data should be read in conjunction
with the consolidated financial statements of the Company and the related notes
included in Item 8 of this form. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of the Company's
business plan.

STATEMENT OF OPERATIONS

As of and For the Periods Ended June 30,
2003 2002 2001 2000 1999
----------- ------------ ------------ ------------ ------------
Revenues (1)$52,892,000 $ 43,161,000 $ 40,274,038 $ 33,560,000 $30,208,150

Cost of (1)$32,477,000 $ 24,682,000 $ 25,959,000 $ 25,054,000 $24,804,000
revenues

Research & $ 5,164,000 $ 5,100,000 $ 5,866,000 $ 5,532,000 $ 6,648,000
Development
Expenses

Net Loss $(15,201,000) $(16,956,000) $(14,538,000) $(11,054,000)$(14,677,000)
from
continued
operations

Net Gain $ 194,000 $ (5,926,000) $ (646,000) $ 98,000 $ 461,000
(Loss) from
discontinued
operations

Basic and $(.20) $(.27) $(.25) $(.20) $(.27)
Diluted Net
Loss per
common share-
continuing
operations

Basic and $ --- $(.09) $(.01) $--- $.01
Diluted Net
Gain (Loss)
per common
share-
discontinued
operations

Weighted 75,816,973 63,511,814 57,388,050 55,096,212 52,862,647
average
number of
shares
outstanding

BALANCE SHEET DATA

Working
capital (1)$13,053,000 $14,107,000 $ 17,206,000 $24,857,000 $38,472,000

Total $58,749,000 $73,129,000 $84,900,000 $84,599,000 $97,648,000
assets

Long- (1)$1,930,000 $ 9,624,000 $17,760,000 $15,443,000 $18,138,000
term debt
and
obligations
under
capital
leases

Stock- $32,380,000 $35,695,000 $41,830,000 $51,285,000 $59,304,000
holder's
equity

(1) Amounts as of and for the years ended June 30, 1999 to June 30, 2002 have
been adjusted for the reclassification of discontinued operations.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.

INTRODUCTION.

The Company was formed in 1978 to engage in the business of designing,
manufacturing and selling MRI scanners. In 1997, the Company formed a
wholly-owned subsidiary, Health Management Corporation of America ("HMCA"),
formerly known as U.S. Health Management Corporation, in order to expand into
the physician and diagnostic management services business.

FONAR's principal MRI products are its Stand-Up(TM) MRI, Fonar 360(TM), QUAD(TM)
and Echo(TM) MRI scanners. The Stand-Up(TM) MRI allows patients to be scanned
for the first time under weight-bearing conditions. The Company has been
aggressively seeking new sales and during fiscal 2003 and 2002, respectively
received orders for 22 and 20 Stand-Up(TM) MRI scanners. The Stand-Up(TM) MRI is
the only MRI capable of producing images in the weight bearing state.

At 0.6 Tesla field strength, the Stand-Up(TM) MRI, Fonar 360(TM) and QUAD(TM)
magnets are among the highest field "Open MRI" scanners in the industry,
offering non-claustrophobic MRI together with high-field image quality. Fonar's
open MRI scanners were the first high field strength MRI scanners in the
industry. Fonar also offers the Echo(TM), a low cost open MRI scanner. Fonar's
works in progress include an in-office extremities scanner. (See "Description of
Business - Products, Works-in-Progress and Product Marketing.")

HMCA commenced operations in July, 1997 and generates revenues from providing
comprehensive management services (including development, administration,
accounting and billing and collection services) together with office space,
medical equipment, supplies and non-medical personnel to its clients. Revenues
are in the form of management and leasing fees, which have been earned under
contracts with MRI facilities, medical practices and physical rehabilitation
practices. Since April 2003, HMCA no longer engages in the management of primary
care medical practices.

Approximately 99% of HMCA's revenues for the fiscal years ended June 30, 2003,
June 30, 2002 and June 30, 2001 were derived from contracts with facilities and
practices owned by Dr. Raymond V. Damadian, the President of FONAR and HMCA and
principal stockholder of FONAR. The agreements with the MRI facilities are for
one-year terms which renew automatically on an annual basis, unless terminated.
The fees are based on the number of procedures performed and currently range
from $325 to $1,060 per MRI scan. The fees are reviewed and if appropriate,
adjusted on an annual basis by mutual agreement.

The agreements with the physical rehabilitation practices are for a term of 20
years. The fees are fixed monthly fees adjusted annually. Historically,
adjustments have been on the basis of changes in HMCA's costs, plus a percentage
of costs. Currently, the monthly fees under these contracts with the physical
rehabilitation practices range from approximately $75,000 to $285,000. Prior to
HMCA's diversiture of A&A Services, Inc., which managed the medical practices,
the monthly fees under the contracts with the medical practices were $110,000
during fiscal 2003.

Critical Accounting Policies
----------------------------

Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to investments, intangible assets, income taxes, contingencies and
litigation. We base our estimates on historical experience and on various
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. We recognize revenue and related costs of revenue from
sales contracts for our MRI scanner products, under the percentage-of-completion
method. Under this method, we recognize revenue and related costs of revenue, as
each sub-assembly is completed. Amounts received in advance of our commencement
of production are recorded as customer advances.

We recognize revenue from license agreements for our intellectual property over
the shorter of the contractual life of the license or the estimated economic
life. For our current license agreement, we are recognizing revenue ratably over
5 years.

We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. As of June 30, 2003, we recorded a
valuation allowance which reduced our deferred tax assets to equal our deferred
tax liability.

We amortize our intangible assets, including patents, purchased management
agreements and capitalized software development costs, over the shorter of the
contractual/legal life or the estimated economic life. Our amortization life for
patents, purchased management agreements and capitalized software development
costs is 15 to 17 years, 20 years and 5 years, respectively.

We periodically assesses the recoverability of long-lived assets, including
property and equipment, intangibles and management agreements, when there are
indications of potential impairment, based on estimates of undiscounted future
cash flows. The amount of impairment is calculated by comparing anticipated
discounted future cash flows with the carrying value of the related asset. In
performing this analysis, management considers such factors as current results,
trends, and future prospects, in addition to other economic factors. During the
year ended June 30, 2002, we recorded an impairment loss of $4,700,000 related
to the management contracts in our physician's management services segment with
the primary care medical practices. In April, 2003, we sold A&A Services, Inc.,
the subsidiary which held those contracts, back to the original sellers for a
purchase price of $4.0 million. In addition, the buyers released HMCA from the
balance of its indebtedness remaining due on the original purchase, in the
amount of $913,495. As depreciated assets attributed to these contracts was
$3,298,443. We recognized a gain of $509,814 on the transaction. These amounts
have been reflected as discontinued operations in the accompanying consolidated
financial statements.

RESULTS OF OPERATIONS. (FISCAL 2003 COMPARED TO FISCAL 2002)

In fiscal 2003, the Company experienced a net loss of $15.0 million on revenues
of $52.9 million, as compared to a net loss of $22.9 million on revenues of
$43.2 million for fiscal 2002. This represents a decrease in the net loss of
34.5% and an increase in revenues of 22.5%. This was due in part to the fact
that while revenues increased by 22.5%, total costs and expenses increased by
only 18.2%. The Company's consolidated operating loss increased by 5.3% to $15.1
million for fiscal 2003 as compared to an operating loss of $14.4 million for
fiscal 2002.

Discussion of Operating Results of Medical Equipment Segment
(Fiscal 2003 Compared to Fiscal 2002)
------------------------------------------------------------

Revenues attributable to the Company's medical equipment segment increased by
85.2% to $30.0 million in fiscal 2003 from $16.2 million in fiscal 2002,
reflecting an increase in product sales of 115%, from $11.6 million in fiscal
2002 to $24.9 million in fiscal 2002 and an increase in service revenue of
13.6%, from $2.2 million in fiscal 2002 to $2.5 million in fiscal 2003. This
improvement in revenues was attributable to the Company's increase in scanner
sales, particularly its Stand-Up(TM) MRI, which is unique in that it permits MRI
scans to be performed on patients upright in the weight-bearing state and in
multiple positions that correlate with symptoms. During the fiscal years ended
June 30, 2003 and June 30, 2002, respectively, the Company received orders for
22 and 20 Stand-Up(TM) MRI scanners.

Confirming the Company's expectation of increased demand for its MRI scanners,
product sales to unrelated parties increased by 228% in fiscal 2003 from $5.4
million in fiscal 2002 to $17.7 million in fiscal 2003. Product sales to related
parties increased by 17.7% in fiscal 2003 from $6.2 million in fiscal 2002 to
$7.3 million in fiscal 2003. The Company believes that its principal challenges
in achieving greater market penetration are primarily attributable to the better
name recognition and larger sales forces of its larger competitors such as
General Electric, Siemens, Hitachi, Philips and Toshiba and the ability of some
of its competitors to offer attractive financing terms through affiliates, such
as G.E. Capital. Nevertheless, no other competitor offers a whole body weight
bearing MRI scanner such as the Stand-Up(TM) MRI, and General Electric Medical
Systems division acts as a manufacturer's representative for the Stand-Up(TM)
MRI.

The operating loss for the medical equipment segment improved by 26.6% from a
loss of $15.4 million in fiscal 2002 to a loss of $11.3 million in fiscal 2003.
This improvement is attributable to our continuing increase in gross margins on
our scanner sales.

The Company recognized revenues of $24.3 million from the sale of its new
Stand-Up(TM) MRI scanners and of $100,000 from the sale of one refurbished
(used) Beta(TM) scanner (the Company no longer manufactures Beta(TM) scanners)
in fiscal 2003. In fiscal 2002, the Company recognized revenues of $11.1 million
from the sale of Stand-Up(TM) MRI scanners, and $361,000 from the sale of two
refurbished (used) Beta(TM) scanners.

Product sales revenues for fiscal 2003 included revenues from the sale of 17
scanners. Product sales revenues for fiscal 2002 included revenues from the
sales of 11 scanners and for fiscal 2001, seven scanners.

Sales of MRI scanners to affiliated parties, consisting of professional
corporations and other entities in which Dr. Damadian or members of his family
have an interest represented approximately 13.8% ($7.3 million) of the Company's
revenues in fiscal 2003, as compared to 13.9% ($6.2 million) of the Company's
revenues in fiscal 2002.

License and royalty revenue increased by 6.1% to approximately $2.6 million in
fiscal 2003 from approximately $2.4 million in fiscal 2002.

Gross profit margins on product sales improved significantly during fiscal 2003
from a 28% in fiscal 2002 to 35.6% in fiscal 2003. Such improvement was
principally attributable to the medical equipment segment operating at a higher
level of capacity resulting from the increased sales volume.

Research and development expenses, net of capitalized costs, increased by 2% to
$5.2 million in fiscal 2003 as compared to $5.1 million in fiscal 2002. Our
expenses for fiscal 2003 represented continued research and development of
Fonar's scanners, its new hardware and software product, "Sympulse (TM)" and new
surface coils to be used with the Stand-Up(TM) MRI scanner.

Discussion of Operating Results of Physician and Diagnostic Services Management
Segment (Fiscal 2003 Compared to Fiscal 2002)
--------------------------------------------------------------------------------

Revenues attributable to the Company's physician and diagnostic services
management segment (HMCA) decreased by 15.1% to $22.9 million in fiscal 2003
from $27.0 million in fiscal 2002. The decrease in revenues reflected a decline
in MRI scan volume prior to upgrading older scanners, the closing of certain MRI
facilities and other facilities managed by HMCA. The $1.2, $1.5 and $2.0 million
in revenues from the medical primary care practices in fiscal 2003, 2002 and
2001 are not included in HMCA's revenues; this part of its business has been
sold and results of operations are shown separately under discontinued
operations.

Cost of revenues as a percentage of the related revenues for the Company's
physician and diagnostic services management segment increased from $13.7
million or 50.7% of related revenues for the year ended June 30, 2002 to $13.3
million, or 57.9% of related revenue for the year ended June 30, 2003.

Operating results of this segment declined from operating income of $1.1 million
in fiscal 2002 to an operating loss of $3.8 in fiscal 2003. In the fourth
quarter of fiscal 2003, HMCA recognized an impairment loss of $795,237, on
certain management agreements with a physical rehabilitation and therapy
facility which was closed in the beginning of the second quarter of fiscal 2003.
HMCA believes that focusing its efforts on more profitable facilities, including
the introduction of Stand-Up(TM) MRI scanners, will in the long term improve
HMCA's profitability.

Discontinued Operations - (Fiscal 2003 Compared to Fiscal 2002)
----------------------------------------------------------------

The net gain from discontinued operations for fiscal 2003 was $0.2 million as
compared to a loss from discontinued operations of $5.9 million in fiscal 2002.
The net gain from discontinued operations in fiscal 2003 consists of a loss from
discontinued operations of $0.3 million offset by a gain from the sale of
discontinued operations of $0.5 million. The loss from discontinued operations
for fiscal 2002 was attributable primarily to an impairment loss of $4.7 million
due to the reduction of the value of the management contracts with the medical
primary care practices reflected on the Company's balance sheet because of past
and anticipated performance. This portion of HMCA's business has now been sold
and accordingly all results for the current and prior fiscal years have been
reclassified as discontinued operations. In addition, included in the loss from
discontinued operations in fiscal 2002, we recorded a debt conversion expense of
$545,000 in connection with a premium associated with the repayment of
approximately $2.5 million in long-term debt incurred in connection with the
initial acquisition of A&A by HMCA.

The gain on the sale of discontinued operations in fiscal 2003 was $509,814, and
represented the excess of the consideration received over the depreciated value
of the contracts and other assets of the sold subsidiary.

Discussion of Consolidated Results of Operations (Fiscal 2003 Compared to Fiscal
2002)
--------------------------------------------------------------------------------

Interest income of $670,678 was recognized by the Company in 2003 as compared to
$973,862 in fiscal 2002, representing a decrease of 31.1%. The decrease was
attributable primarily to a decrease in interest on the Company's investments in
marketable securities.

Interest expense of $626,450 was recognized in fiscal 2003 decreasing from
$691,126 in fiscal 2002 and representing a decrease of 9.4%. The decrease was
attributable primarily to the repayment of long-term debt and capital lease
obligations in fiscal 2002.

In fiscal 2002, the Company recorded non-cash financing costs of $2.4 million in
connection with the payment of its convertible debentures to The Tailwind Fund
in common stock and the issuance of related warrants. This expense represented
the discount from the market price on the stock issued to The Tailwind Fund and
the value of the purchase warrants granted to the investor.

Selling, general and administrative expenses increased by 9.3% to $23.4 million
in fiscal 2003 from $21.4 million in fiscal 2002. The increase in selling,
general and administrative expenses was attributable primarily to the expansion
of Fonar's increased manufacturing, advertising, marketing and sales activity.
Commencing in fiscal 2002, the Company engaged the services of an advertising
agency and introduced television and radio advertising.

The increase in compensatory element of stock issuances from approximately $4.7
million in fiscal 2002 to $4.8 million in fiscal 2003 reflected the continued
use of Fonar's stock bonus plan to pay certain highly compensated employees and
others in stock rather than in cash.

The lower provision for bad debt of $702,000 in fiscal 2003 as compared to
$972,000 in fiscal 2002, reflected a decrease in reserves and write-offs of
certain indebtedness. This represented primarily a reduction in the reserves for
fees due to HMCA from $729,000 in fiscal 2002 to $335,000 in fiscal 2003 offset
by an increase in Fonar's bad debt from $243,000 in fiscal 2002 to $367,000 in
fiscal 2003.

The amortization expense in fiscal 2003 and 2002 of approximately $696,000 for
both fiscal years, reflects the amortization of management agreements
attributable to HMCA's acquisitions. The loss on impairment of management
agreements was attributable to the closure of the primary care practices managed
by HMCA's subsidiary, Central Health Care Services, Inc. because of a
significant decline in overall patient volume.

The Company is enthusiastic about the future of its Stand-Up(TM) MRI and FONAR
360(TM) product line scanners which bring a new plateau of "openness" to
diagnostic MRI and are expected to bring a new frontier in surgery for
performing surgical treatments using MRI images to guide surgery. The Company
believes its new products are beginning to successfully penetrate the market, as
reflected in the dramatic increase in product sales from approximately $3.4
million in fiscal 2000 to $6.1 million in fiscal 2001, to $11.6 million in
fiscal 2002 and to $24.9 million in fiscal 2003. In addition to increased
product sales, the decline in service and repair fees has been reversed, as
reflected by the increase in service and repair fees from $1.7 million in fiscal
2000 to $2.0 million in fiscal 2001 to $2.2 million in fiscal 2002 and $2.5
million in fiscal 2003.

Continuing its tradition as the originator of MRI, the Company remained
committed to maintaining its position as the leading innovator of the industry
through aggressive investing in research and development. In fiscal 2003 the
Company continued its investment in the development of its new MRI scanners,
together with software and upgrades, with an investment of $5,955,667 in
research and development ($791,216 of which was capitalized) as compared to
$5,955,394 ($855,612 of which was capitalized) in fiscal 2002. The research and
development expenditures were approximately 18% of revenues attributable to the
Company's medical equipment segment (and 10.8% of total revenues) in 2003 and
34.6% of medical equipment segment revenues (and 13.8% of total revenues)in
fiscal 2002. This represented an essentially constant amount in research and
development expenditures in fiscal 2002 and fiscal 2003 and also reflects the
Company's greater emphasis on marketing and selling the products it has
developed.

In summary, Fonar continued the trend of steadily increasing MRI scanner sales,
most dramatically the increase in Stand-Up(TM) MRI scanner sales from fiscal
2001 through fiscal 2003. The physician and diagnostic services management
segment (HMCA) revenues continued to decline slightly in the same period, from
$28.5 in fiscal 2001 to $27.0 million in fiscal 2002 and to $22.9 in fiscal
2003.

Fonar anticipates that the increase in scanner sales will continue due to the
unique capability of the Stand-Up(TM) MRI scanner to scan patients in
weight-bearing positions and future sales of the Fonar 360(TM) for image guided
interventional procedures and treatments and the high field strength of its
other open MRI scanners, the Fonar 360(TM) and QUAD(TM) scanners. Service
revenues have also increased over the past four fiscal years, from $1.7 million
in fiscal 2000 to $2.0 million in fiscal 2001 to $2.2 million in fiscal 2002 and
to $2.5 in fiscal 2003, which increases are attributable primarily to the
increased number of scanners being placed in service. Most of the revenues on
the Stand-Up(TM) MRI scanners sold in the last quarter of fiscal 2003, were not
recognized as of June 30, 2003, and as of June 30, 2003, the Company's balance
sheet reflects $4.9 million in customer advances, as compared to $7.7 million in
customer advances as at June 30, 2002.

The Company has taken steps to reverse the decline in HMCA revenues by closing
unprofitable facilities and continuing its program of replacing the MRI scanners
at the MRI facilities it manages with Stand-Up(TM) MRI scanners. Stand-Up(TM)
MRI scanners are now installed in the Islandia, New York site, Bensonhurst, New
York and Staten Island, New York sites and additional Stand-Up(TM) MRI's are
planned for other MRI facilities managed by HMCA.

Expenditures for advertising and marketing are likely to continue to increase,
as the Company believes the increased advertising is helpful to promote sales.

RESULTS OF OPERATIONS. (FISCAL 2002 COMPARED TO FISCAL 2001)

In fiscal 2002, the Company experienced a net loss of $22.9 million and a net
loss from continuing operations of $17.0 million on revenues of $43.2 million as
compared to a net loss of $15.2 million and a net loss from continuing
operations of $14.5 million on revenues of $40.3 million for fiscal 2001. This
represented an increase in the net loss of 51%, an increase in the net loss from
continuing operations of 16.6% and an increase in revenues of 7.1%.

Discussion of Operating Results of Medical Equipment Segment
(Fiscal 2002 Compared to Fiscal 2001)
------------------------------------------------------------

Revenues attributable to the Company's medical equipment segment increased by
54.3% to $16.2 million in fiscal 2002 from $10.5 million in fiscal 2001,
reflecting an increase in scanner sales of 90.0%, from $6.1 million in fiscal
2001 to $11.6 million in fiscal 2002 and an increase in service revenue of 10%
from $2.0 million in fiscal 2001 to $2.2 million in fiscal 2002. The Company
attributed the increase in scanner sales to the growing market penetration of
its products, particularly the Stand-Up(TM) MRI. Product sales to unrelated
parties increased by 59% in fiscal 2002 from $3.4 million in fiscal 2001 to $5.4
million in fiscal 2002.

Sales to affiliated parties, consisting of professional corporations and other
entities in which Dr. Damadian or members of his family have an interest
represented approximately 14% ($6.2 million) of the Company's revenues in fiscal
2002, as compared to 6.0% ($2.7 million) of the Company's revenues in fiscal
2001.

Research and development expenses net of capitalized costs decreased by 14% to
$5.1 million in fiscal 2002 as compared to $5.9 million in fiscal 2001. Our
expenses for fiscal 2002 represented continued research and development of
Fonar's scanners and its new hardware and software product, "Sympulse(TM) and
new surface coils to be used within the Stand-Up(TM) MRI scanner".

Gross profit margins on product sales improved significantly during fiscal 2002
from a negative 2% in fiscal 2001 to 28% in fiscal 2002. Such improvement was
principally attributable to the medical equipment segment operating at a higher
level of capacity resulting from increased sales volume.

Results of operations for the medical equipment segment improved by 10% from a
loss of $17.2 million in fiscal 2001 to a loss of $15.4 million in fiscal 2002.
This improvement is attributable to our increase in gross margins on our scanner
sales.

The Company recognized revenues of $11.1 million from the sale of its new
Stand-Up(TM) MRI scanners and of $361,000 from sale of two refurbished (used)
Beta(TM) scanners in fiscal 2002. In fiscal 2001 the Company recognized revenues
of $1.6 million from the sale of Stand-Up(TM) MRI scanners, $1.1 million from
the sale of Echo(TM) scanners and $3.0 million from the sale of QUAD(TM) MRI
scanners. Sales of Beta(TM) scanners were $0 in fiscal 2001.

Product sales revenues for fiscal 2002 included revenues from the sale of 11
scanners. Product sales revenues for fiscal 2001 included revenues from the
sales of seven scanners.

Discussion of Operating Results of Physician Management Services Segment
(Fiscal 2002 Compared to Fiscal 2001)
------------------------------------------------------------------------

Revenues attributable to the Company's physician and diagnostic services
management segment (HMCA) decreased by 9.3% to $27.0 million in fiscal 2002 from
$29.8 million in fiscal 2001. The decrease in revenues reflected the closing of
certain facilities managed by HMCA.

Cost of revenue for the Company's physician and diagnostic services management
segment decreased from $16.7 million, or 56.0%, of related revenues for the year
ended June 30, 2001 to $14.0 million, or 52.0%, of related revenues for the year
ended June 30, 2002.

Discussion of Discontinued Operations (Fiscal 2002 Compared to Fiscal 2001)
---------------------------------------------------------------------------

The loss from discontinued operations increased from $5.9 million for fiscal
2002 as compared to $0.6 million for fiscal 2001 for increase in the loss of
$5.3 million or 818%. The increase in the loss was due primarily to the loss on
impairment of the management contract of $4.7 million. In addition, in fiscal
2002, we recorded a debt conversion expense of $545,000 in connection with a
premium associated with the repayment of approximately $2.5 in long-term debt
incurred in connection with an HMCA acquisition.

Discussion of Consolidated Results of Operations
(Fiscal 2002 Compared to Fiscal 2001)
------------------------------------------------

Other expenses of $69,133 were recognized by the Company in fiscal 2002 as
compared to other income of $1.0 million (principally the sale of a partnership
interest) in fiscal 2001, and investment income of $973,862 was recognized by
the Company in 2002 as compared to $1.8 million in fiscal 2001. This represented
a decrease of 69% in other income. In addition, the Company recorded non-cash
financing costs of $2.4 million in fiscal 2002 in connection with the payment of
its convertible debentures to the Tailwind Fund in common stock and the issuance
of related warrants. This expense represented the discount from the market price
on the stock issued to the Tailwind Fund and the value of the purchase warrants
granted to the investor.

Selling, general and administrative expenses increased by 11.8% to $21.4 million
in fiscal 2002 from $19.1 million in fiscal 2001. The increase was attributed
primarily to the expansion of Fonar's increased manufacturing, advertising,
marketing and sales activity.

The increase in compensatory element of stock issuances from approximately $4.0
million in fiscal 2001 to $4.7 million in fiscal 2002 reflected greater use of
Fonar's stock bonus plan to pay certain highly compensated employees and others
in stock rather than cash.

The higher provision for bad debts of $972,000 in fiscal 2002 as compared to
$443,000 in fiscal 2001, reflected an increase in reserves and the write-offs of
certain indebtedness by the medical equipment segment of $243,000 and reserves
for fees due from HMCA managed facilities that were closed during the year in
the amount of $729,000.

The amortization expense in fiscal 2002 and 2001 of approximately $.7 million in
each year reflects the amortization of management agreements attributable to
HMCA's acquisitions.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and marketable securities increased by 16% from $13.1
million at June 30, 2002 to $15.2 million at June 30, 2003.

Marketable securities approximated $5.8 million as of June 30, 2003, as compared
to $5.6 million as of June 30, 2002. At June 30, 2003, we increased our
investments in U.S. Government obligations from approximately $3.8 million to
approximately $3.9 million and increased our investments in corporate and
government agency bonds from approximately $1.8 million to approximately $1.9
million.

Cash provided by operating activities for fiscal 2003 approximated $3.2 million.
Cash provided by operating activities was attributable substantially to the
collection of sales type leases of $2.6 million and the collection of advances
and notes from related parties of $0.5 million. Although we had an operating
loss of $15.1 million, for fiscal 2003, we had a similar amount of non-cash
expenses and other costs which were satisfied by the issuance of our common
stock.

Cash provided by investing activities for fiscal 2003 approximated $0.4 million.
The principal source of cash from investing activities was $2.8 million of
proceeds from the sale of discontinued operations. The principal uses of cash
from investing activities during fiscal 2003 consisted of expenditures for
property and equipment of $1.3 million, capitalized software of $0.8 million and
costs of patents of $0.4 million.

Cash used in financing activities for fiscal 2003 approximated $1.7 million. The
principal uses of cash in financing activities during fiscal 2003 consisted of
repayment of principal on long-term debt of approximately $8.7 million and the
principal source was proceeds of restricted cash of $5.5 million along with
proceeds of long-term debt of $950,000.

Total liabilities decreased by 30.0% during fiscal 2003, from approximately
$37.2 million at June 30, 2002 to approximately $26.0 million at June 30, 2003.
The decrease in liabilities was attributable principally to the repayments of
long-term debt and capital leases.

During the year ended June 30, 2003, we issued 5,433,077 shares of our common
stock primarily in connection with the payment of vendors and suppliers of goods
and services to the Company. The greater number of these shares were used in
lieu of cash to pay the costs of manufacturing the Company's MRI scanners. In
addition, we issued 15,000 shares of our common stock in connection with a
repayment of a note payable in the aggregate amount of $21,750.

The Company's obligations and the periods in which they are scheduled to become
due are set forth in the following table:

Due in
Less Due Due Due
than 1 in 1-3 in 4-5 after 5
Obligation Total years years years years
-------------- ----------- ---------- ---------- ---------- ----------
Long-term debt $ 1,178,249 $ 443,948 $ 453,673 $ 280,628 $ -

Capital lease
Obligation 751,327 578,004 173,323 - -

Operating
leases 12,685,018 2,766,571 4,469,223 3,302,947 2,146,277
----------- ---------- ---------- ---------- ----------
Total cash
Obligations $14,614,594 $3,788,523 $5,096,219 $3,583,575 $2,146,277
=========== ========== ========== ========== ==========

As at June 30, 2003, our obligations included approximately $1.9 million in
various state sales taxes. The Company has to enter into payment plans with
taxing authorities with respect to $1.5 million of past due sales taxes.

Our working capital surplus as of June 30, 2003 approximates $13.1 million, as
compared to a working capital surplus of $14.1 million as of June 30, 2002.

In order to conserve its capital resources, we have issued common stock under
its stock bonus and stock option plans to compensate employees and non-employees
for services rendered. In fiscal 2003, the compensatory element of stock
issuances was $4.8 as compared to $4.7 million for fiscal 2002. Utilization of
equity in lieu of cash compensation has improved our liquidity since it
increases cash available for other expenditures.

The foregoing trends in Fonar's capital resources are expected to improve as
Fonar's MRI scanner products gain wider market acceptance and produce greater
sales revenues.

Capital expenditures for fiscal 2003 approximated $2.5 million and substantially
consisted of office and production equipment ($1.3 million), capitalized
software costs ($0.8 million) and capitalized patent costs ($0.4 million).

Fonar has not committed to making capital expenditures in the 2004 fiscal year
other than its intention to continue research and development expenditures at
current levels. In addition, HMCA plans to incur expenditures of approximately
$400,000 for a site location in Boca Raton, Florida.

Our business plan currently includes an aggressive program for manufacturing and
selling its new line of Open MRI scanners. In addition, we are enhancing our
revenue by participating in the physician and diagnostic services management
business through our subsidiary, HMCA and are in the process of upgrading the
facilities which it manages, most significantly by the replacement of existing
MRI scanners with new Stand-Up(TM) MRI scanners.

Our business plan calls for a continuing emphasis on providing its customers
with enhanced equipment service and maintenance capabilities and delivering
state-of-the-art, innovative and high quality equipment upgrades at competitive
prices. Fees for on-going service and maintenance from the Company's installed
base of scanners were $2.0 million for the year ended June 30, 2001 and $2.2
million for the year ended June 30, 2002 and $2.5 million for the year ended
June 30, 2003.

As of June 30, 2003, our current assets were $35.3 million and current
liabilities of $22.2 million, resulting in a working capital surplus of
approximately $13.1 million. Capital resources included $9.3 million in cash and
cash equivalents and $5.8 million in marketable securities.

In addition, in May of 2001, we raised $4.5 through the issuance of debentures
to The Tail Wind Fund. The debentures were repaid in shares of common stock,
although at a discounted price, but provided us with much needed liquidity.
Subsequently, in June, 2002, The Tailwind Fund provided Fonar with an additional
$1,500,000 through the exercise of warrants for 1,000,000 shares at a price of
$1.50 per share and in August, 2002 with an additional $1,125,000 through the
exercise of warrants for an additional 1,000,000 shares at an exercise price of
$1.125 per share. In September, 2003, The Tail Wind Fund exercised options to
purchase 200,000 of the 2,000,000 replacement warrant received by The Tail Wind
Fund after it had exercised the original 2,000,000 callable warrants in June and
August of 2002. The exercise price was $1.42 per share.

We believe that the above mentioned financial resources, anticipated cash flows
from operations and potential financing sources, will provide the cash flows
needed to achieve the sales, service and production levels necessary to support
its operations.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

FONAR's investments in fixed rate instruments. None of the fixed rate
instruments in which FONAR invests extend beyond June 30, 2009. Below is a
tabular presentation of the maturity profile of the fixed rate instruments held
by the Company at June 30, 2003.

INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
WEIGHTED AVERAGE INTEREST RATE

Investments in Weighted
Fixed Rate Average
Date Instruments Interest Rate

6/30/04 4,466,422 2.07%
6/30/05 303,984 5.32%
6/30/06 400,000 4.97%
6/30/07 200,000 5.25%
6/30/08 297,939 5.55%
6/30/09 100,000 3.38%

Total: 5,768,345

Fair Value
at 6/30/03 5,837,017

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

See Note 11 to the consolidated Financial Statements for information on
long-term debt.

Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FONAR CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

Page No.
-------

INDEPENDENT AUDITORS' REPORT

CONSOLIDATED BALANCE SHEETS
At June 30, 2003 and 2002

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended June 30, 2003, 2002 and 2001

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended June 30, 2003, 2002 and 2001

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended June 30, 2003, 2002 and 2001

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INDEPENDENT AUDITORS' REPORT
----------------------------

To the Audit Committee of the Board of Directors
FONAR Corporation and Subsidiaries

We have audited the accompanying consolidated balance sheets of FONAR
Corporation and Subsidiaries as of June 30, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 2003. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements and schedules referred to
above present fairly, in all material respects, the consolidated financial
position of FONAR Corporation and Subsidiaries at June 30, 2003 and 2002, and
the consolidated results of their operations and cash flows for each of the
years in the three-year period ended June 30, 2003, in conformity with
accounting principles generally accepted in the United States of America.

During each of the years in the three-year period ended June 30, 2003, a
significant portion of the Company's revenues was from related parties.

/s/MARCUM & KLIEGMAN LLP

New York, New York
September 29, 2003

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
June 30,
---------------------------
2003 2002
------------ ------------

Current Assets:
Cash and cash equivalents $ 9,334,378 $ 7,460,866
Marketable securities 5,837,017 5,573,483
Restricted cash - 5,500,000
Accounts receivable - net of allowances for
doubtful accounts of $442,437 and
$382,437 at June 30, 2003 and 2002,
respectively 716,435 680,671
Accounts receivable - related parties -
net of allowances for doubtful accounts of
$694,655 at June 30, 2003 and 2002 114,004 100,700
Accounts receivable - related medical
practices - net of allowances for doubtful
accounts of $1,296,390 and $1,096,390 at
June 30, 2003 and 2002, respectively 12,261,288 12,938,738
Costs and estimated earnings in excess of
billings on uncompleted contracts 359,873 1,152,606
Inventories 5,057,261 4,663,767
Investment in sales-type leases with related
parties 14,285 1,796,724
Investment in sales-type lease 135,456 119,601
Assets from discontinued operations - 4,007,456
Prepaid expenses and other current assets 1,285,861 1,101,902
Note receivable from buyers of A&A Services 150,000 -
------------ ------------
Total Current Assets 35,265,858 45,096,514

Property and Equipment - Net 8,625,434 10,534,833

Advances and Notes to Related Parties - Net of
allowances for doubtful accounts of $446,035
and $366,035 at June 30, 2003 and 2002, respectivel 1,266,749 1,796,044

Investment in Sales-Type Leases with Related Party - 814,892

Investment in Sales-Type Lease 606,191 741,647

Notes Receivable 5,000 175,000

Management Agreements - Net 9,363,850 11,000,759

Other Intangible Assets - Net 3,375,187 2,648,618

Other Assets 240,392 320,516
------------ ------------
Total Assets $ 58,748,661 $ 73,128,823
============ ============

See accompanying notes to consolidated financial statements.

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

June 30,
---------------------------
2003 2002
------------ ------------

Current Liabilities:
Current portion of long-term debt and
capital leases $ 1,021,952 $ 8,790,779
Accounts payable 3,703,689 3,999,102
Other current liabilities 7,552,223 7,326,867
Unearned revenue on service contracts - related
parties 240,139 158,333
Customer advances 4,305,918 4,307,632
Customer advances - related parties 626,847 3,400,000
Income taxes payable 10,401 744,505
Billings in excess of costs and estimated
earnings on uncompleted contracts 4,390,012 1,114,912
Billings in excess of costs and estimated
earnings on uncompleted contracts - related
party 361,427 -
Liabilities from discontinued operations - 1,147,404
------------ ------------
Total Current Liabilities 22,212,608 30,989,534

Due to Affiliates 262,335 299,036

Long-term Debt and Capital Leases, Less
current maturities 907,624 833,165

Deferred Revenue - License Fee 2,340,000 4,680,000

Other Liabilities 301,684 359,534
------------ ------------
Total Liabilities 26,024,251 37,161,269
------------ ------------
Minority Interest 345,118 272,306
------------ ------------

Commitments, Contingencies and Other Matters

See accompanying notes to consolidated financial statements.

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Continued)

June 30,
---------------------------
2003 2002
------------ ------------

Stockholders' Equity:
Class A non-voting preferred stock - $.0001
par value; authorized - 8,000,000
shares; issued and outstanding - 7,836,287
shares at June 30, 2003 and 2002 $ 784 $ 784
Preferred stock - $.001 par value;
authorized - 10,000,000 shares; issued
and outstanding - none - -
Common stock - $.0001 par value; authorized
110,000,000 and 85,000,000 shares at
June 30, 2003 and 2002, respectively;
issued - 82,452,958 and 71,582,243
shares at June 30, 2003 and 2002,
respectively; outstanding - 82,161,894 and
71,291,179 shares at June 30, 2003 and 2002 8,246 7,158
Class B common stock (10 votes per share) -
$.0001 par value; authorized - 4,000,000
shares; issued and outstanding - 4,153 and
4,211 shares at June 30, 2003 and 2002 - -
Class C common stock (25 votes per share) -
$.0001 par value; authorized - 10,000,000
shares; issued and outstanding - 9,562,824
shares at June 30, 2003 and 2002 956 956
Paid-in capital in excess of par value 131,519,579 120,156,196
Accumulated other comprehensive income 68,672 85,569
Accumulated deficit (97,889,309) (82,882,893)
Notes receivable from stockholders (654,246) (997,132)
Treasury stock, at cost - 291,064 shares
of common stock at June 30, 2003 and 2002 (675,390) (675,390)
------------ ------------
Total Stockholders' Equity 32,379,292 35,695,248
------------ ------------
Total Liabilities and Stockholders' Equity $ 58,748,661 $ 73,128,823
============ ============

See accompanying notes to consolidated financial statements.

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended June 30,
------------------------------------------
2003 2002 2001
------------ ------------ ------------

Revenues
Product sales - net $ 17,652,799 $ 5,364,809 $ 3,370,826
Product sales - related parties - net 7,276,209 6,229,195 2,686,646
Service and repair fees - net 2,063,999 1,901,954 1,893,251
Service and repair fees - related
parties - net 415,691 254,173 123,086
Patient revenue - net - - 1,285,028
Management and other fees - related
medical practices - net 22,932,837 27,007,974 28,491,201
License fees and royalties 2,550,000 2,403,000 2,424,000
------------ ------------ ------------
Total Revenues - Net 52,891,535 43,161,105 40,274,038
------------ ------------ ------------
Costs and Expenses
Costs related to product sales 11,681,213 3,815,081 3,206,385
Costs related to product sales -
related parties 4,351,860 4,523,940 2,956,668
Costs related to service and repair fees 2,539,563 2,338,361 2,216,899
Costs related to service and repair
fees - related parties 627,661 312,493 144,127
Costs related to patient revenue - - 1,138,569
Costs related to management and
other fees - related medical practices 13,277,016 13,691,973 16,295,992
Research and development 5,164,451 5,099,782 5,866,421
Selling, general and administrative 23,361,212 21,379,598 19,118,276
Compensatory element of stock
issuances for selling, general
and administrative expenses 4,842,748 4,712,163 4,044,826
Provision for bad debts 701,534 972,236 442,505
Loss on impairment of management
agreement 795,237 - -
Amortization of management
agreements 696,285 696,285 695,960
------------ ------------ ------------
Total Costs and Expenses 68,038,780 57,541,912 56,126,628
------------ ------------ ------------
Loss from Operations (15,147,245) (14,380,807) (15,852,590)

Financing Costs Paid in Stock and Warrants - (2,368,541) -
Interest Expense (580,748) (691,126) (971,932)
Interest Expense - Related Parties (45,702) - -
Investment Income 470,271 824,858 1,626,359
Interest Income - Related Parties 200,407 149,004 215,510
Other (Expense) Income (25,499) (69,133) 964,488
Minority Interests in Income of Partnerships (776,222) (392,842) (480,166)
------------ ------------ ------------
Loss Before Benefit From (Provision for)
Income Taxes (15,904,738) (16,928,587) (14,498,331)

Benefit From (Provision for) Income Taxes 703,871 (27,039) (39,996)
------------ ------------ ------------
Net Loss From Continuing Operations $(15,200,867) $(16,955,626) $(14,538,327)
------------ ------------ ------------

See accompanying notes to consolidated financial statements.

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended June 30,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
Discontinued Operations:
Loss from discontinued operations $ (315,363) $ (5,926,581) $ (645,535)
Gain on sale of discontinued
operations 509,814 - -
------------ ------------ ------------
Net Gain (Loss) from
Discontinued Operations 194,451 (5,926,581) (645,535)
------------ ------------ ------------
Net Loss $(15,006,416) $(22,882,207) $(15,183,862)
============ ============ ============
Basic and Diluted Net Loss Per
Share - Continuing Operations $(0.20) $(0.27) $(0.25)
Basic and Diluted Net Loss Per
Share - Discontinued Operations - (0.09) (.01)
------ ====== ======
Basic and Diluted Net Loss Per Share $(0.20) $(0.36) $(0.26)
====== ====== ======
Weighted Average Number of Shares
Outstanding 75,816,973 63,511,814 57,388,050
============ ============ ============

See accompanying notes to consolidated financial statements.

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2003

Class B
Common
Common Stock Stock Class C
---------------------- -------- Common
Shares Amount Shares Stock
---------- --------- -------- -------

Balance - June 30, 2002 71,582,243 $ 7,158 4,211 $ 956

Net loss - - - -

Other comprehensive income, net of tax:
Unrealized losses on securities
arising during the year, net of tax - - - -

Exercise of stock options 27,571 3 - -
Exercise of callable warrants 1,000,000 100 - -
Stock issued to employees under stock
bonus plans 2,400,117 240 - -
Issuance of stock for goods and services 5,433,077 543 - -
Issuance of stock for consulting services 772,042 78 - -
Issuance of stock for options held by
related party 1,125,000 113 - -
Issuance of stock for note payable 15,000 1 - -
Issuance of stock for minority interest 97,850 10 - -
Net reduction in notes receivable
from stockholders - - - -
Conversion of Class B common stock to
common stock 58 - (58) -
========== --------- -------- -------
BALANCE - JUNE 30, 2003 82,452,958 $ 8,246 4,153 $ 956
========== ========= ======== =======

See accompanying notes to consolidated financial statements.

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2003

Class A Paid-in
Non-Voting Capital in
Preferred Excess of Treasury
Stock Par Value Stock
---------- ------------ ----------

Balance - June 30, 2002 $ 784 $120,156,196 $ (675,390)

Net loss - - -

Other comprehensive income, net of tax:
Unrealized losses on securities
arising during the year, net of tax - - -

Exercise of stock options - 31,200 -
Exercise of callable warrants - 1,072,972 -
Stock issued to employees under stock
bonus plans - 2,653,942 -
Issuance of stock for goods and services - 5,473,406 -
Issuance of stock for consulting services - 784,806 -
Issuance of stock for options held by
related party - 1,226,138 -
Issuance of stock for note payable - 21,749 -
Issuance of stock for minority interest - 99,170 -
Net reduction in notes receivable
from stockholders - - -
Conversion of Class B common stock to -
common stock - - -
---------- ------------ ----------
BALANCE - JUNE 30, 2003 $ 784 $131,519,579 $ (675,390)
========== ============ ==========

See accompanying notes to consolidated financial statements.

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2003

Notes Accumulated
Receivable Other
From Comprehensive Accumulated
Stockholders Income Deficit
------------ ------------ ------------

Balance - June 30, 2002 $(997,132) $ 85,569 $(82,882,893)

Net loss - - (15,006,416)

Other comprehensive income, net of tax:
Unrealized losses on securities
arising during the year, net of tax - (16,897) -

Exercise of stock options - - -
Exercise of callable warrants - - -
Stock issued to employees under stock
bonus plans - - -
Issuance of stock for goods and services - - -
Issuance of stock for consulting services - - -
Issuance of stock for options held by
related party - - -
Issuance of stock for note payable - - -
Issuance of stock for minority interest - - -
Net reduction in notes receivable
from stockholders 342,886 - -
Conversion of Class B common stock to
common stock - - -
----------- ----------- ------------
BALANCE - JUNE 30, 2003 $ (654,246) $ 68,672 $(97,889,309)
=========== =========== ============

See accompanying notes to consolidated financial statements.

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2003

Comprehensive
Total Income (Loss)
------------ -------------
Balance - June 30, 2002 $ 35,695,248 $ -

Net loss (15,006,416) (15,006,416)

Other comprehensive income, net of tax:
Unrealized losses on securities
arising during the year, net of tax (16,897) (16,897)

Exercise of stock options 31,203 -
Exercise of callable warrants 1,073,072 -
Stock issued to employees under stock
bonus plans 2,654,182 -
Issuance of stock for goods and services 5,473,949 -
Issuance of stock for consulting services 784,884 -
Issuance of stock for options held by
related party 1,226,251 -
Issuance of stock for note payable 21,750 -
Issuance of stock for minority interest 99,180 -
Net reduction in notes receivable
from stockholders 342,886 -
Conversion of Class B common stock to
common stock - -
------------ ------------
BALANCE - JUNE 30, 2003 $ 32,379,292 $(15,023,313)
============ ============

See accompanying notes to consolidated financial statements.

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2002

Class A Paid-in
Common Stock Class C Non-Voting Capital in Treasury
---------------------- Common Preferred Excess of Stock
Shares Amount Stock Stock Par Value Amount
---------- --------- ------- ---------- ------------ ---------

Balance - June 30, 2001 59,524,455 $ 5,952 $ 956 $ 784 $104,984,020 $(675,390)

Net loss - - - - - -

Other comprehensive income, net of tax:
Unrealized gains on
securities arising
during the year,
net of tax - - - - - -

Exercise of stock options 13,868 1 - - 15,045 -
Exercise of callable warrants 1,000,000 100 - - 1,499,900 -
Stock issued to employees
under stock bonus plans 2,108,674 211 - - 2,762,301 -
Issuance of stock for
professional services 604,492 60 - - 728,196 -
Issuance of stock under
consulting contracts 1,116,078 112 - - 1,497,916 -
Issuance of stock for note
receivable - stockholders 140,100 14 - - 159,161 -
Issuance of stock for
conversion of convertible
debentures 3,832,073 383 - - 4,499,617 -
Issuance of stock for financing
costs 1,099,503 110 - - 1,291,036 -
Issuance of stock for notes
payable 2,045,000 205 - - 2,602,391 -
Issuance of stock for equipment 98,000 10 - - 116,613 -
Net reduction in notes
receivable from stockholders - - - - - -
Amortization of unearned
compensation - - - - - -
Amortization of value assigned
to warrants in debt financing - - - - - -
---------- --------- ------- -------- ------------ ---------
BALANCE - JUNE 30, 2002 71,582,243 $ 7,158 $ 956 $ 784 $120,156,196 $(675,390)
========== ========= ======= ======== ============ =========

See accompanying notes to consolidated financial statements.

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2002

Notes Accumulated
Receivable Other
from Unearned Comprehensive Accumulated Comprehensive
Stockholders Compensation Income Deficit Total Income (Loss)
------------ ------------ ------------- ------------- ------------ -------------

Balance - June 30, 2001 $(1,040,457) $(1,529,018) $ 84,133 $(60,000,686) $ 41,830,294 $ -

Net loss - - - (22,882,207) (22,882,207) (22,882,207)

Other comprehensive
income, net of tax:
Unrealized gains
on securities
arising during
the year, net 1,436 - 1,436 1,436
of tax - -

Exercise of stock
options - - - - 15,046 -
Exercise of callable
warrants - - - - 1,500,000 -
Stock issued to
employees under stock
bonus plans - - - - 2,762,512 -
Issuance of stock for
professional services - - - - 728,256 -
Issuance of stock under
consulting contracts - - - - 1,498,028 -
Issuance of stock for
notes receivable -
stockholders (159,175) - - - - -
Issuance of stock for
conversion of
convertible debentures - - - - 4,500,000 -
Issuance of stock for
financing costs - - - - 1,291,146 -
Issuance of stock for
notes payable - - - - 2,602,596 -
Issuance of stock for
equipment - - - - 116,623 -
Net reduction in notes
receivable from
stockholders 202,500 - - - 202,500 -
Amortization of unearned
compensation - 451,623 - - 451,623 -
Amortization of value
assigned to warrants
in debt financing - 1,077,395 - - 1,077,395 -
----------- ----------- ----------- ------------ ------------- ------------
BALANCE - JUNE 30, 2002 $ (997,132) $ - $ 85,569 $(82,882,893) $ 35,695,248 $(22,880,771)
=========== =========== =========== ============ ============= ============

See accompanying notes to consolidated financial statements.

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2001

Class A Paid-in
Common Stock Class C Non-Voting Capital in Treasury
-------------------- Common Preferred Excess of Stock
Shares Amount Stock Stock Par Value Amount
---------- -------- ------- ---------- ------------ ----------

Balance - June 30, 2000 56,315,471 $ 5,631 $ 956 $ 784 $ 98,581,757 $(671,359)

Net loss - - - - - -

Other comprehensive income,
net of tax:
Unrealized gain on securities
arising during the year,
net of tax - - - - - -
Less: Reclassification
adjustment for (gains)
losses included in net
loss - - - - - -

Exercise of stock options 24,000 2 - - 28,170 -
Purchase of treasury stock - - - - - (4,031)
Stock issued to employees under
stock bonus plans 1,636,602 164 - - 2,636,417 -
Issuance of stock for professional
services 435,976 44 - - 653,895 -
Issuance of stock under consulting
contracts 923,482 92 - - 1,632,980 -
Issuance of stock for research
and development expenses 183,924 18 - - 344,839 -
Issuance of stock for notes
receivable - stockholders 5,000 1 - - 10,311 -
Value assigned to warrants
issued in debt financing - - - - 1,095,651 -
Net reduction in notes
receivable from stockholders - - - - - -
Amortization of unearned
compensation - - - - - -
---------- -------- --------- -------- ------------ ---------
BALANCE - JUNE 30, 2001 59,524,455 $ 5,952 $ 956 $ 784 $104,984,020 $(675,390)
========== ======== ========= ======== ============ =========

See accompanying notes to consolidated financial statements.

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2001

Balance - June 30, 2000 $(1,338,005) $ (213,374) $ (264,808) $(44,816,824) $ 51,284,758 $ -

Net loss - - - (15,183,862) (15,183,862) $(15,183,862)

Other comprehensive
income, net of tax:
Unrealized gains on
Securities
arising during
the year, net of
tax - - 342,050 - - 342,050
Less: Reclassific-
ation adjustment
for (gains)losses
included in net
loss - - 6,891 - 348,941 6,891

Exercise of stock
options - - - - 28,172 -
Purchase of treasury
stock - - - - (4,031) -
Stock issued to
employees under stock
bonus plans - - - - 2,636,581 -
Issuance of stock for
professional services - - - - 653,939 -
Issuance of stock under
consulting contracts - (1,247,813) - - 385,259 -
Issuance of stock for
research and develop-
ment expenses - - - - 344,857 -
Issuance of stock for
notes receivable -
stockholders (10,312) - - - - -
Value assigned to
warrants issued in
debt financing - (1,095,651) - - - -
Net reduction in notes
receivable from
stockholders 307,860 - - - 307,860 -
Amortization of unearned
compensation - 1,027,820 - - 1,027,820 -
------------ ----------- ------------ ------------ ------------ ------------
BALANCE - JUNE 30, 2001 $(1,040,457) $(1,529,018) $ 84,133 $(60,000,686) $ 41,830,294 $(14,834,921)
============ ============ ============ ============ ============ ============

See accompanying notes to consolidated financial statements.

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended June 30,
------------------------------------------
2003 2002 2001
------------ ------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(15,006,416) $(22,882,207) $(15,183,862)
(Income) loss from discontinued
operations (194,451) 5,926,581 645,535
------------ ------------ ------------
Loss from continuing operations (15,200,867) (16,955,626) (14,538,327)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Minority interest in income of
partnerships 776,222 392,842 480,166
Depreciation and amortization 4,433,490 4,809,468 4,116,455
License fee - - 11,700,000
Amortization of unearned license fee (2,340,000) (2,340,000) (2,340,000)
Loss on impairment of management
agreement 795,237 - -
Gain on sale of partnership interest - - (750,000)
Issuance of stock for research and
development expenses - - 344,839
Gain on sale of equipment (1,608) - (150,000)
Imputed interest on deferred payment
obligations - - 52,087
Provision for bad debts 701,534 972,236 442,505
Compensatory element of stock
issuances 4,842,748 4,712,163 4,049,210
Stock issued for costs and expenses 5,473,949 3,093,797 653,895
(Increase) decrease in operating
assets, net:
Accounts receivable (73,152) (1,320,499) (211,776)
Notes receivable 170,000 200,000 125,810
Costs and estimated earnings
in excess of billings on
uncompleted contracts 792,733 616,250 (800,697)
Inventories (393,494) (938,392) (189,206)
Sales-type lease receivable -
related party - - (1,895,000)
Sales-type lease receivable - - (1,083,192)
Principal payments received on
sales-type lease - related
parties 2,597,331 93,391 120,428
Principal payments received on
sales-type lease 119,601 119,550 102,394
Prepaid expenses and other current
assets (333,959) (198,151) (301,072)
Other assets 80,124 (44,584) 4,810
Receivables and advances to
related parties and affiliates 492,594 62,151 (400,161)
Increase (decrease) in operating
liabilities, net:
Accounts payable (295,413) 1,031,617 1,275,392
Other current liabilities 472,617 (682,950) (1,559,230)
Customer advances (2,774,867) 6,035,110 1,089,971
Billings in excess of costs and
estimated earnings on
uncompleted contracts 3,636,527 763,320 351,592
Other liabilities (57,850) 32,123 189,073
Income taxes payable (734,104) (7,162) (52,029)
------------ ------------ ------------
NET CASH PROVIDED BY CONTINUING
OPERATIONS 3,179,393 446,654 827,937

See accompanying notes to consolidated financial statements.

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended June 30,
------------------------------------------
2003 2002 2001
------------ ----------- ------------

NET CASH PROVIDED BY CONTINUING
OPERATIONS 3,179,393 446,654 827,937

NET CASH PROVIDED BY (USED IN)
DISCONTINUED OPERATIONS 232,939 (244,905) (1,814,432)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 3,412,332 201,749 (986,495)
------------ ------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES
(Purchases) sales of marketable securities $ (280,431) $ 513,219 $ 5,747,851
Purchases of property and equipment (1,273,557) (3,097,512) (2,550,008)
Costs of capitalized software development (791,216) (855,612) (752,285)
Proceeds from sale of discontinued
operations, net 2,821,564 - -
Proceeds from sale of equipment 133,898 39,465 150,000
Cost of patents and copyrights (424,761) (548,290) -
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 395,631 (3,948,730) 2,595,558
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible debentures - - 4,500,000
Proceeds from long-term debt 950,000 - 500,000
Decrease (increase) in restricted cash 5,500,000 - (500,000)
Costs in connection with debt financing - - (270,729)
Repayment of borrowings and capital lease
Obligations (8,674,362) (3,930,289) (3,697,923)
Net proceeds from exercise of stock
options and warrants 1,104,275 1,515,046 28,172
Proceeds from sale of partnership interest - - 750,000
Purchase of common stock - - (4,031)
Distributions to holders of minority
Interests (604,230) (273,508) (348,709)
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (1,724,317) (2,688,751) 956,780
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,873,512 (6,435,732) 2,565,843

CASH AND CASH EQUIVALENTS - BEGINNING OF
YEAR 7,460,866 13,896,598 11,330,755
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 9,334,378 $ 7,460,866 $ 13,896,598
============ ============ ============

See accompanying notes to consolidated financial statements.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 1 - DESCRIPTION OF BUSINESS

FONAR Corporation (the "Company" or "FONAR") is a Delaware corporation, which
was incorporated on July 17, 1978. FONAR is engaged in the research,
development, production and marketing of medical scanning equipment, which uses
principles of Magnetic Resonance Imaging ("MRI") for the detection and diagnosis
of human diseases. In addition to deriving revenues from the direct sale of MRI
equipment, revenue is also generated from its installed-base of customers
through its service and upgrade programs.

Health Management Corporation of America ("HMCA") was organized by the Company
in March 1997, as a wholly-owned subsidiary, in order to enable the Company to
expand into the business of providing comprehensive management services to
physicians' practices and other medical providers, including diagnostic imaging
centers and ancillary services. The services provided by the Company include
development, administration, leasing of office space, facilities and medical
equipment, provision of supplies, staffing and supervision of non-medical
personnel, legal services, accounting, billing and collection and the
development and implementation of practice growth and marketing strategies.

HMCA entered the physician and diagnostic management services business through
the consummation of two acquisitions in fiscal 1997, two acquisitions in fiscal
1998, and one acquisition consummated in fiscal 1999. The acquired companies in
all cases were actively engaged in the business of managing medical providers.
The medical providers are diagnostic imaging centers, principally MRI scanning
centers, multi-specialty practices and primary care practices. On April 8, 2003,
HMCA sold all of its issued and outstanding stock of A&A Services, Inc., a
physician practice management services organization engaged in the business of
managing four primary care practices (see Note 22).

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
---------------------------

The consolidated financial statements include the accounts of FONAR Corporation,
its majority and wholly-owned subsidiaries and partnerships. All significant
intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates
----------------

The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities in the consolidated financial statements and accompanying notes. The
most significant estimates relate to allowances, intangible assets, income
taxes, useful lives of equipment, contingencies, revenue recognition and
litigation. In addition, healthcare industry reforms and reimbursement practices
will continue to impact the Company's operations and the determination of
contractual and other allowance estimates. Actual results could differ from
those estimates.

FONAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Investment in Marketable Securities
-----------------------------------

The Company accounts for its investments using Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). This standard requires that certain debt
and equity securities be adjusted to market value at the end of each accounting
period. Unrealized market value gains and losses are charged to earnings if the
securities are traded for short-term profit. Otherwise, such unrealized gains
and losses are charged or credited to comprehensive income.

Management determines the proper classifications of investments in obligations
with fixed maturities and marketable equity securities at the time of purchase
and re-evaluates such designations as of each balance sheet date. At June 30,
2003 and 2002, all securities covered by SFAS No. 115 were designated as
available for sale. Accordingly, these securities are stated at fair value, with
unrealized gains and losses reported in comprehensive income. Realized gains and
losses on sales of investments, as determined on a specific identification
basis, are included in investment income in the Consolidated Statements of
Operations.

Inventories
-----------

Inventories consist of purchased parts, components and supplies, as well as
work-in-process, and are stated at the lower of cost determined on the first-in,
first-out method or market.

Property and Equipment
----------------------

Property and equipment procured in the normal course of business is stated at
cost. Property and equipment purchased in connection with an acquisition is
stated at its estimated fair value, generally based on an appraisal. Property
and equipment is being depreciated for financial accounting purposes using the
straight-line method over the shorter of their estimated useful lives, generally
five to seven years, or the term of a capital lease, if applicable. Leasehold
improvements are being amortized over the shorter of the useful life or the
remaining lease term. Upon retirement or other disposition of these assets, the
cost and related accumulated depreciation of these assets are removed from the
accounts and the resulting gains or losses are reflected in the results of
operations. Expenditures for maintenance and repairs are charged to operations.
Renewals and betterments are capitalized.

Management Agreements
---------------------

Amounts allocated to management agreements, in connection with four acquisitions
completed during the period from June 1997 through August 1998, are being
amortized using the straight-line method over the 20-year term of the
agreements.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Other Intangible Assets
-----------------------

1) Capitalized Software Development Costs

Capitalization of software development costs begins upon the establishment of
technological feasibility. Technological feasibility for the Company's computer
software is generally based upon achievement of a detail program design free of
high risk development issues and the completion of research and development on
the product hardware in which it is to be used. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized computer software development costs requires considerable judgement
by management with respect to certain external factors, including, but not
limited to, technological feasibility, anticipated future gross revenue,
estimated economic life and changes in software and hardware technology.

Amortization of capitalized software development costs commences when the
related products become available for general release to customers. Amortization
is provided on a product by product basis. The annual amortization is the
greater of the amount computed using (a) the ratio that current gross revenue
for a product bear to the total of current and anticipated future gross revenue
for that product, or (b) the straight-line method over the remaining estimated
economic life of the product.

The Company periodically performs reviews of the recoverability of such
capitalized software development costs. At the time a determination is made that
capitalized amounts are not recoverable based on the estimated cash flows to be
generated from the applicable software, any remaining capitalized amounts are
written off.

2) Patents and Copyrights

Amortization is calculated on the straight-line basis over a period ranging from
15 to 17 years.

Long-Lived Assets
-----------------

The Company periodically assesses the recoverability of long-lived assets,
including property and equipment, intangibles and management agreements, when
there are indications of potential impairment, based on estimates of
undiscounted future cash flows. The amount of impairment is calculated by
comparing anticipated discounted future cash flows with the carrying value of
the related asset. In performing this analysis, management considers such
factors as current results, trends, and future prospects, in addition to other
economic factors (see Note 3).

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition
-------------------

Revenue on sales contracts for scanners is recognized under the
percentage-of-completion method. The Company manufactures its scanners under
specific contracts that provide for progress payments. Production and
installation take approximately six months. The percentage of completion is
determined by the ratio of costs incurred to date on completed sub-assemblies to
the total estimated cost for each scanner. Contract costs include purchased
parts and components, direct labor and overhead. Revisions in cost estimates and
provisions for estimated losses on uncompleted contracts, if any, are made in
the period in which such losses are determined. The asset, "Costs and Estimated
Earnings in Excess of Billings on Uncompleted Contracts", represents revenues
recognized in excess of amounts received. The liability, "Billings in Excess of
Costs and Estimated Earnings on Uncompleted Contracts", represents amounts
received in excess of revenues recognized.

Revenue on scanner service contracts is recognized on the straight-line method
over the related contract period, usually one year.

Revenue from sales of other items is recognized upon shipment.

Revenue from sales-type leases are recognized when collectibility of the minimum
lease payments is reasonably predictable and no important uncertainties surround
the amount of unreimbursable costs yet to be incurred by the Company as lessor
under the lease. The minimum lease payments, plus the unguaranteed residual
value accruing to the benefit of the Company as lessor, are recorded as the
gross investment in the lease. The difference between the gross investment in
the lease and the sum of the present value of the minimum lease payments and
unguaranteed residual value, accruing to the Company's benefit as lessor, are
recorded as unearned income.

Revenue under management and lease contracts is recognized based upon
contractual agreements for management services rendered by the Company and
leases of medical equipment under various long-term agreements with related
medical providers (the "PC's"). The PC's are primarily owned by Raymond V.
Damadian, M.D., President and Chairman of the Board of FONAR. The Company's
agreements with the PC's stipulate fees for services rendered and equipment
leased, are primarily calculated on activity based efforts at pre-determined
rates per unit of activity. All fees are re-negotiable at the anniversary of the
agreements and each year thereafter.

Patient revenue from the Company's wholly-owned Florida multi-specialty practice
through the period ended June 30, 2001 was recorded in the period the services
were rendered at established rates reduced by provisions for doubtful accounts
and contractual adjustments. Such adjustments represent the difference between
charges at established rates and estimated recoverable amounts and were
recognized in the period the services were rendered. Any differences between
estimated contractual adjustments and actual final settlements were recognized
as contractual adjustments in the year final settlements were determined. This
multi-specialty practice was sold by the Company on June 30, 2001 (see Note 17).

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Research and Development Costs
------------------------------

Research and development costs are charged to expense as incurred. The costs of
materials and equipment that are acquired or constructed for research and
development activities, and have alternative future uses (either in research and
development, marketing or production), are classified as property and equipment
and depreciated over their estimated useful lives.

During the year ended June 30, 2001, the Company acquired a minority interest in
a development stage technology company through the issuance of 270,000 shares
valued at $344,857. The entire amount of this purchase price was charged to
research and development expenses.

Advertising Costs
-----------------

Advertising costs are expensed as incurred.

Shipping Costs
--------------

The Company's shipping and handling costs are included under costs related to
product sales.

Income Taxes
------------

Deferred tax assets and liabilities are determined based on the difference
between the financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.

Customer Advances
-----------------

Cash advances and progress payments received on sales orders are reflected as
customer advances until such time as revenue recognition begins.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock Options and Warrants and Similar Equity Instruments and Earnings (Loss)
Per Share
--------------------------------------------------------------------------------

At December 31, 2002, the Company had various stock-based employee compensation
plans, which are more fully described in Note 11. As permitted under SFAS No.
148, "Accounting for Stock-Based Compensation--Transition and Disclosure", which
amended SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation",
the Company has elected to continue to follow the intrinsic value method in
accounting for its stock-based employee compensation arrangements as defined by
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees", and related interpretations including Financial Accounting
Standards Board Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation", an interpretation of APB No. 25. No stock-based
employee compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant.

Basic earnings (loss) per share is computed based on weighted average shares
outstanding and excludes any potential dilution. In accordance with EITF Topic
D-95, "Effect of Participating Convertible Securities on the Computation of
Basic Earnings Per Share," the Company's participating convertible securities,
which include the Class A Non-voting Preferred stock, Class B common stock and
Class C common stock, are not included in the computation of basic or diluted
earnings per share since they are antidilutive. Diluted earnings (loss) per
share reflects the potential dilution from the exercise or conversion of all
dilutive securities into common stock based on the average market price of
common shares outstanding during the period.

Options and warrants to purchase approximately 4,691,000, 3,022,000 and
4,036,000 shares of common stock were outstanding at June 30, 2003, 2002 and
2001, respectively, but were not included in the computation of diluted earnings
per share due to losses for all years, as a result of the options and warrants
being antidilutive.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock Options and Warrants and Similar Equity Instruments and Earnings (Loss)
Per Share (Continued)
--------------------------------------------------------------------------------

The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation:

For the Years Ended
June 30,
-------------------------------------------
2003 2002 2001
------------ ------------ -------------

Net Loss As Reported $(15,006,416) $(22,882,207) $(15,183,862)

Deduct:
Total stock-based employee
compensation expense determined
under fair value based method
for all awards 537,549 585,543 113,991
------------ ------------ ------------
Proforma Net Loss $(15,543,965) $(23,467,750) $(15,297,853)
============ ============ ============

Basic and Diluted Net Loss Per Share
as Reported $(0.20) $(0.36) $(0.26)
====== ====== ======
Basic and Diluted Proforma Net Loss
Per Share $(0.21) $(0.37) $(0.27)
====== ====== ======

The fair value of options at date of grant was estimated using the Black-Scholes
fair value based method with the following weighted average assumptions:

For the Years Ended
June 30,
-------------------------------------------
2003 2002 2001
------------ ------------ -------------

Expected life (years) 3 3 3
Interest rate 4.00% 4.00% 5.00%
Annual rate of dividends 0% 0% 0%
Volatility 55% 92% 98%

Cash and Cash Equivalents
-------------------------

The Company considers all short-term highly liquid investments with a maturity
of three months or less when purchased to be cash or cash equivalents.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Concentration of Credit Risk
----------------------------

Cash: The Company maintains its cash and cash equivalents with various financial
institutions, which exceed federally insured limits throughout the year. At June
30, 2003, the Company had cash on deposit of approximately $7,918,000 in excess
of federally insured limits.

Related Parties: Net revenues from related parties accounted for approximately
58%, 78% and 78% of the consolidated net revenues for the years ended June 30,
2003, 2002 and 2001, respectively.

Fair Value of Financial Instruments
-----------------------------------

The financial statements include various estimated fair value information at
June 30, 2003, 2002 and 2001, as required by SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments". Such information, which pertains to the
Company's financial instruments, is based on the requirements set forth in that
Statement and does not purport to represent the aggregate net fair value to the
Company.

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:

Cash and cash equivalents: The carrying amount approximates fair value because
of the short-term maturity of those instruments.

Accounts receivable and accounts payable: The carrying amounts approximate fair
value because of the short maturity of those instruments.

Investment in sales-type leases and investments, advances and notes to
affiliates and related parties: The carrying amount approximates fair value
because the discounted present value of the cash flow generated by the related
parties approximates the carrying value of the amounts due to the Company.

Long-term debt and notes payable: The carrying amounts of debt and notes payable
approximate fair value due to the length of the maturities, the interest rates
being tied to market indices and/or due to the interest rates not being
significantly different from the current market rates available to the Company.

All of the Company's financial instruments are held for purposes other than
trading.

Comprehensive Income (Loss)
---------------------------

Comprehensive income (loss) generally includes all changes in equity during a
period, except those resulting from investments by stockholders and
distributions to stockholders.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements
--------------------------------

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity to be
recognized when the liability is incurred. A fundamental conclusion reached by
the FASB in this statement is that an entity's commitment to a plan, by itself,
does not create a present obligation to others that meets the definition of a
liability. SFAS 146 also establishes that fair value is the objective for
initial measurement of the liability. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The adoption of SFAS 146 did not have a
significant impact to the consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The recognition and measurement
provisions are effective on a prospective basis to guarantees issued or modified
after December 31, 2002. The adoption of FIN 45 did not have a material impact
on the Company's financial position and results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 provides guidance on the
identification of entities for which control is achieved through means other
than through voting rights, variable interest entities, and how to determine
when and which business enterprises should consolidate variable interest
entities. This interpretation applies immediately to variable interest entities
created after January 31, 2003. It applies in the first fiscal year or interim
period beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Company is currently evaluating the effect that the adoption of FIN 46 will
have on its consolidated financial position and results of operations.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)
--------------------------------

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The statement amends and
clarifies accounting for derivative instruments, including certain derivatives
instruments embedded in other contracts and for hedging activities under SFAS
133. This Statement is effective for contracts entered into or modified after
June 30, 2003, except as stated below and for hedging relationships designated
after June 30, 2003 the guidance should be applied prospectively. The provisions
of this Statement that relate to SFAS 133 Implementation Issues that have been
effective for fiscal quarters that began prior to June 15, 2003, should continue
to be applied in accordance with respective effective dates. In addition,
certain provisions relating to forward purchases or sales of when-issued
securities or other securities that do not yet exist, should be applied to
existing contracts as well as new contracts entered into after June 30, 2003.
The adoption of SFAS No. 149 did not have an impact on the Company's
consolidated financial position and results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
establishes standards for classification and measurement in the statement of
financial position of certain financial instruments with characteristics of both
liabilities and equity. It requires classification of a financial instrument
that is within its scope as a liability (or an asset in some circumstances).
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003 and, otherwise, is effective at the beginning of the first
interim period beginning after July 15, 2003. The Company is currently
evaluating the effect that the adoption of SFAS No. 150 will have on its
consolidated financial position and results of operations.

Reclassifications
-----------------

Certain prior year balances have been reclassified to conform to the current
year presentation.

NOTE 3 - MANAGEMENT AGREEMENTS

In connection with four acquisitions completed during the period June of 1997
through August of 1998, a portion of the purchase price was allocated to various
long-term management agreements. The cost, accumulated amortization and net
carrying value at June 30, 2003 and 2002 is as follows:

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 3 - MANAGEMENT AGREEMENTS (Continued)

As of June 30, 2003
-------------------
Net
Acquisition Accumulated Carrying
Date Cost Amortization Value
----------- ----------- ------------ ----------

Affordable Diagnostics, Inc. June 1997 $ 3,719,640 $ 1,069,720 $2,649,920

Dynamic Health Care
Management, Inc. August 1998 8,951,907 2,237,977 6,713,930
----------- ----------- ----------
$12,671,547 $ 3,307,697 $9,363,850
=========== =========== ==========

As of June 30, 2002
-------------------

Acquisition Accumulated Net Carrying
Date Cost Amortization Value
------------ ----------- ------------ -----------

Affordable Diagnostics, Inc. June 1997 $ 3,719,640 $ 883,738 $ 2,835,902

Dynamic Health Care
Management, Inc. August 1998 8,951,907 1,790,381 7,161,526

Central Health Care
Management Services,
Inc. (a) January 1998 1,254,163 250,832 1,003,331
----------- ---------- -----------
$13,925,710 $2,924,951 $11,000,759
=========== ========== ===========

Amortization of management agreements for the years ended June 30, 2003, 2002
and 2001 was $696,285, $696,285 and $695,960, respectively.

The estimated amortization expense of management agreements for each of the next
5 years is approximately $634,000.

Impairment Loss and Sale of Management Company - A&A Services, Inc.
-------------------------------------------------------------------

During the quarter ended June 30, 2002, the primary care medical practices
managed by the Company's subsidiary, A&A Services, Inc., experienced a
significant overall decline in patient volume and related operating cash flows
which led to the inability of the medical practices to fully and timely pay the
contractual management fees to the Company. As a result of the continued
occurrence of this negative trend, the Company recorded an impairment loss of
$4,700,000 during the quarter ended June 30, 2002 related to those management
agreements, which reduced the carrying value of such agreements to $3,518,847 at
June 30, 2002.

On April 8, 2003, the Company's wholly-owned subsidiary, HMCA, sold all of its
issued and outstanding stock of A&A Services, Inc. (see Note 22).

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 3 - MANAGEMENT AGREEMENTS (Continued)

Impairment Loss - Central Health Care Management Services, Inc.
---------------------------------------------------------------

(a) During the year ended June 30, 2003, the primary care medical practices
managed by the Company's subsidiary, Central Health Care Management Services,
Inc., closed because it experienced a significant overall decline in patient
volume and related operating cash flows, which led to the inability of the
medical practices to fully and timely pay the contractual management fees to the
Company. As a result, the Company recorded an impairment loss of $795,237 during
the quarter ended June 30, 2003, related to the management agreement, which
reduced the carrying value of such agreement to $-0-.

NOTE 4 - MARKETABLE SECURITIES

The following is a summary of marketable securities at June 30, 2003 and 2002:

June 30, 2003
--------------------------------------------
Unrealized Fair
Holding Market
Cost Gain Value
----------- ----------- -----------

U.S. Government Obligations $ 3,919,329 $ 11,887 $ 3,931,216
Corporate and government
agency bonds 1,849,016 56,785 1,905,801
----------- ----------- -----------
$ 5,768,345 $ 68,672 $ 5,837,017
=========== =========== ===========

June 30, 2002
--------------------------------------------
Unrealized Fair
Holding Market
Cost Gain Value
----------- ----------- -----------

U.S. Government Obligations $ 3,764,690 $ 60,942 $ 3,825,632
Corporate and government
agency bonds 1,723,224 24,627 1,747,851
----------- ----------- -----------
$ 5,487,914 $ 85,569 $ 5,573,483
=========== =========== ===========

All debt securities are due within five years. At June 30, 2003, the amount of
cost due within one year was $4,466,422.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 5 - ACCOUNTS RECEIVABLE

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

The Company's receivable from the related PC's substantially consists of fees
outstanding under management agreements, service contracts and lease agreements.
Payment of the outstanding fees is dependent on collection by the PC's of fees
from third party medical reimbursement organizations, principally insurance
companies and health management organizations.

Collection by the Company of its accounts receivable may be impaired by the
uncollectibility of PC's medical fees from third party payors, particularly
insurance carriers covering automobile no-fault and workers compensation claims
due to longer payment cycles and rigorous informational requirements.
Approximately 69%, 52% and 56%, respectively, of the PC's 2003, 2002 and 2001
net revenues were derived from no-fault and personal injury protection claims.
The Company considers the aging of its accounts receivable in determining the
amount of allowance for doubtful accounts and contractual allowances. The
Company generally takes all legally available steps, including legally
prescribed arbitrations, to collect its receivables. Credit losses associated
with the receivables are provided for in the consolidated financial statements
and have historically been within management's expectations.

Net revenues from management and other fees charged to the related PC's
accounted for approximately 43%, 63% and 71%, of the consolidated net revenues
for the years ended June 30, 2003, 2002 and 2001, respectively.

Unaudited Financial Information of Unconsolidated Managed Medical Practices
---------------------------------------------------------------------------

Audited financial information related to the 23 unconsolidated related PC's
managed by the Company is not available. Substantially all of these medical
practice books and records are maintained on a cash basis and depreciate their
assets on an accelerated tax basis and have a December 31 year end.

Summarized unaudited income statement data for the years ended December 31,
2002, 2001 and 2000 related to the 23 unconsolidated medical practices managed
by the Company are as follows:

(000's omitted)

2002 2001 2000
-------- -------- --------

Patient Revenue - Net $ 31,316 $ 32,268 $ 32,765
======== ======== ========
(Loss) Income from
Operations $ (160) $ 207 $ 720
======== ======== ========
Net (Loss) Income (Income
Tax - Cash Basis) $ (608) $ (21) $ 562
======== ======== ========

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 5 - ACCOUNTS RECEIVABLE (Continued)

Unaudited Financial Information of Unconsolidated Managed Medical Practices
---------------------------------------------------------------------------
(Continued)

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

NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES

1) Information relating to uncompleted contracts as of June 30, 2003 and 2002
is as follows:

As of June 30,
---------------------------
2003 2002
----------- -----------

Costs incurred on uncompleted
Contracts $ 5,999,120 $ 3,547,178
Estimated earnings 3,712,940 1,252,425
----------- -----------
9,712,060 4,799,603
Less: Billings to date 14,103,626 4,761,909
----------- -----------
$(4,391,566) $ 37,694
=========== ===========

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES (Continued)

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

As of June 30,
----------------------------
2003 2002
----------- -----------

Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 359,873 $ 1,152,606
Less: Billings in excess
of costs and estimated
earnings on uncompleted
contracts 4,390,012 1,114,912
Less: Billings in excess
of costs and estimated
earnings on uncompleted
contracts - related party 361,427 -
----------- -----------
$(4,391,566) $ 37,694
=========== ===========

2) Customer advances consist of the following:

As of June 30, 2003
-------------------------------------
Related
Total Parties Other
----------- ----------- -----------

Total advances $19,036,391 $ 1,203,473 $17,832,918
Less: Advances on contracts
under construction 14,103,626 576,626 13,527,000
----------- ----------- -----------
$ 4,932,765 $ 626,847 $ 4,305,918
=========== =========== ===========

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 6 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND CUSTOMER
ADVANCES (Continued)

As of June 30, 2002
-------------------------------------
Related
Total Parties Other
----------- ----------- ----------

Total advances $12,469,541 $ 5,957,409 $6,512,132
Less: Advances on contracts
under construction 4,761,909 2,557,409 2,204,500
----------- ----------- ----------
$ 7,707,632 $ 3,400,000 $4,307,632
=========== =========== ==========

NOTE 7 - INVENTORIES

Inventories included in the accompanying consolidated balance sheets consist of:

As of June 30,
--------------------------
2003 2002
----------- ----------

Purchased parts, components and
supplies $ 3,733,783 $3,326,318
Work-in-process 1,323,478 1,337,449
----------- ----------
$ 5,057,261 $4,663,767
=========== ==========

NOTE 8 - INVESTMENT IN SALES-TYPE LEASES

During the year ended June 30, 2001, the Company entered into two lease
agreements, totalling $1,895,000, with related parties for MRI scanners, which
are considered sales-type leases. The leases are payable in 120 monthly
installments of $12,356 and $11,903, respectively, including interest at 10% and
8.5% per annum. The lessees can also elect to pay lump sums of $581,544 and
$580,149, respectively, at the end of the 60 months. If the lease term is
extended beyond 60 months, the lessee may elect to purchase the scanner at the
end of the second 60-month period for a purchase price of $1.

During the year ended June 30, 2003, three related entities that had lease
agreements with the Company obtained financing from a third party and utilized
the proceeds to repay amounts due to the Company. During the year ended June 30,
2003, the Company received a total of $2,600,000 from these related entities as
payment of a substantial portion of the amounts due to the Company under the
lease agreements.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 8 - INVESTMENT IN SALES-TYPE LEASES (Continued)

During the year ended June 30, 2001, the Company entered into a $1,050,000 lease
agreement with a third party for an MRI scanner, which is considered a
sales-type lease. The lease is payable in 75 monthly installments of $18,389
each, plus at the end of the 75-month lease, the lessee can elect to continue
the lease for an additional two years, at a monthly payment of $18,389,
including interest at 12.5% per annum, or pay a lump sum of $200,000.

The Company's investment in sales-type leases as at June 30, 2003 and 2002 is as
follows:

As of June 30,
--------------------------
2003 2002
---------- ----------
Net minimum lease payments
Receivable $ 978,112 $4,630,593
Less: Unearned income 222,180 1,157,729
---------- ----------
Net investment in sales-type leases $ 755,932 $3,472,864
========== ==========
Current portion $ 149,741 $1,916,325
Non-current portion 606,191 1,556,539
---------- ----------
$ 755,932 $3,472,864
========== ==========

Future minimum lease payments are as follows:

Years Ending June 30:
-------------------
2004 $ 149,741
2005 153,413
2006 173,751
2007 79,027
2008 200,000
----------
$ 755,932
==========

Interest income from sales-type leases with related parties for the years ended
June 30, 2003, 2002 and 2001 amounted to $172,363, $126,297 and $187,568,
respectively.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 9 - PROPERTY AND EQUIPMENT

Property and equipment, at cost, less accumulated depreciation and amortization,
at June 30, 2003 and 2002, is comprised of:

As of June 30,
--------------------------
2003 2002
----------- -----------

Diagnostic equipment under lease $ 1,776,450 $ 1,569,197
Diagnostic equipment 3,993,324 5,695,488
Research, development and
demonstration equipment 8,566,952 8,447,906
Machinery and equipment 7,433,921 6,225,307
Furniture and fixtures 3,334,334 3,266,549
Equipment under capital leases 1,684,380 2,444,947
Leasehold improvements 4,710,718 4,235,978
----------- -----------
31,500,079 31,885,372
Less: Accumulated depreciation
and amortization 22,874,645 21,350,539
----------- -----------
$ 8,625,434 $10,534,833
=========== ===========

Depreciation and amortization of property and equipment for the years ended June
30, 2003, 2002 and 2001 was $3,247,798, $3,581,268 and $3,249,611, respectively.

Equipment under capital leases has a net book value of $842,762 and $1,295,537
at June 30, 2003 and 2002, respectively.

NOTE 10 - OTHER INTANGIBLE ASSETS

Other intangible assets, net of accumulated amortization, at June 30, 2003 and
2002 are comprised of:

As of June 30,
--------------------------
2003 2002
---------- ----------

Capitalized software development
costs $3,940,915 $3,171,355
Patents and copyrights 2,098,860 1,674,098
---------- ----------
6,039,775 4,845,453
Less: Accumulated amortization 2,664,588 2,196,835
---------- ----------
$3,375,187 $2,648,618
========== ==========

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 10 - OTHER INTANGIBLE ASSETS (Continued)

Information related to other intangible assets for the years ended June 30,
2003, 2002 and 2001 is as follows:
2003 2002 2001
---------- ---------- ----------
Balance - Beginning of Year $2,648,618 $1,853,506 $1,035,924
Amounts capitalized 1,215,977 1,403,902 1,025,533
Amortization (489,408) (608,790) (207,951)
---------- ---------- ----------
Balance - End of Year $3,375,187 $2,648,618 $1,853,506
========== ========== ==========

Amortization of patents and copyrights for the years ended June 30, 2003, 2002
and 2001 amounted to $72,382, $66,224 and $66,224, respectively.

Amortization of capitalized software development costs for the years ended June
30, 2003, 2002 and 2001 was $417,026, $271,837 and $141,727, respectively.

Amortization of deferred financing costs for the years ended June 30, 2003, 2002
and 2001 was $-0-, $270,729 and $-0-, respectively.

The estimated amortization of patents and copyrights and capitalized software
development costs for the five years ending June 30, 2008 is as follows:

Capitalized
Software
For the Years Patents and Development
Ending June 30, Total Copyrights Costs
--------------- ---------- ----------- -----------
2004 $ 587,963 $ 76,437 $ 511,526
2005 642,620 131,094 511,526
2006 570,355 131,094 439,261
2007 440,355 124,986 315,369
2008 358,564 124,986 233,578
---------- ---------- ----------
$2,599,857 $ 588,597 $2,011,260
========== ========== ==========

NOTE 11 - CAPITAL STOCK

Common Stock
------------

Cash dividends payable on the common stock shall, in all cases, be on a per
share basis, one hundred twenty percent (120%) of the cash dividend payable on
shares of Class B common stock and three hundred sixty percent (360%) of the
cash dividend payable on a share of Class C common stock. In addition, as
revised, pursuant to a legal settlement agreement on April 29, 1997, a special
cash dividend was paid in an amount equal to 3-1/4% on first $10 million, 4-1/2%
on next $20 million, and 5-1/2% on amounts in excess of $30 million of the
amount of any cash awards or settlements received by the Company in connection
with the enforcement by the Company of United States Patent No. 3,789,832
(Apparatus and Method of Detecting Cancer in Tissue). On June 26, 2003, the
Company amended its certificate of incorporation increasing the number of
authorized shares from 85,000,000 to 110,000,000.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 11 - CAPITAL STOCK (Continued)

Class B Common Stock
--------------------

Class B common stock is convertible into shares of common stock on a one-for-one
basis. Class B common stock has 10 votes per share. During the year ended June
30, 2003, 58 shares of Class B common stock were converted to common stock
leaving 4,153 of such shares outstanding as of June 30, 2003. There were 4,211
of such shares outstanding at June 30, 2002.

Class C Common Stock
--------------------

On April 3, 1995, the stockholders ratified a proposal creating a new Class C
common stock and authorized the exchange offering of three shares of Class C
common stock for each share of the Company's outstanding Class B common stock.
The Class C common stock has 25 votes per share, as compared to 10 votes per
share for the Class B common stock and one vote per share for the common stock.
The Class C common stock was offered on a three-for-one basis to the holders of
the Class B common stock. Although having greater voting power, each share of
Class C common stock has only one-third of the rights of a share of Class B
common stock to dividends and distributions. Class C common stock is convertible
into shares of common stock on a three-for-one basis.

Class A Non-Voting Preferred Stock
----------------------------------

On April 3, 1995, the stockholders ratified a proposal consisting of the
creation of a new class of Class A non-voting preferred stock with special
dividend rights and the declaration of a stock dividend on the Company's common
stock consisting of one share of Class A non-voting preferred stock for every
five shares of common stock. The stock dividend was payable to holders of common
stock on October 20, 1995. Class A non-voting preferred stock issued pursuant to
such stock dividend approximates 7.8 million shares.

The Class A non-voting preferred stock is entitled to a special dividend equal
to 3-1/4% of first $10 million, 4-1/2% of next $20 million and 5-1/2% on amounts
in excess of $30 million of the amount of any cash awards or settlements
received by the Company in connection with the enforcement of five of the
Company's patents in its patent lawsuits, less the revised special dividend
payable on the common stock with respect to one of the Company's patents.

The Class A non-voting preferred stock participates on an equal per share basis
with the common stock in any dividends declared and ranks equally with the
common stock on distribution rights, liquidation rights and other rights and
preferences (other than the voting rights).

Options
-------

The Company has stock option plans, which provide for the awarding of incentive
and non-qualified stock options to employees, directors and consultants who may
contribute to the success of the Company. The options granted vest either
immediately or ratably over a period of time from the date of grant, typically
three or four years, at a price determined by the Board of Directors or a
committee of the Board of Directors, generally the fair value of the Company's
common stock at the date of grant. The options must be exercised within ten
years from the date of grant.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 11 - CAPITAL STOCK (Continued)

Options (Continued)
-------

Stock option activity and weighted average exercise prices under these plans and
grants for the years ended June 30, 2003, 2002 and 2001 were as follows:

Weighted
Average
Number of Exercise
Options Price
--------- ---------
Outstanding, July 1, 2000 549,783 $2.53
Granted 2,488,276 1.23
Exercised (24,000) 1.17
Forfeited - -
--------- -----
Outstanding, June 30, 2001 3,014,059 1.47
Granted - -
Exercised (13,868) 1.09
Forfeited - -
--------- -----
Outstanding, June 30, 2002 3,000,191 1.47
Granted 718,073 1.00
Exercised (27,571) 1.13
Forfeited - -
--------- -----
Outstanding, June 30, 2003 3,690,693 $1.38
========= =====
Exercisable at:
June 30, 2001 525,783 $2.59
June 30, 2002 1,184,811 $2.00
June 30, 2003 1,972,777 $1.62

The range of exercise prices for options outstanding as of June 30, 2003 was as
follows:

Weighted
Average
Number of Remaining
Options Contractual
Range of Exercise Price Outstanding Life in Years
----------------------- ----------- -------------

$0.75 - $2.00 3,514,208 7
$3.00 - $5.00 176,485 2
---------
3,690,693
=========

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 11 - CAPITAL STOCK (Continued)

Options (Continued)
-------

On March 10, 1997, HMCA adopted the 1997 Incentive Stock Option Plan, pursuant
to which HMCA authorized the issuance of up to 2,000,000 shares of the common
stock of HMCA. Options to purchase 1,600,000 shares at an option price of $0.10
per share were granted on March 10, 1997.

On December 16, 1998, HMCA adopted the 1998 Non-Statutory Stock Option Plan,
pursuant to which HMCA authorized the issuance of up to 500,000 shares of the
common stock of HMCA. Options to purchase 400,000 shares at an option price of
$1.00 per share were granted on December 16, 1998. During the year ended June
30, 2003, the Company issued 1,125,000 shares of FONAR common stock at a value
of $1,226,251 to a related party in exchange for the options outstanding under
the 1997 Incentive and 1998 Non-Statutory Stock Option Plans.

On December 16, 1998, HMCA adopted the 1998 Incentive Stock Option Plan,
pursuant to which HMCA authorized the issuance of up to 2,000,000 shares of the
common stock of HMCA. Options to purchase 670,000 shares at an option price of
$1.00 per share were granted on December 16, 1998. 470,000 of the options
granted will not become exercisable unless and until such time as HMCA
successfully completes a public offering of its securities, and 200,000 of the
options will not become exercisable until one year thereafter. The options will
expire on December 15, 2008. No options have vested as of June 30, 2003.

Stock option share activity and weighted average exercise prices under the HMCA
plans and grants for the three years ended June 30, 2003, 2002 and 2001 were as
follows:

Weighted
Average
Number of Exercise
Options Price
--------- ---------

Outstanding, June 30, 2001 and
2002 2,670,000 $ .46

Forfeited/exchanged (2,000,000) .28
---------- -----
Outstanding, June 30, 2003 670,000 $1.00
========== =====

Stock Bonus Plans
-----------------

On June 1, 2002, October 1, 2000 and May 9, 1997, the Board of Directors adopted
Stock Bonus Plans. Under the terms of the Plans, 2,000,000, 5,000,000 and
5,000,000 shares of common stock, respectively, were available for issuance
under each plan. The stock bonuses may be awarded no later than May 31, 2012 for
the 2002 Plan, September 30, 2010 for the 2000 Plan and March 31, 2007 for the
1997 Plan.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 11 - CAPITAL STOCK (Continued)

Stock Bonus Plans (Continued)
-----------------

FONAR's 2002 Incentive Stock Option Plan, adopted on July 1, 2002, is intended
to qualify as an incentive stock option plan under Section 422A of the Internal
Revenue Code of 1954, as amended. The 2002 Incentive Stock Option Plan permits
the issuance of stock options covering an aggregate of 2,500,000 shares of
common stock of FONAR. The options have an exercise price equal to the fair
market value of the underlying stock on the date the option is granted, are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The 2002 Stock Option Plan will
terminate on June 30, 2012. As of June 30, 2003, options to purchase 718,073
shares of common stock of FONAR were available for future grant under the plan.

FONAR's 2003 Stock Bonus Plan, adopted on November 1, 2002, permitted FONAR to
issue an aggregate of 5,000,000 shares of common stock of FONAR as bonus or
compensation. As of June 30, 2003, no shares of common stock of FONAR were
available for future grant under the plan.

FONAR's 2003 Supplemental Stock Bonus Plan, adopted May 1, 2003, permits FONAR
to issue an aggregate of 5,000,000 shares of common stock of FONAR as bonus or
compensation. FONAR selects the persons to whom bonus stock will be issued, the
number of shares to be awarded and such other terms and conditions as it deems
advisable. The 2003 Supplemental Stock Bonus Plan will terminate on April 30,
2013. As of June 30, 2003 4,502,170 shares of common stock of FONAR were
available for future grant under the plan.

During fiscal 2003, 2002 and 2001, 2,400,117, 2,108,674 and 3,001,060 shares,
respectively, were issued under the stock bonus plans.

Warrants
--------

In connection with the convertible debenture financing completed in May of 2001
(Note 13), the Company granted to the investor and the placement agent warrants
to purchase a total of 959,501 common shares at an exercise price of $1.801 per
share. The warrants are exercisable over a five-year period. The fair value of
the warrants was estimated at $1.14 on the date of grant using the Black-Scholes
pricing model. Separately, the Company issued to the investor callable warrants
to purchase a total of 2,000,000 shares of common stock at fluctuating prices
(Note 13).

During the quarter ended September 30, 2002, in accordance with the agreements
with The Tail Wind, Ltd., the Company issued replacement callable warrants to
purchase 2,000,000 shares on the same terms as the original warrants. The
exercise price of these replacement callable warrants will vary depending on the
market price of the stock, subject to a minimum exercise price of $2.00 per
share and maximum of $6.00 per share.

On September 30, 2002, the Company issued 1,000,000 shares of common stock and
received proceeds, net of fees, of $1,073,072 upon the exercise of certain of
the callable warrants.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES

Long-term debt, notes payable and capital leases consist of the following:

June 30,
------------------------
2003 2002
----------- -----------
Promissory note payable to a bank, collateralized by
a $5.5 million certificate of deposit, requiring
monthly payments of interest only, at a variable rate
based on the bank's prime rate (4.56% at June 30,
2002) with payment of the entire principal paid on
March 20, 2003. $ - $ 5,500,000

Deferred payment obligation, aggregating $5,490,000,
payable to the former shareholders of Dynamic Health
Care Management, Inc. ("Dynamic"). The obligation is
payable over three years, commencing August 20, 2000.
The obligation has been recorded, net of discount of
$739,324, representing interest imputed at a rate of
7.5% over two years. The obligation is collateralized
by all of the assets of the acquired business and
guaranteed by FONAR. 165,052 2,070,048

Capital lease requiring monthly payments of $28,997,
including interest at a rate of 9.95% per annum
through April 2004. The loan is collateralized by the
related equipment. 303,654 652,297

Capital lease requiring monthly payments of $8,468,
including interest at a rate of 8.63% through April
2006. The loan is collateralized by the related
equipment. $ 164,505 $ 293,438

Note payable requiring monthly payments of $21,083,
including interest at a rate of 8% per annum through
August 31, 2007. The note is collateralized by the
related equipment. 890,938 -

Other (including capital leases for property and
equipment). 405,427 1,108,161
----------- -----------
1,929,576 9,623,944
Less: Current maturities 1,021,952 8,790,779
----------- -----------
$ 907,624 $ 833,165
=========== ===========

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 12 - LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)

The maturities of long-term debt over the next five years are as follows:

Years Ending
June 30,
------------
2004 $1,021,952
2005 385,875
2006 241,121
2007 238,887
2008 41,741
----------
$1,929,576
==========
Modification of Notes Payable
-----------------------------

Pursuant to a stock payment agreement consummated January 11, 2002 between the
Company and the former stockholders of A&A, these stockholders agreed to accept
payment of certain debt obligations in shares of the Company's common stock. The
promissory notes were initially issued by HMCA in partial payment of the
purchase price for the acquisition of A&A Services, Inc. Payments under the
notes were due quarterly through December 2002.

In order to induce the former A&A stockholders to accept payment in stock, and
in the manner provided in the stock payment agreement, the Company agreed to pay
a 15% premium on the note obligations and related accrued interest. On January
11, 2002, the Company issued 1,000,000 shares of common stock to each of them,
or 2,000,000 shares in the aggregate, at $1.27 per share, totalling $2,540,000.
The shares were issued in partial payment of four promissory notes. The debt
conversion expense of $544,370, as a result of the agreement, has been recorded
as part of discontinued operations in the statement of operations for the year
ended June 30, 2002 (see Note 22).

Under the terms of the stock payment agreement, the Company will issue shares
and the net proceeds from the sale of the shares will be applied to the
indebtedness. The quarterly payment due dates were waived, but the net proceeds
received by the selling stockholders from the shares of the Company's stock
issued to them must be sufficient to pay the full indebtedness for each note,
including the premium on the note. The notes were settled in full in April 2003
in connection with the sale by HMCA of all of its issued and outstanding stock
of A&A Services, Inc. (see Note 22). As of June 30, 2002, the notes have been
reclassified and included as part of liabilities of discontinued operations.

NOTE 13 - CONVERTIBLE DEBENTURES

Pursuant to a securities purchase agreement, dated May 24, 2001, between the
Company and an investor group, the Company issued and sold to the investor
group:

- 4% convertible debentures due June 30, 2002 in the aggregate principal amount
of $4.5 million, convertible into shares of the Company's common stock at a
conversion price of $2.047 per share, subject to adjustment.

- Purchase warrants to the investor group to purchase an aggregate of 659,501
shares of the Company's common stock at an initial exercise price of $1.801 per
share, subject to adjustment, exercisable through May 24, 2006.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 13 - CONVERTIBLE DEBENTURES (Continued)

In connection with the issuance of the debentures, the Company paid a placement
fee in the amount of $157,500. In addition, the Company issued 300,000 purchase
warrants to the placement agent at the same terms as to the investor group.

The debentures were convertible at the option of the holder at a price of $2.047
per share. The debentures were payable in ten monthly installments of $450,000,
commencing October 1, 2001. At the option of the Company, the principal
installments could have been either paid in cash or shares of the Company's'
common stock, valued at 90% of the market value, as defined. By amendment, dated
October 25, 2001, however, the payments originally due October 1, 2001 and
November 1, 2001, were extended to November 5, 2001, and for those payments, the
stock was valued at the average of the two lowest closing bid prices for October
2001 less $0.25. During the year ended June 30, 2002, the Company repaid the
principal on the debentures of $4,500,000 and related accrued interest of
$132,022 through the issuance of 4,931,576 shares of the Company's common stock.

Separately, callable warrants were issued to purchase 2,000,000 shares of common
stock and have a variable exercise price. Subject to a maximum price of $6.00
per share and a minimum price of $2.00 per share, which is subject to
adjustment, pursuant to the terms of the warrants, the exercise price will be
equal to the average closing bid price of the Company's common stock for the
full calendar month preceding the date of exercise. The exercise period extends
to May 24, 2004.

The Company had the option of redeeming up to 200,000 callable warrants per
month at a price of $0.01 per underlying warrant share, if the average closing
bid price of its common stock is greater than 115% of the warrant price in
effect for five consecutive trading days in any calendar month.

During the month of June 2002, the investor exercised 1,000,000 callable
warrants at an exercise price of $1.50 per share for total proceeds received by
the Company of $1,500,000. In addition, during August 2002, the investor
exercised an additional 1,000,000 callable warrants at an exercise price of
$1.125 per share for total proceeds received by the Company of $1,125,000.

The purchase warrants provide for proportionate adjustments in the event of
stock splits, stock dividends and reverse stock splits. In addition, exercise
price will be reduced, with certain specified exceptions, if the Company issues
shares at lower prices than the warrant exercise price, or less than market
price, for its common stock.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 14 - INCOME TAXES

Components of the current (benefit from) provision for income taxes are as
follows:

Years Ended June 30,
2003 2002 2001
---------- ---------- ----------

Current:
Federal $ (554,642) $ - $ -
State (149,229) 27,039 39,996
---------- ---------- ----------
$ (703,871) $ 27,039 $ 39,996
========== ========== ==========

During the quarter ended June 30, 2003, the Company recorded a benefit for
federal and state income taxes payable of $554,642 and $169,244, respectively,
substantially due to the reversal of an accrual for corporate income taxes
related to the 1997 tax year, for which the statute of limitations has expired.

A reconciliation of the federal statutory income tax rate to the Company's
effective tax rate as reported is as follows:

Years Ended June 30,
2003 2002 2001
---------- --------- ----------

Taxes at federal
statutory rate (34.0)% (34.0)% (34.0)%
State and local income
taxes (benefit), net
of federal benefit (0.9) 0.1 0.3
Permanent differences (2.6) 0.6 0.7
Increase in the valuation
allowance against
deferred tax assets 33.1 33.5 33.3
------ ------ ------
Effective income tax rate (4.4)% 0.2% 0.3%
====== ====== ======

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 14 - INCOME TAXES (Continued)

As of June 30, 2003, the Company has net operating loss ("NOL") carryforwards of
approximately $101,567,000 that will be available to offset future taxable
income. The utilization of certain of the NOL's is limited by separate return
limitation year rules pursuant to Section 1502 of the Internal Revenue Code. The
expiration dates of NOL carryforwards are as follows:

June 30,
--------
2007 $ 764,000
2008 527,000
2009 145,000
2010 32,000
2011 1,037,000
2012 5,867,000
2013 867,000
2019 15,983,000
2020 18,756,000
2021 17,604,000
2022 19,680,000
2023 20,305,000
------------
$101,567,000
============

The Company has, for federal income tax purposes, research and development tax
credit carryforwards aggregating $3,048,586, which are accounted for under the
flow-through method. The tax credit carryforwards expire as follows:

June 30,
--------
2004 $ 258,200
2005 172,207
2012 70,145
2013 402,590
2018 432,195
2019 378,193
2020 448,221
2022 441,865
2023 444,970
----------
$3,048,586
==========

In addition, for New York State income tax purposes, the Company has tax credit
carryforwards aggregating approximately $1,080,000, which are accounted for
under the flow-through method. The tax credit carryforwards expire during the
years ending June 30, 2006 to June 30, 2023.

The Company has charitable contributions of approximately $172,000, which expire
during the years ending June 30, 2004 to June 30, 2008.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 14 - INCOME TAXES (Continued)

Significant components of the Company's deferred tax assets and liabilities at
June 30, 2003 and 2002 are as follows:
June 30,
2003 2002
----------- ------------
Deferred tax assets:
Allowance for doubtful accounts 1,226,941 $ 998,302
Non-deductible accruals 638,198 690,684
Net operating carryforwards 40,626,608 31,945,236
Tax credits 4,130,022 3,850,578
Inventory capitalization for
tax purposes 111,115 57,407
Impairment of management agreement - 1,880,000
Charitable contributions 68,686 42,376
----------- -----------
46,801,570 39,464,583
Valuation allowance (45,848,177) (37,816,617)
----------- -----------
Net deferred tax assets 953,393 1,647,966
----------- -----------

Deferred tax liabilities:
Fixed assets and depreciation (151,308) (940,393)
Capitalized software development
costs (802,085) (707,573)
----------- -----------
Gross deferred tax liabilities (953,393) (1,647,966)
----------- -----------
Net deferred tax liabilities $ - $ -
=========== ===========

The net change in the valuation allowance for deferred tax assets increased by
approximately $8,031,600 and $13,335,400, respectively, for the years ended June
30, 2003 and 2002.

NOTE 15 - OTHER CURRENT LIABILITIES

Included in other current liabilities are the following:

2003 2002
----------- -----------

Deferred revenue - license fee $ 2,340,000 $ 2,340,000
Unearned revenue on service contracts 936,750 658,777
Accrued salaries, commissions and
payroll taxes 1,015,534 1,043,092
Litigation judgements 281,549 289,189
Sales tax payable 1,887,241 2,069,291
Other 1,091,149 926,518
----------- -----------
$ 7,552,223 $ 7,326,867
=========== ===========

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 16 - COMMITMENTS AND CONTINGENCIES

Leases
------

The Company rents its operating facilities and certain equipment pursuant to
operating lease agreements expiring at various dates through February 2009. The
leases for certain facilities contain escalation clauses relating to increases
in real property taxes as well as certain maintenance costs.

In May 2002, HMCA entered into a sub-lease agreement (as amended in January
2003) with an entity owned by a relative of Raymond V. Damadian. The sub-lease
agreement expires on September 30, 2009. Rental income under the sub-lease
agreement for the year ended June 30, 2003 amounted to $39,775.

During 2003, HMCA entered into a sub-lease agreement with a third party. The
sub-lease agreement expires on June 30, 2006. Rental income under the sub-lease
agreement for the year ended June 30, 2003 amounted to approximately $19,500.

Future minimum operating and capital lease commitments, along with sub-lease
income consisted of the following at June 30, 2003:

Facilities
and
Equipment Equipment
Year Ending (Operating Sub-Lease Capital
June 30, Lease) (Income) Lease
----------- ----------- --------- -----------

2004 $ 2,766,571 $(180,951) $ 623,413
2005 2,278,698 (174,397) 166,761
2006 2,190,525 (175,766) 20,034
2007 1,850,517 (45,420) -
2008 1,452,430 (45,420) -
Thereafter 2,146,277 (56,775) -
----------- --------- -----------
Total minimum obligations $12,685,018 $(678,729) 810,208
=========== =========
Less: Amount representing interest (58,880)
-----------
Present value of net minimum lease
obligations $ 751,328
===========

Rent expense for operating leases approximated $3,166,000, $3,227,000 and
$3,072,000 for the years ended June 30, 2003, 2002 and 2001, respectively.

License Agreement and Self-Insurance
------------------------------------

The Company has license agreements with two separate companies, which require
the Company to pay a royalty on the Company's future sales of certain MRI
imaging apparatus. Royalty expense charged to operations for the years ended
June 30, 2003, 2002 and 2001 approximated $126,000, $70,000 and $33,000,
respectively.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)

License Agreement and Self-Insurance (Continued)
------------------------------------

The Company is self-insured with respect to product liability. During the fiscal
years ended June 30, 2003, 2002 and 2001, no material claims arose.

In July 2000, the Company entered into a license agreement, pursuant to which it
licensed certain of its intellectual assets on a non-exclusive basis.
Remuneration payable to the Company under this agreement is $11.7 million, of
which $9.0 million was received in September of 2000 and $2.7 million in January
of 2001. The license fee of $11.7 million is being recognized as income ratably
over the five-year period ending June 30, 2005.

Employment Agreements
---------------------

On August 20, 1998, a wholly-owned subsidiary of HMCA entered into two
employment agreements with the former owners of Dynamic. Each agreement provides
for base compensation of $150,000 during the first year with annual cost of
living increases for the first five years. Each agreement also provides for an
increase in base compensation of $100,000 per annum commencing in the sixth
year. In addition, the agreements provide for bonus compensation contingent upon
pretax earnings of Dynamic. The employment agreements expire ten years from
August 20, 1998.

Minimum annual payments, excluding bonuses, incentives and cost of living
increases under these contracts are as follows:

Years Ending
June 30,
------------
2004 $ 466,660
2005 500,000
2006 500,000
2007 500,000
2008 500,000
Thereafter 83,334
----------
$2,549,994
==========
Employee Benefit Plans
----------------------

The Company has a non-contributory 401(k) plan (the "Plan"). The Plan covers all
non-union employees who are at least 21 years of age with no minimum service
requirements. There were no employer contributions to the Plan for the years
ended June 30, 2003, 2002 and 2001.

The stockholders of the Company approved the 2000 Employee Stock Purchase Plan
("ESPP") at the Company's annual stockholders' meeting in April 2000. The ESPP
provides for eligible employees to acquire common stock of the Company at a
discount, not to exceed 15%. The Plan has not been put into effect as of June
30, 2003.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)

Litigation
----------

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

NOTE 17 - OTHER INCOME (EXPENSE) AND SUPPLEMENTARY PROFIT AND LOSS DATA

Other income (expense) consists of:

For the Years Ended June 30,
------------------------------------
2003 2002 2001
---------- ---------- ----------

Other (income) expense $ (15,499) $ (19,133) $ 101,707
Gain on sale of subsidiary/
partnership interest - - 712,781
Litigation settlement (10,000) (50,000) -
Gain on sale of property - - 150,000
---------- ---------- ----------
$ (25,499) $ (69,133) $ 964,488
========== ========== ==========

In October 2000, the Company sold its interest in the partnership of AMD
Southfield Michigan Limited Partnership for $750,000. AMD Southfield operates an
MRI Scanning Center in Michigan. The Company recognized a pre-tax gain of
$750,000.

In June 2001, HMCA sold the stock of its wholly-owned Florida multi-specialty
practice subsidiaries, Medical Specialties, Inc. and Diagnostic Services, Inc.
for a promissory note for $50,000, resulting in a loss of $37,000.

Advertising expense approximated $3,558,000, $2,076,000 and $2,020,000 for the
years ended June 30, 2003, 2002 and 2001, respectively. Maintenance and repair
expenses totalled approximately $625,000, $656,000 and $831,000 for the years
ended June 30, 2003, 2002 and 2001, respectively.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION

During the years ended June 30, 2003, 2002 and 2001, the Company paid
$1,142,741, $799,600 and $1,261,379 for interest, respectively. During the years
ended June 30, 2003, 2002 and 2001, the Company paid $30,233, $32,420 and
$39,997 for income taxes, respectively.

Non-Cash Transactions
---------------------

- During the year ended June 30, 2003:

a) The Company issued 1,125,000 shares at a value of $1,226,251 as part of the
consideration issued in exchange for options held by a related party to acquire
approximately 20% of the stock of HMCA.

b) The Company acquired equipment of $207,254 under capital lease obligations.

c) The Company issued 15,000 shares of its common stock valued at $21,750 in
connection with the repayment of a note payable.

d) The Company issued 97,850 shares of its common stock valued at $99,180 in
connection with distributions made to its minority stockholders.

e) The Company transferred equipment in satisfaction of a note payable of
$10,123.

f) The Company offset notes payable of $145,386 in connection with the
acquisition of Central Health Care Management, Inc. against the impairment of
its management contracts.

- During the year ended June 30, 2002:

a) The Company issued 2,045,000 shares of its common stock, valued at
$2,602,596, in connection with the repayment of notes payable.

b) The Company acquired equipment of $357,056 under capital lease obligations.

c) The Company issued 98,000 shares of its common stock, valued at $116,623, in
connection with the acquisition of equipment.

d) The Company issued 3,832,073 shares of its common stock in connection with
repayment of $4,500,000 of convertible debentures.

- During the year ended June 30, 2001:

a) Property and equipment, costing $636,504, was acquired under a capital lease
obligation.

b) The Company issued 20,000 shares of its common stock, valued at $28,438, in
connection with the repayment of note payable of $115,000.

c) The Company acquired equipment of $176,480 under equipment notes payable
obligations.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 19 - ADVANCES AND NOTES TO RELATED PARTIES

Effective December 1, 1993, Albany Magnetic Imaging Center, P.C. ("Albany
Center"), a Georgia professional corporation, of which Raymond V. Damadian is
the sole stockholder, purchased the scanner being utilized at its site from the
Company for a purchase price of $1,128,844. In June of 1997, the payment terms
for the outstanding balance of $344,766 were restructured to provide for 60
equal monthly payments (including interest at the rate of 10% per annum) of
$7,325 each, commencing July 1997. The balance due under this note as of June
30, 2003 was $84,951. The note was repaid in full in September 2003.

During 1994, Melville MRI, P.C. ("Melville Center"), a New York professional
corporation, of which Raymond V. Damadian is the sole shareholder, director and
president, purchased an MRI scanner from the Company for a purchase price of
$1,011,431. Of the purchase price, $900,000 is to be paid by the assumption and
payment of the Company's indebtedness to the lender secured by the scanner,
pursuant to a note, bearing interest at 14% per annum, and providing for 60
monthly payments of $20,700 each. The remaining $111,431 of the purchase price
was to be paid concurrently with the payments to the lender. The payment terms
for the principal balance, plus accrued interest (in the aggregate amount of
$139,290), were restructured to provide for 60 equal monthly payments (including
interest at the rate of 10% per annum) of $2,959.50 each, commencing July 1998.
In fiscal 2001, the balance outstanding on the obligation was paid in full by
the Company as guarantor of the indebtedness due to the lender. This resulted in
a balance of $893,606 owing to the Company by the Melville Center. The $2,959
monthly payment to the Company has been increased by an additional principal
payment of $10,000 per month to be applied toward the balance due. The balance
due under this note as of June 30, 2003 was $544,335, the payment terms of which
have been restructured to be $16,314 per month, inclusive of interest at the
rate of 5% per annum, over a three year period commencing July, 2003. Interest
income on this note for the years ended June 30, 2003, 2002 and 2001 amounted to
$3,993, $2,900 and $7,950, respectively.

Canarsie MRI Associates ("Canarsie"), a joint venture partnership, of which MRI
Specialties, Inc. ("Specialties") is an owner, is a party to a service agreement
for its scanner with the Company at an annual fee of $70,000. In addition,
during fiscal 2001, Canarsie entered into an agreement to purchase a QUAD MRI
scanner from the Company, recognizing on a percentage-of-completion basis
revenue of $636,121. The agreement provides for a purchase price of $850,000,
payable as follows: (1) $400,000 downpayment (received April 2001); (2) $450,000
in 84 equal monthly installments, including interest at 6%, pursuant to a
promissory note to be executed upon acceptance of the scanner. Timothy Damadian,
the son of Raymond V. Damadian, is the sole stockholder, Director and President
of Specialties. The balance due under this note as of June 30, 2003 was
$364,043. Interest income on this note for the years ended June 30, 2003, 2002
and 2001 amounted to $23,654, $15,292 and $-0-, respectively.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 20 - SEGMENT AND RELATED INFORMATION

Effective July 1, 1998, the Company adopted the provisions of SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for the way public enterprises report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to stockholders.

The Company operates in two industry segments - manufacturing and the servicing
of medical equipment and management of physician practices, including diagnostic
imaging services.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. All intersegment sales are
market-based. The Company evaluates performance based on income or loss from
operations.

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

Fiscal 2003: FONAR Physician
------------ Medical Management
Equipment Services Totals
------------ ------------ -----------
Net revenues from external
customers $ 29,958,698 $ 22,932,837 $ 52,891,535
Intersegment net revenues $ 2,041,080 $ - $ 2,041,080
Loss from operations $(11,324,562) $ (3,822,683) $(15,147,245)
Depreciation and amortization $ 2,628,826 $ 1,804,664 $ 4,433,490
Compensatory element of stock
Issuances $ 1,330,767 $ 3,511,981 $ 4,842,748
Total identifiable assets $ 31,403,708 $ 27,344,953 $ 58,748,661
Capital expenditures $ 583,190 $ 1,409,032 $ 1,992,222

Fiscal 2002:
-----------

Net revenues from external
Customers $ 16,153,131 $ 27,007,974 $ 43,161,105
Intersegment net revenues $ 1,050,599 $ - $ 1,050,599
Loss on impairment of management
Agreements $ - $ - $ -
Operating (loss) income $(15,433,351) $ 1,052,544 $(14,380,807)
Depreciation and amortization $ 2,804,669 $ 2,081,674 $ 4,886,343
Compensatory element of stock
Issuances $ 1,715,678 $ 2,996,485 $ 4,712,163
Total identifiable assets $ 40,179,100 $ 32,949,723 $ 73,128,823
Capital expenditures $ 2,107,509 $ 1,463,682 $ 3,571,191

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 20 - SEGMENT AND RELATED INFORMATION (Continued)

Fiscal 2001: FONAR Physician
------------ Medical Management
Equipment Services Totals
------------ ------------ -----------
Net revenues from external
customers $ 11,782,837 $ 28,491,201 $ 40,274,038
Intersegment net revenues $ 1,039,499 $ - $ 1,039,499
Operating (loss) income $(17,205,614) $ 1,353,024 $(15,852,590)
Depreciation and amortization $ 2,203,591 $ 1,912,538 $ 4,116,129
Compensatory element of stock
issuances $ 1,684,136 $ 2,360,690 $ 4,044,826
Total identifiable assets $ 45,938,960 $ 29,266,680 $ 75,205,640
Capital expenditures $ 3,039,866 $ 1,025,411 $ 4,115,277

Export Product Sales
--------------------

The Company's areas of operations are principally in the United States. The
Company had export sales of medical equipment amounting to 6.2% and 26.6% of
product sales revenues to third parties for the years ended June 30, 2003 and
2002, respectively. There were no foreign product sales during the year ended
June 30, 2001.

The foreign product sales were made to customers in the following countries:

2003 2002
------ ------
Scotland .4% 26.6%
Spain 5.8 -
------ ------
6.2% 26.6%
====== ======

Foreign Service and Repair Fees
-------------------------------

The Company's areas of service and repair are principally in the United States.
The Company had foreign revenues of service and repair of medical equipment
amounting to 12.2%, 27.7% and 33.7% of consolidated net service and repair fees
for the years ended June 30, 2003, 2002 and 2001, respectively. The foreign
service and repair fees were provided principally to the following countries:

For the Years Ended June 30,
2003 2002 2001
------ ------ ------
Korea 2.8% 9.3% 11.9%
Spain 1.9 3.7 .3
Mexico - 3.0 3.5
Puerto Rico - 3.5 4.1
Saudi Arabia 3.0 4.5 8.4
Poland 2.6 3.7 4.0
India - - 1.5
Scotland 1.9 - -
------ ------ ------
12.2% 27.7% 33.7%
====== ====== ======

The Company does not have any material assets outside of the United States.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 21 - QUARTERLY FINANCIAL DATA (UNAUDITED)

(000's omitted, except per share data)
For the Quarters Ended
------------------------------------------------
Sept. 30, Dec. 31, March 31, June 30,
2002 2002 2003 2003
---------- ---------- ---------- ----------

Total Revenues - Net $ 13,277 $ 15,954 $ 9,775 $ 13,886

Total Costs and Expenses 15,730 18,707 15,221 18,381

Net Loss from Continuing
Operations (2,597) (2,805) (6,256) (3,543)

Net (Loss) Gain from
Discontinued Operations (109) (116) (70) 490

Basic and Diluted Net
Loss Per Share from
Continuing Operations $ (0.04) $ (0.04) $ (0.08) $ (0.04)

Basic and Diluted Net
Loss Per Share from
Discontinued Operations $ - $ - $ - $ -

(000's omitted, except per share data)
For the Quarters Ended
------------------------------------------------
Sept. 30, Dec. 31, March 31, June 30,
2001 2001 2002 2002
---------- ---------- ---------- ----------

Total Revenues - Net $ 9,666 $ 8,762 $ 10,451 $ 14,282

Total Costs and Expenses 12,990 12,707 12,608 19,237

Net Loss from Continuing
Operations (3,789) (4,624) (4,360) (4,183)

Net Loss from Discontinued
Operations (38) (66) (690) (5,133)

Basic and Diluted Net
Loss Per Share from
Continuing Operations $ (0.06) $ (0.08) $ (0.07) $ (0.06)

Basic and Diluted Net
Loss Per Share from
Discontinued Operations $ - $ - $ (0.01) $ (0.08)

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 22 - SALE OF MANAGEMENT COMPANY AND DISCONTINUED OPERATIONS

On April 8, 2003, HMCA sold all of its issued and outstanding stock of A&A
Services, Inc. ("A&A Services"), a physician practice management services
organization engaged in the business of managing four primary care practices
located in Queens County, New York (the "Practices"). The sale was made to the
former owners (the "Buyers"), for a purchase price of $3,000,000, payable as
follows: $500,000 at closing, $2,350,000 due 75 days after closing and $150,000
six months following the closing, together with a release of indebtedness in the
approximate amount of approximately $913,000, which remained owing to the Buyers
by HMCA as a result of the original acquisition. At June 30, 2003, the remaining
balance due from the buyers of the A&A was $150,000.

The repurchase by the Buyers of the stock was the principal part of a settlement
of three lawsuits, which had been instituted by the parties. The first was
instituted by HMCA and FONAR against the Buyers for fraud, failure of
consideration and breach of the contract with respect to the original
acquisition by HMCA of A&A Services, and the second was instituted by
professional corporations managed by HMCA against the Buyers for breach of their
employment agreements. The third case was commenced by a limited liability
company in which the Buyers have an interest, against A&A Services for
nonpayment of rent. The case was settled before the defending parties answered
the complaints. As part of the settlement, the parties released each other of
all claims, including all remaining balances due to the Buyers with respect to
the purchase of A&A Services and $21,167 owed to the limited liability company,
by A&A Services for past due rents.

There is no family, business or other material relationship between either of
the Buyers and any of FONAR, HMCA, or any of their respective affiliates,
directors, officers or any associate of any such director or officer.

A&A Services provided the Practices with management services, office space,
equipment, repair and maintenance service for the equipment and clerical and
other non-medical personnel. All services were terminated upon the sale.

This reporting unit of the Company's operations has been reflected as
discontinued operations for all periods presented. Accordingly, the assets and
liabilities of this reporting unit have been segregated from the assets and
liabilities from continuing operations in the consolidated balance sheet at June
30, 2002 and their operating results have been segregated from continuing
operations and are reported as discontinued operations in the consolidated
statements of operations, comprehensive income (loss) and cash flows for each of
the years in the three-year period ended June 30, 2003, 2002 and 2001.

As a result of this sale, the Company realized a gain of approximately $510,000,
which was recognized in discontinued operations during the year ended June 30,
2003.

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 22 - SALE OF MANAGEMENT COMPANY AND DISCONTINUED OPERATIONS (Continued)

Summarized financial information of discontinued operations is as follows:

For the Years Ended
June 30,
2003 2002 2001
------------ ------------ ------------

Management and other fees - related
medical practices - net $ 1,179,095 $ 1,517,465 $ 1,999,263
------------ ------------ ------------
Costs and Expenses:
Costs related to management and
other fees - related parties 1,271,121 1,638,354 1,838,558
Amortization of management agreement 220,404 522,407 522,732
Interest expense 2,933 583,285 283,508
Loss on impairment of management contract - 4,700,000 -
------------ ------------ ------------
Total Costs and Expenses 1,494,458 7,444,046 2,644,798
------------ ------------ ------------
Loss from Discontinued Operations $ (315,363) $ (5,926,581) $ (645,535)
============ ============ ============

Gain on Sale of Discontinued Operations
Sales price:
Cash proceeds, net of closing costs $ 2,821,564
Note receivable 150,000
Settlement of liabilities 913,492
------------
Total Selling Price 3,885,056

Investment in discontinued operations 3,375,244
------------
Gain on Sale of Discontinued Operations $ 509,812
============

As of June 30,
2003 2002
------------ ------------

Assets from Discontinued Operations:
Cash $ - $ 33,122
Accounts receivable - related
medical practices - net - 372,498
Property and equipment - net - 61,649
Management agreements - net - 3,518,847
Other assets - 21,340
------------ ------------
Total Assets from Discontinued
Operations $ - $ 4,007,456
============ ============
Liabilities from Discontinued
Operations:
Long-term debt and capital leases $ - $ 985,560
Accounts payable - 77,628
Other current liabilities - 84,216
------------ ------------
Total Liabilities from
Discontinued Operations $ - $ 1,147,404
============ ============

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003

NOTE 23 - ALLOWANCE FOR DOUBTFUL ACCOUNTS

The following represents a summary of allowance for doubtful accounts for the
years ended June 30, 2003, 2002 and 2001 respectively:

Balance Balance
June 30, June 30,
Description 2002 Additions Deductions 2003
----------- ---------- --------- ---------- -----------
Receivables from equipment sales
and service contracts $ 382,437 60,000 $ - $ 442,437
Receivables from equipment sales
and service contracts -
related parties 694,655 - - 694,655
Receivables from related PC's 1,096,390 200,000 - 1,296,390
Advance and notes to related
parties 366,035 80,000 - 446,035

Balance Balance
June 30, June 30,
Description 2001 Additions Deductions 2002
----------- ---------- --------- ---------- -----------
Receivables from equipment sales
and service contracts $ 338,676 $ 43,761 $ - $ 382,437
Receivables from equipment sales
and service contracts -
related parties 694,655 - - 694,655
Receivables from related PC's 538,297 558,093 - 1,096,390
Advance and notes to related
parties 316,035 50,000 - 366,035

Balance Balance
June 30, June 30,
Description 2000 Additions Deductions 2001
----------- ---------- --------- ---------- -----------
Receivables from equipment sales
and service contracts $ 93,676 $ 245,000 $ - $ 338,676
Receivables from equipment sales
and service contracts -
related parties 694,655 - - 694,655
Receivables from related PC's 153,732 387,505 2,940 538,297
Advance and notes to related
parties 904,000 287,456 875,421 316,035
Notes receivable 477,456 - 477,456 -

(1) Included in bad debt expense.

NOTE 24 - SUBSEQUENT EVENT

On August 27, 2003, warrants to purchase 200,000 shares of the Company's common
stock were exercised by The Tail Wind, Ltd. at an exercise price of $1.42 per
share.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Effective as of September 10, 2002, the Company, as a result of the recent
merger of several of the partners of Grassi & Co., CPAs, P.C. into Marcum &
Kliegman LLP, in order to retain the services of the individual partners and
staff accountants who have been serving the Company as its independent
certifying public accountants since fiscal 1990, the Company dismissed Grassi &
Co. and engaged Marcum & Kliegman. There were no disagreements with Grassi & Co.
or other matters requiring disclosure under Regulation S-K, Item 304(b). This
change in accountants was previously reported in the Company's 8-K filed on
September 16, 2002, as amended by the 8-K/A filed on October 2, 2002.

ITEM 9A. CONTROLS AND PROCEDURES

Management believes that its disclosure controls and procedures in place are
effective to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others in these
entities in a timely manner so that appropriate disclosures can be made and
appropriate corporate action be taken.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Directors serve from the date of their election until the next annual meeting of
stockholders and until their successors are elected and qualify. With the
exception of Dr. Raymond V. Damadian, who does not receive any fees for serving
as a director, each director receives $20,000 per annum for his or her service
as a director. Officers serve at the discretion of the Board of Directors.

The officers and directors of the Company are set forth below:

Raymond V. Damadian, M.D. 67 President, Treasurer,
Chairman of the Board
and a Director

David B. Terry 56 Vice President and
Secretary

Claudette J.V. Chan 66 Director

Robert J. Janoff 76 Director

Charles N. O'Data 67 Director

Robert Djerejian 71 Director

Raymond V. Damadian, M.D. has been the Chairman of the Board and President of
FONAR since its inception in 1978 and Treasurer since February, 2001. Dr.
Damadian was employed by the State University of New York, Downstate Medical
Center, New York, as an Associate Professor of Biophysics and Associate
Professor of Internal Medicine from 1967 until September 1979. Dr. Damadian
received an M.D. degree in 1960 from Albert Einstein College of Medicine, New
York, and a B.S. degree in mathematics from the University of Wisconsin in 1956.
In addition, Dr. Damadian conducted post-graduate work at Harvard University,
where he studied extensively in the fields of physics, mathematics and
electronics. Dr. Damadian is the author of numerous articles and books on the
nuclear magnetic resonance effect in human tissue, which is the theoretical
basis for the FONAR MRI scanners. Dr. Damadian is a 1988 recipient of the
National Medal of Technology and in 1989 was inducted into the National
Inventors Hall of Fame, for his contributions in conceiving and developing the
application of magnetic resonance technology to medical applications including
whole body scanning and diagnostic imaging. Dr. Damadian is the President,
Treasurer and director of HMCA.

David B. Terry is the Vice President of Administration and Secretary of the
Company. Mr. Terry has been serving as Vice President since December 1998 and as
Secretary since May, 1990. Previously, he served as Treasurer from May 1990 to
December, 1998, as Secretary from July 1978 through June 1987 and as Treasurer
from August 1981 through June 1987. From July 1978 through June 1987, he was
also a Director of the Company. Between July 1987 and January 1990, Mr. Terry
was a co-owner and actively engaged in the business of Carman-Terry Realty, a
real estate brokerage firm. In January 1990, Mr. Terry resumed his employment
with the Company. Mr. Terry is a brother-in-law of Raymond V. Damadian.

Claudette J.V. Chan has been a Director of FONAR since October 1987. Mrs. Chan
was employed from 1992 through 1997 by Raymond V. Damadian, M.D. MR Scanning
Centers Management Company and since 1997 by HMCA, as "site inspector," in which
capacity she is responsible for supervising and implementing standard procedures
and policies for MRI scanning centers. From 1989 to 1994 Mrs. Chan was employed
by St. Matthew's and St. Timothy's Neighborhood Center, Inc., as the director of
volunteers in the "Meals on Wheels" program, a program which cares for the
elderly. In approximately 1983, Mrs. Chan formed the Claudette Penot Collection,
a retail mail-order business specializing in women's apparel and gifts, of which
she was the President until she stopped operating the business in approximately
1989. Mrs. Chan practiced and taught in the field of nursing until 1973, when
her son was born. She received a bachelor of science degree in nursing from
Cornell University in 1960. Mrs. Chan is the sister of Raymond V. Damadian.

Robert J. Janoff has been a Director of FONAR since February, 1989. Mr. Janoff
has been a self-employed New York State licensed private investigator for more
than thirty-five years and was a Senior Adjustor in Empire Insurance Group for
more than 15 years until retiring from that position on July 1, 1997. Mr. Janoff
also served, from June 1985 to June 1991, as President of Action Data Management
Strategies, Ltd., a supplier of computer programs for use by insurance
companies. Mr. Janoff is a member of the Board of Directors of Harmony Heights
of Oyster Bay, New York, which is a nonprofit residential school for girls with
learning disabilities.

Charles N. O'Data has been a Director of FONAR since February, 1998. From 1968
to 1997, Mr. O'Data was the Vice President for Development for Geneva College, a
liberal arts college located in western Pennsylvania. In that capacity, he acted
as the College's chief investment officer. His responsibilities included
management of the College's endowment fund and fund raising. In July 1997, Mr.
O'Data retired from Geneva College after 36 years of service to assume a
position of National Sales Executive for SC Johnson Company's Professional
Markets Group (a unit of SC Johnson Wax), and specialized in healthcare and
education sales, a position he held until the spring of 1999. In his capacity
with SC Johnson he was responsible for sales to the nation's three largest Group
Purchasing Organizations which included some 4,000 hospitals. Mr. O'Data
presently acts as an independent financial consultant to various entities. Mr.
O'Data served on the board of the Medical Center, Beaver, Pennsylvania (now a
part of Heritage Valley Health System), a 500 bed acute care facility, for 22
years, three as its Chair. Mr. O'Data also served on the board of the Hospital
Council of Western Pennsylvania, a shared-services and group purchasing
organization covering seven states. He founded The Beaver County Foundation, a
Community Foundation, in 1992, and serves as its President. Mr. O'Data is listed
as a finance associate in the Middle States Association, Commission on Higher
Education. The commission is the formal accrediting body for higher education in
the eastern region of the country. In this capacity he evaluates the financial
aspects of educational organizations. Mr. O'Data is a graduate of Geneva
College, where he received a B.S. degree in Economics in 1958.

Robert Djerejian, has been a Director for Fonar since June, 2002. Since 1996 he
has served as a senior consultant for Haines, Lundberg & Waehler International,
an architecture, design and engineering firm, which among other specialties
designs hospitals and laboratories. Prior to that time he was the senior
managing partner of the firm. Mr. Djerejian serves on the Board of Trustees of
Pratt Institute, where he is also Vice Chairman of the Executive Committee and
on the Board of Directors of the Delaware College of Art and Design, of which he
was one of the founding directors. He is a graduate of Pratt Institute, where he
received a B.A. in Architecture in 1955.

ITEM 11. EXECUTIVE COMPENSATION.

With the exception of the Chief Executive Officer, the compensation of the
Company's executive officers is based on a combination of salary and bonuses
based on performance. The Chief Executive Officer's compensation consists only
of a salary which has remained constant for more than the past three fiscal
years.

The Board of Directors does not have a compensation Committee: Dr. Raymond V.
Damadian, President, Chief Executive Officer and Chairman of the Board, is the
only executive officer who is a member of the Board of Directors. Dr. Damadian
participates in the determination of executive compensation for the Company's
officers.

The Board of Directors has established an audit committee. The members of the
committee are Robert J. Janoff, Charles N. O'Data and Robert Djerejian.

There is set forth in the following Summary Compensation Table the compensation
provided by the Company during fiscal 2003 to its Chief Executive Officer. There
is set forth in the following Option Grant Table and Option Exercise Table any
stock options granted and exercised by Dr. Damadian during fiscal 2003.

I. SUMMARY COMPENSATION TABLE
Long Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
------------------------------------------ ------------------ ---------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other All
and Annual Restricted Other
Principal Compen- Stock Options LTIP Compen-
Position Salary Bonus sation Award(s) SARs Payouts sation
2 Year ($) ($) ($) ($) (#) ($) ($)
--------- ---- ---------- ----- ------- ---------- ------- ------- -------
Raymond V. 2003 $86,799.98 - - - - - -
Damadian, 2002 $86,799.96 - - - - - -
CEO 2001 $86,799.96 - - - - - -
--------- ---- ---------- ----- ------- ---------- ------- ------- -------

II. OPTION/SAR GRANTS IN LAST FISCAL YEAR

Potential
Realizable
Value at Assumed
Annual Rates of Alternative
Stock Price to (f) and
Appreciation for (g): Grant
Individual Grants Option Term Date Value
----------------------------------------------------------- ---------------- -----------
(a) (b) (c) (d) (e) (f) (g) (h)
% of Total
Options/
SARs
Options/ Granted to Excercise
SARs Employees or Grant Date
Granted in Fiscal Base Price Expiration Present
Name (#) Year ($/Sh) Date 5% ($) 10% ($) Value $
---------- -------- ---------- ---------- ---------- ------- ------- ----------

Raymond V.
Damadian, 0 - - - - - -
President
& CEO

III. OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE

Aggregated Options/SAR Exercises in Last Fiscal Year and FY-End Option/Sar Value
--------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of Value of Unexercised
Name Shares Acquired Value Realized Unexercised In-the-Money
on Exercise (#) ($) Options/SARs Options/SARs at
at FY-End (#) FY-End ($)

Exercisable/ Exercisable/
Unexercisable Unexercisable

--------- --------------- -------------- ------------- --------------------

Raymond V. 0 - 0 -
Damadian,
President
and CEO

EMPLOYEE COMPENSATION PLANS

Equity Compensation Plan Information as of June 30, 2003

(a) (b) (c)
Plan category Number of Weighted- Number of securities
securities average remaining available
to be issued exercise price for future issuance
upon exercise of outstanding under equity
of outstanding options, compensation plans
options, warrants warrants (excluding securities
and rights and rights reflected in column (a)
----------------- -------------- -----------------------
Equity compensation 3,690,693 $1.38 1,309,307
plans approved by
security holders

Equity compensation - N/A -
plans not approved
by security holders

Total 3,690,693 $1.38 1,309,307

========= ===== =========

FONAR's 1993 Incentive Stock Option Plan, adopted on March 26, 1993, is intended
to qualify as an incentive stock option plan under Section 422A of the Internal
Revenue Code of 1954, as amended. The 1993 Incentive Stock Option Plan permitted
the issuance of stock options covering an aggregate of 1,500,000 shares of
Common Stock of FONAR. The 1993 Stock Option Plan terminated on March 25, 2003.
No options to purchase shares of Common Stock remained available for grant under
the plan at that time.

FONAR's 1997 Nonstatutory Stock Option Plan, adopted on May 9, 1997, permits the
issuance of stock options covering an aggregate of 5,000,000 shares of Common
Stock of FONAR. The options may be issued at such prices and upon such terms and
conditions as are determined by FONAR. The 1997 Nonstatutory Stock Option Plan
will terminate on May 8, 2007. As of June 30, 2003, options to purchase
3,900,369 shares of Common Stock of FONAR were available for future grant.

Fonar's 2002 Incentive Stock Option Plan, adopted on July 1, 2002, is intended
to qualify as an incentive stock option plan under Section 422A of the Internal
Revenue Code of 1954, as amended. The 2002 Incentive Stock Option Plan permits
the issuance of stock options covering an aggregate of 2,500,000 shares of
Common Stock of Fonar. The options have an exercise price equal to the fair
market value of the underlying stock on the date the option is granted, are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The 2002 Stock Option Plan will
terminate on June 30, 2012. As of June 30, 2003, options to purchase 1,781,927
shares of Common Stock of Fonar were available for future grant under the plan.

Fonar's 2002 Stock Bonus Plan, adopted on June 1, 2002, permitted Fonar to issue
an aggregate 2,000,000 shares of Common Stock of Fonar as bonus or compensation.
As of June 30, 2003 no shares of Common Stock of Fonar were available for future
grant under the plan.

Fonar's 2003 Stock Bonus Plan, adopted on November 1, 2002, permitted Fonar to
issue an aggregate of 5,000,000 shares of Common Stock of Fonar as bonus or
compensation. As of June 30, 2003, no shares of Common Stock of Fonar were
available for future grant under the plan.

Fonar's 2003 Supplemental Stock Bonus Plan, adopted May 1, 2003, permits Fonar
to issue an aggregate of 5,000,000 shares of Common Stock of Fonar as bonus or
compensation. Fonar selects the persons to whom bonus stock will be issued, the
number of shares to be awarded and such other terms and conditions as it deems
advisable. The 2003 Supplemental Stock Bonus Plan will terminate on April 30,
2013. As of June 30, 2003 4,502,170 shares of Common Stock of Fonar were
available for future grant under the plan.

HMCA's 1997 Incentive Stock Option Plan, adopted on March 10, 1997, is intended
to qualify as an incentive stock option plan under Section 422A of the Internal
Revenue Code of 1954, as amended. The 1997 Incentive Stock Option Plan permits
the issuance of stock options covering an aggregate of 2,000,000 shares of
Common Stock of HMCA. The options have an exercise price equal to the fair
market value of the underlying stock on the date the option is granted, are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The exercisability of the options
granted to date is contingent upon the successful completion by HMCA of a public
offering of its securities or the recognition by HMCA of at least $10 million in
revenues for at least two consecutive fiscal quarters. The 1997 Stock Option
Plan will terminate on March 9, 2007. As of June 30, 2003, options to purchase
400,000 shares of HMCA Common Stock were available for future grant under the
plan.

HMCA's 1998 Incentive Stock Option Plan, adopted on December 16, 1998, is
intended to qualify as an incentive stock option plan under Section 422A of the
Internal Revenue Code of 1954, as amended. The 1998 Incentive Stock Option Plan
permits the issuance of stock options covering an aggregate of 2,000,000 shares
of Common Stock of HMCA. The options have an exercise price equal to the fair
market value of the underlying stock on the date the option is granted, are
nontransferable, are exercisable for a period not exceeding ten years and expire
upon the voluntary termination of employment. The excessability of the options
granted to date is contingent upon the successful completion by HMCA of a public
offering of its securities. The 1998 Stock Option Plan will terminate on
December 15, 2008. As of June 30, 2003, options to purchase 1,330,000 shares of
HMCA Common Stock were available for future grant under the plan.

HMCA's 1998 Nonstatutory Stock Option Plan, adopted on December 16, 1998,
permits the issuance of stock options covering an aggregate of 500,000 shares of
Common Stock of HMCA. The options may be issued at such prices and upon such
terms and conditions as are determined by HMCA. The exercisability of the
options granted to date is contingent upon the successful completion by HMCA of
a public offering of its securities. The 1998 Nonstatutory Stock Option Plan
will terminate on December 15, 2008. As of June 30, 2003, options to purchase
100,000 shares of Common Stock were available for future grant.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth the number and percentage of shares of the
Company's securities held by each director, by each person known by the Company
to own in excess of five percent of the Company's voting securities and by all
officers and directors as a group as of September 3, 2003.

Name and Address of Shares Percent
Beneficial Owner (1) Beneficially Owned of Class

Raymond V. Damadian, M.D.
c/o FONAR Corporation
Melville, New York
Director, President
CEO, 5% + Stockholder
Common Stock 2,488,274 2.90%
Class C Stock 9,561,174 99.98%
Class A Preferred 477,328 6.09%

Claudette Chan
Director
Common Stock 2,648 *
Class A Preferred 800 *

Robert J. Janoff
Director
Common Stock 80,000 *
Class A Preferred 1,999 *

Charles N. O'Data
Director
Common Stock 700 *

All Officers and Directors
as a Group (5 persons) (2) (3)
Common Stock 2,588,843 3.01%
Class C Stock 9,561,174 99.98%
Class A Preferred 480,165 6.13%
---------------------------
* Less than one percent

1. Address provided for each beneficial owner owning more than five percent of
the voting securities of the Company.

2. Includes 101 shares of the Company's Common Stock and 19 shares of the
Company's Class A Non-voting Preferred Stock held by an officer jointly with his
wife and 192 shares of the Company's Common Stock and 38 shares of the Company's
Class A Non-voting Preferred Stock held in trust by an officer for his children.

3. Includes options to purchase 16,928 shares of Common Stock held by an
officer.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Background.

On April 7, 1989, at a time when the Company lacked both the financing and
working capital to establish its own centers, Donna Damadian, the wife of
Raymond V. Damadian, M.D., Chairman and President of the Company, purchased from
FONAR a scanner for a purchase price of $1,508,000 (the price paid by FONAR's
customers for like equipment). $1.2 million was paid in cash, providing a much
needed cash infusion for the Company, and the balance was paid over time with
interest pursuant to a promissory note. The scanner was leased to Macon Magnetic
Resonance Imaging, P.C., a Georgia professional corporation wholly-owned by, and
of which Dr. Damadian is, the President. Thereafter, between 1990 and 1996,
Raymond V. Damadian, M.D. MRI Scanning Centers Management Company, a Delaware
corporation of which Dr. Damadian was the sole stockholder, director and
President ("RVDC"), purchased and leased scanners from FONAR to establish a
network of professional corporations operating MRI scanning centers ("Centers"),
including the Macon Center, in New York, Florida, Georgia and other locations.
Dr. Damadian was the owner, director and President of each of these professional
corporations. RVDC provided the necessary management and the scanners to the
Centers, although in certain situations, a Center would acquire the scanner
directly from FONAR.

ACQUISITION OF RVDC.

Effective June 30, 1997, FONAR's wholly-owned subsidiary, Health Management
Corporation of America ("HMCA"), formerly known as U.S. Health Management
Corporation, acquired RVDC by purchasing all of the issued and outstanding
shares of RVDC from Dr. Damadian for 10,000 shares of the Common Stock of FONAR.
The transactions can be rescinded by Dr. Damadian, however, in the event of a
change of control in FONAR or the bankruptcy of FONAR. There is no time limit on
the right to rescind. In connection with the transaction, FONAR granted RVDC a
nonexclusive royalty free license to FONAR's patents and software. These
licenses may be terminated by FONAR in the event of the bankruptcy of RVDC or a
change in control of RVDC.

In connection with and immediately prior to the sale of RVDC to HMCA, certain
leases and sales of scanners to RVDC were terminated. The scanners were then
leased directly to the Centers at which they were installed pursuant to new
scanner leases between HMCA and the Centers.

AGREEMENTS WITH HMCA.

Effective July 1, 1997, immediately following the effective date of the
acquisition of RVDC by HMCA, all previous management arrangements between RVDC
and the Centers were terminated and new management agreements were entered into
by the Centers and HMCA.

Pursuant to the management agreements, HMCA is providing comprehensive
management and administrative services and office facilities, including billing
and collection of accounts, payroll and accounts payable processing, supplies
and utilities to the Centers. Under the Management Agreements, HMCA provides
service through FONAR for the scanners at the Centers, eliminating the need for
the Centers to have separate service agreements for their scanners. In total, 11
MRI Centers, both those previously managed by RVDC and additional Centers opened
after the acquisition, have management agreements with HMCA.

In addition, HMCA is providing the MRI scanners used at 2 of the 11 Centers
pursuant to scanner leases.

The fees to HMCA under both the management agreements and the scanner leases are
on a per scan basis.

During the fiscal years ended June 30, 2003 and June 30, 2002 the net revenues
received by HMCA from the MRI Centers owned by Dr. Damadian were approximately
$9.0 million and $15.5 million respectively.

Effective December 1, 1993, one of the Centers, Albany Magnetic Resonance
Imaging, P.C. (the "Albany Center"), a Georgia professional corporation of which
Raymond V. Damadian is the sole shareholder, director and President, purchased
the scanner being utilized at its site from the Company for a purchase price of
$1,128,844, which in Fonar's opinion represented a fair market price based on
sales of like equipment by Fonar to its customers. Of the purchase price,
$574,077 was paid by the assumption and payment of the Company's indebtedness to
the lender secured by the scanner. Such indebtedness to the lender was retired
pursuant to a new equipment finance lease between the lender and the Albany
Center, guaranteed by the Company, providing for 18 monthly payments of $35,000
each. Following payment of the lease, the remaining $554,767 of the purchase
price due to the Company was required to be paid pursuant to a promissory note,
with interest at 10% per annum, over an 18 month term (17 payments of $35,000
each and one final payment of $2,454.08). In June, 1997, the payment terms for
the outstanding balance of $344,766 were restructured to provide for 60 equal
monthly payments (including interest at the rate of 10% per annum) of $7,325.27
each commencing July, 1997. The Albany Center has been closed and payments are
in arrears. As of June 30, 2003, $90,228.51 in principal and interest
($84,951.41 in principal) were owed by the Albany Center to Fonar, which amount
was paid in full in the first quarter of fiscal 2004.

Effective December 1, 1993, Daytona Beach Magnetic Resonance Imaging, P.A. (the
"Daytona Beach Center"), a Florida professional association of which Raymond V.
Damadian is the sole shareholder, director and President, purchased the scanner
being utilized at its site from the Company for a purchase price of $1,416,717,
which in Fonar's opinion represented a fair market price based on sales of like
equipment by Fonar to its customers. Of the purchase price, $328,044 was paid by
the assumption and payment of the Company's indebtedness to the lender secured
by the scanner. Such indebtedness to the lender was retired pursuant to a new
equipment finance lease between the lender and the Daytona Beach Center,
guaranteed by the Company, providing for 18 monthly payments of $20,000 each.
The remaining $1,088,673 of the purchase price due to the Company was required
to be paid pursuant to a promissory note, with interest at 10% per annum. In
May, 1999, the payment terms for the outstanding balance of $1,001,507 were
restructured to provide for 84 equal monthly payments (including interest at the
rate of 10% per annum) of $16,626.20 each commencing May 1999. During fiscal
2001, FONAR took back the scanner in satisfaction of the outstanding
indebtedness. The Daytona Beach Center then purchased a new QUAD(TM) MRI scanner
from FONAR for a purchase price of $960,000, which was payable with interest at
a rate of 8.5% per annum in 59 monthly payments of $11,902.62 each and one final
installment of $580,148.53. As of June 30, 2003, this indebtedness was paid in
full.

On June 30, 1994, Melville MRI, P.C. (the "Melville Center"), a New York
professional corporation of which Raymond V. Damadian is the sole shareholder,
director and President, purchased the scanner being utilized at its site from
the Company for a purchase price of $1,011,431.12, which in Fonar's opinion
represented a fair market price based on sales of like equipment by Fonar to its
customers. Of the purchase price, $900,000 was to be paid by the assumption and
payment of the Company's indebtedness to the lender secured by the scanner
pursuant to a note bearing interest at 14% per annum and providing for 60
monthly payments of $20,700 each. The remaining $111,431.12 of the purchase
price was to be paid concurrently with the payments to the lender. The payment
terms for the principal balance, plus accrued interest (in the aggregate amount
of $139,290) were restructured to provide for 60 equal monthly payments
(including interest at the rate of 10% per annum) of $2,959.50 each commencing
July, 1998. In fiscal 2001, following the payment in full by FONAR, as
guarantor, of the indebtedness due to the lender, there was as a result a
balance of $893,606 then owing to FONAR by the Melville Center. The $2,959.50
monthly payment to FONAR was increased by an additional principal amount of
$10,000 per month to be applied toward the balance due. The outstanding balance
of June 30, 2003 was $544,335, the payment terms of which have been restructured
to be $16,314.22 per month, inclusive of interest at the rate of 5% per annum,
over a three year period commencing July, 2003.

ACQUISITION OF THE AFFORDABLE COMPANIES.

Effective June 30, 1997, HMCA acquired a group of several interrelated
corporations, limited liability companies and a partnership engaged in managing
three diagnostic imaging centers and one multi-specialty practice in New York
State (the "Affordable Companies") pursuant to a series of transactions
concluding with a merger between a wholly-owned subsidiary of HMCA and
Affordable Diagnostics, Inc. Concurrently with the acquisition, Raymond V.
Damadian purchased three New York professional corporations to which the
Affordable Companies were providing their services under several agreements. Dr.
Damadian is the sole stockholder, director and President of these professional
corporations (the "Affordable Professional Corporations"). The diagnostic
imaging centers managed have been closed and the management of the
multi-specialty practice integrated with the other multi-specialty practices
managed by HMCA. During the fiscal year ended June 30, 2003, the net revenues
received by HMCA from the Affordable Professional Corporations were
approximately $2.0 million.

ACQUISITION AND DIVESTITURE OF A & A SERVICES.

Effective March 20, 1998, HMCA acquired A & A Services, Inc. ("A & A Services"),
an management company managing four primary care practices in Queens County, New
York the "A & A Professional Corporations"). During the fiscal year ended June
30, 2002, the net revenues from the A & A Professional Corporations were $1.6
million. A&A Services was sold in April, 2003, and as a result, HMCA no longer
manages primary care practices. During fiscal year ended June 30, 2003, the net
revenues from the A&A Professional Corporations were $1.2 million.

ACQUISITION OF DYNAMIC HEALTH CARE MANAGEMENT

Effective August 20, 1998, HMCA acquired Dynamic Health Care Management, Inc.
("Dynamic"), an MSO managing three physician practices in Nassau and Suffolk
Counties on Long Island, New York. Concurrently with the acquisition, Raymond V.
Damadian purchased two professional service corporations under contract with
Dynamic (the "Dynamic Professional Corporations"). During the fiscal year ended
June 30, 2003, the net revenues from the Dynamic Professional Corporations were
$5.8 million.

OTHER TRANSACTIONS

HMCA performs management services for Superior Medical Services, P.C.
("Superior"), a New York professional corporation of which Raymond V. Damadian
is the sole stockholder, director and President. Superior conducts
multi-specialty practices at locations in Elmont, Elmhurst and the Bronx, New
York. During the fiscal year ended June 30, 2003, the net revenues received by
HMCA from Superior were $3.7 million.

Pursuant to an agreement dated March 31, 1993, RVDC agreed to purchase the
Company's general partnership interest (approximately 92% of the partnership) in
a partnership owning and operating an MRI scanning center in Bensonhurst
(Brooklyn), New York. Robert Janoff, a director of the Company, is a limited
partner in the partnership. During the first six months of fiscal 2003,
Bensonhurst was party to a service contract at an annual rate of $50,000 on its
scanner. During the 2002 fiscal year, Stand-Up MRI of Bensonhurst, P.C., the
professional corporation owned by Dr. Raymond V. Damadian which is managed by
the Partnership, agreed to purchase a Stand-Up(TM) MRI scanner from Fonar for a
purchase price of $1,450,000. The purchase price has been paid in full.

Pursuant to an agreement dated December 1, 1999, Damadian MRI in Garden City,
P.C. ("Garden City") a New York professional corporation of which Raymond V.
Damadian is the sole stockholder, director and President, agreed to lease a
Fonar QUAD(TM) MRI Scanner from the Company for a term of five years at a
monthly rental of $12,356.09. Upon the conclusion of the five year term, Garden
City had the option to purchase the scanner for $581,544.42 or extend the lease
for an additional five year period at the same monthly rental. The term of the
lease commenced on June 12, 2000 upon acceptance of the scanner. As of June 30,
2003, Garden City elected to purchase the scanner for $800,000, which amount has
been paid to Fonar in full.

Pursuant to an agreement dated February 1, 2000, Deerfield Magnetic Resonance
Imaging, P.A. ("Deerfield"), a Florida professional association of which Raymond
V. Damadian is the sole stockholder, director and President, agreed to lease a
Fonar QUAD(TM) 12000 MRI Scanner from the Company for a term of five years at a
monthly rental of $12,356.09. The term of the lease commenced on July 18, 2000
upon the acceptance of the scanner. In September, 2002, Deerfield purchased the
Scanner, paying $800,000 toward the purchase price. A balance of $14,285 owing
as of June 30, 2003 was paid in the first quarter of fiscal 2004.

Canarsie MRI Associates ("Canarsie"), a joint venture partnership of which MRI
Specialties, Inc. ("Specialties") is an owner, is party to a service agreement
for its scanner with the Company at an annual fee of $85,000 for the period from
March 24, 2003 through March 23, 2004. During the prior year, the scanner was
under warranty. During fiscal 2001, Canarsie entered into an agreement to
purchase a QUAD(TM) 12000 MRI scanner from FONAR for a purchase price of
$850,000. Of the purchase price, $400,000 has been paid and $450,000 is payable
pursuant to a note over a period of 7 years at 6% interest per annum. The
monthly payment is $6,573.85 commencing December 1, 2001. Timothy Damadian, the
son of Raymond V. Damadian, is the sole stockholder, director and President of
Specialties.

Pompano MRI Associates ("Pompano"), a joint venture partnership of which
Guardian MRI, Inc. ("Guardian") is an owner, purchased a Stand-Up(TM) MRI
scanner from FONAR for a purchase price of $1,400,000, during fiscal 2002, which
amount has been paid in full. Timothy Damadian, the son of Raymond V. Damadian,
is a stockholder, director and officer of Guardian. Jevan Damadian and Keira
Reinmund, also children of Dr. Damadian, are also stockholders of Guardian.

During fiscal 2001, Damadian MRI in Orlando, P.A. ("Orlando MRI"), a Florida
professional association of which Raymond V. Damadian is the sole stockholder,
director and President, purchased a Stand-Up(TM) MRI scanner from FONAR for a
purchase price of $1,500,000. The purchase price has been paid in full.

A one-year service agreement between Fonar and Orlando MRI Associates,
L.P.("Orlando Partnership"), the management company for Orlando MRI, commenced
on July 13, 2003 at the rate of $85,000 per annum. Timothy Damadian, the son of
Raymond V. Damadian is a limited partner in the Orlando Partnership.

During fiscal 2001, Stand-Up(TM) MRI of Islandia, P.C. ("Islandia") a New York
professional corporation of which Raymond V. Damadian is the sole stockholder,
director and President, purchased a Stand-Up(TM) MRI scanner from FONAR for a
purchase price of $1,350,000. The purchase price has been paid in full.

During fiscal 2001, Black Bear Management LLC, a New York limited liability
company of which TRD Services, Inc. ("TRD") is a member, agreed to purchase a
Stand-Up(TM) MRI scanner from FONAR for a purchase price of $1,400,000. Timothy
Damadian, the son of Raymond V. Damadian, is the stockholder, director and
President of TRD. The scanner has been delivered, installed and paid in full.

During fiscal 2002, Damadian MRI at Elmhurst, P.C. ("Elmhurst"), a New York
professional corporation of which Raymond V. Damadian is the sole stockholder,
director and President, agreed to lease an Echo(TM) MRI scanner from FONAR on a
fee per scan basis of $200 per MRI scan performed.

During fiscal 2002, Tallahassee MRI, P.A. ("Tallahassee"), a Florida
professional association of which Raymond V. Damadian is the sole stockholder,
director and President, agreed to lease a QUAD(TM) MRI scanner from FONAR on a
fee per scan basis of $350 per MRI scan performed. As of March 31, 2003,
Tallahassee purchased the scanner for $950,000, which has been paid in full.
Tallahassee was party to a service agreement with Fonar for an annual fee of
$50,000 for the quarter April 1, 2003 to June 30, 2003 and is now party to a
service agreement for the year July 1, 2003 to June 30, 2004, also for an annual
fee of $50,000.

During fiscal 2002, Stand-Up MRI of Staten Island, P.C., a New York professional
corporation of which Raymond V. Damadian is the sole stockholder, director and
President, acquired the use of a Stand-Up(TM) MRI scanner from Fonar for a
purchase price of $1,650,000, which was purchased and paid in full by Garden
City.

During fiscal 2002, Bronx MRI Associates, LLC, a New York limited liability
company of which Raymond V. Damadian and Donna Damadian, jointly, TRD Services,
Inc. ("TRD"), JAD Ventures, Inc. ("JAD"), Keira Reinmund, Thomas Terry and
Constance Terry, among others, are members, purchased a Stand-Up(TM) MRI scanner
for a purchase price of $1,400,000, which amount has been paid in full. Donna
Damadian is the wife of Raymond Damadian. TRD is owned by Timothy Damadian, a
son of Raymond and Donna Damadian, JAD is owned by Jevan Damadian, a son of
Raymond and Donna Damadian and Keira Reinmund is the daughter of Dr. and Mrs.
Damadian. Constance Terry is the wife of David B. Terry, Vice President and
Secretary of Fonar and brother-in-law of Dr. Damadian. Thomas Terry is also the
brother-in-law of Dr. Damadian.

During fiscal 2002, Deer Park Management Services, LLC, a New York limited
liability company of which TRD and JAD are, among others, members, agreed to
purchase a Stand-Up(TM) MRI scanner from Fonar for a purchase price of
$1,400,000, which amount has been paid in full. TRD and JAD are owned by Timothy
Damadian and Jevan Damadian, respectively, who are the sons of Raymond V.
Damadian.

During fiscal 2002, Long Island Management Services, LLC, a New York limited
liability company of which TRD, JAD and Donna Damadian are, among others,
members, agreed to purchase a Stand-Up(TM) MRI scanner from Fonar for a purchase
price of $1,400,000, which amount has been paid in full. Donna Damadian is the
wife of Raymond Damadian. TRD and JAD are owned by Timothy Damadian and Jevan
Damadian, respectively, the sons of Raymond and Donna Damadian.

During the first quarter of fiscal 2003, Miami MRI Associates, LLC, a Florida
limited liability company of which TRD, JAD and Donna Damadian are, among other
parties, members, agreed to purchase a Stand-Up(TM) MRI from Fonar for a
purchase price of $1,400,000, which amount has been paid in full. Donna Damadian
is the wife of Raymond Damadian. TRD and JAD are owned by Timothy Damadian and
Jevan Damadian, respectively, the sons of Raymond and Donna Damadian.

During the second quarter in fiscal 2003, Manhattan Management Services, LLC, a
New York limited liability company of which TRD, JAD, Donna Damadian, Keira
Reinmund and Robert Djerejian are among other parties, members, agreed to
purchase a Stand-Up(TM) MRI from Fonar for a purchase price of $1,400,000,
payable in installments as the work progresses in accordance with Fonar's usual
terms. The construction and installation of this scanner has not yet been
completed. Donna Damadian is the wife of Raymond Damadian. TRD and JAD are owned
by Timothy Damadian and Jevan Damadian, respectively, the sons of Raymond and
Donna Damadian. Keira Reinmund is the daughter of Raymond and Donna Damadian.
Robert Djerejian is a member of the Board of Directors of Fonar.

During the fourth quarter of fiscal 2003, Queens Management Services, LLC, a New
York limited liability company of which TRD, JAD, Keira Reinmund, Donna Damadian
and Robert Djerejian are among other parties, members, agreed to purchase a
Stand-Up(TM) MRI from Fonar for $1,400,000, payable in installments as the work
progresses in accordance with Fonar's usual terms. The construction and
installation of this scanner has not yet been completed. Donna Damadian is the
wife of Raymond Damadian. TRD and JAD are owned by Timothy Damadian and Jevan
Damadian, respectively, the sons of Raymond and Donna Damadian. Keira Reinmund
is the daughter of Raymond and Donna Damadian. Robert Djerejian is a member of
the Board of Directors of Fonar.

PART IV

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

Not Applicable.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

a) FINANCIAL STATEMENTS AND SCHEDULES

The following consolidated financial statements are included in Part II, Item 8.

Independent Auditors' Report.

Consolidated Balance Sheets as at June 30, 2003 and 2002.

Consolidated Statements of Operations for the Three Years Ended June 30,
2003, 2002 and 2001.

Consolidated Statements of Stockholders' Equity for the Three Years Ended
June 30, 2003, 2002 and 2001.

Consolidated Statements of Cash Flows for the Three Years Ended June 30,
2003, 2002 and 2001.

Notes to Consolidated Financial Statements.

Information required by schedules called for under Regulation S-X is either
not applicable or is included in the consolidated financial statements or notes
thereto.

b) REPORTS ON FORM 8-K

None.

c) EXHIBITS

3.1 Certificate of Incorporation, as amended, of the Company incorporated
herein by reference to Exhibit 3.1 to the Registrant's registration statement on
Form S-1,Commission File No. 33-13365.

3.2 Article Fourth of the Certificate of Incorporation, as amended, of the
Company incorporated by reference to Exhibit 4.1 to the Registrant's
registration statement on Form S-8, Commission File No. 33-62099.

3.3 Article Fourth of the Certificate of Incorporation, as amended
effective June 26, 2003. See Exhibits.

3.4 By-Laws, as amended, of the Company incorporated herein by reference to
Exhibit 3.2 to the Registrant's registration statement on Form S-1, Commission
File No. 33-13365.

4.1 Specimen Common Stock Certificate incorporated herein by reference to
Exhibit 4.1 to the Registrant's registration statement on Form S-1, Commission
File No. 33-13365.

4.2 Specimen Class B Common Stock Certificate incorporated herein by
reference to Exhibit 4.2 to the Registrant's registration statement on Form S-1,
Commission File No. 33-13365.

10.1 License Agreement between FONAR and Raymond V. Damadian incorporated
herein by reference to Exhibit 10 (e) to Form 10-K for the fiscal year ended
June 30, 1983, Commission File No. 0-10248.

10.2 1983 Nonstatutory Stock Option Plan incorporated herein by reference
to Exhibit 10 (a) to Form 10-K for the fiscal year ended June 30, 1983,
Commission File No. 0-10248, and amendments thereto dated as of March 7, 1984
and dated August 22, 1984, incorporated herein by referenced to Exhibit 28 (a)
to Form 10-K for the year ended June 30, 1984, Commission File No. 0-10248.

10.3 1984 Incentive Stock Option Plan incorporated herein by reference to
Exhibit 28 (c) to Form 10-K for the year ended June 30, 1984, Commission File
No. 0-10248.

10.4 1986 Nonstatutory Stock Option Plan incorporated herein by reference
to Exhibit 10.7 to Form 10-K for the fiscal year ended June 30, 1986, Commission
File No. 0-10248.

10.5 1986 Stock Bonus Plan incorporated herein by reference to Exhibit 10.8
to Form 10-K for the fiscal year ended June 30, 1986, Commission File No.
0-10248.

10.6 1986 Incentive Stock Option Plan incorporated herein by reference to
Exhibit 10.9 to Form 10-K for the fiscal year ended June 30, 1986, Commission
File No. 0-10248.

10.7 Lease Agreement, dated as of August 18, 1987, between FONAR and
Reckson Associates incorporated herein by reference to Exhibit 10.26 to Form
10-K for the fiscal year ended June 30, 1987, Commission File No. 0-10248.

10.8 1993 Incentive Stock Option Plan incorporated herein by reference to
Exhibit 28.1 to the Registrant's registration statement on Form S-8, Commission
File No. 33-60154.

10.9 1993 Non-Statutory Stock Option Plan incorporated herein by reference
to Exhibit 28.2 to the Registrant's registration statement on Form S-8,
Commission File No. 33-60154.

10.10 1993 Stock Bonus Plan incorporated herein by reference to Exhibit
28.3 to the Registrant's registration statement on Form S-8, Commission File No.
33-60154.

10.11 1994 Non-Statutory Stock Option Plan incorporated herein by reference
to Exhibit 28.1 to the Registrant's registration statement on Form S-8,
Commission File No. 33-81638.

10.12 1994 Stock Bonus Plan incorporated herein by reference to Exhibit
28.2 to the Registrant's registration statement on Form S-8, Commission File No.
33-81638.

10.13 1995 Non-Statutory Stock Option Plan incorporated herein by reference
to Exhibit 28.1 to the Registrant's registration statement on Form S-8,
Commission File No. 33-62099.

10.14 1995 Stock Bonus Plan incorporated herein by reference to Exhibit
28.2 to the Registrant's registration statement on Form S-8, Commission File No.
33-62099.

10.15 1997 Non-Statutory Stock Option Plan incorporated herein by reference
to Exhibit 28.1 to the Registrant's registration statement on Form S-8,
Commission File No.: 333-27411.

10.16 1997 Stock Bonus Plan incorporated herein by reference to Exhibit
28.2 to the Registrant's registration statement on Form S-8, Commission File No:
333-27411.

10.17 Stock Purchase Agreement, dated July 31, 1997, by and between U.S.
Health Management Corporation, Raymond V. Damadian, M.D. MR Scanning Centers
Management Company and Raymond V. Damadian, incorporated herein by reference to
Exhibit 2.1 to the Registrant's Form 8-K, July 31, 1997, commission File No:
0-10248.

10.18 Merger Agreement and Supplemental Agreement dated June 17, 1997 and
Letter of Amendment dated June 27, 1997 by and among U.S. Health Management
Corporation and Affordable Diagnostics Inc. et al., incorporated herein by
reference to Exhibit 2.1 to the Registrant's 8-K, June 30, 1997, Commission File
No: 0-10248.

10.19 Stock Purchase Agreement dated March 20, 1998 by and among Health
Management Corporation of America, FONAR Corporation, Giovanni Marciano, Glenn
Muraca et al., incorporated herein by reference to Exhibit 2.1 to the
Registrant's 8-K, March 20, 1998, Commission File No: 0-10248.

10.20 Stock Purchase Agreement dated August 20, 1998 by and among Health
Management Corporation of America, FONAR Corporation, Stuart Blumberg and Steven
Jonas, incorporated herein by reference to Exhibit 2 to the Registrant's 8-K,
September 3, 1998, Commission File No. 0-10248.

10.21 2000 Stock Bonus Plan incorporated herein by reference to Exhibit
99.1 to the Registrant's registration Statement on Form S-8, Commission File
No.: 333-66760.

10.22 2002 Stock Bonus Plan incorporated herein by reference to Exhibit
99.1 to the Registrant's registration statement on Form S-8, Commission File
No.: 333-89578.

10.23 2002 Incentive Stock Option Plan incorporated herein by reference to
Exhibit 99.1 to the Registrant's registration statement on Form S-8, Commission
File No.: 333-96557.

10.24 2003 Stock Bonus Plan incorporated herein by reference to Exhibit
99.1 to the Registrant's registration statement on Form S-8, Commission File No:
333-106626.

10.25 2003 Supplemental Stock Bonus Plan incorporated herein by reference
to Exhibit 99.1 to the Registrant's registration statement on Form S-8,
Commission File No: 333-106626.

21.1 Subsidiaries of the Registrant. See Exhibits.

31.1 Section 302 Certification. See Exhibits.

32.1 Section 906 Certification. See Exhibits.

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

FONAR CORPORATION

Dated: September 29, 2003

By: /s/ Raymond Damadian
Raymond V. Damadian, President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

Signature Title Date

/s/ Raymond Damadian Chairman of the September 29, 2003
Raymond V. Damadian Board of Directors,
President, Director
Principal Executive
Officer and Acting
Principal Financial
Officer)

/s/ Claudette J.V. Chan Director September 29, 2003
Claudette J.V. Chan

/s/ Robert J. Janoff Director September 29, 2003
Robert J. Janoff

/s/ Charles N. O'Data Director September 29, 2003
Charles N. O'Data

Director September ---, 2003
Robert Djerejian

CORPORATE INFORMATION

Corporate Headquarters

110 Marcus Drive
Melville, NY 11747
(631) 694-2929

Investor Relations

FONAR Corporation
110 Marcus Drive
Melville, NY 11747
(631) 694-2929

Stock Transfer Agency

Computershare Trust Company, Inc.
350 Indiana Street, Suite 800
Golden, Colorado 80401

Auditors

Marcum & Kliegman, LLP
New York, New York

Board of Directors

Raymond V. Damadian, M.D.
Chairman of the Board

Claudette Chan, Director

Robert Janoff, Director

Charles O'Data, Director

Robert Djerejian, Director

Officers

Raymond V. Damadian, M.D.
President, Chief Executive Officer and Treasurer

David B. Terry
Vice President of Administration and Secretary