Fonar Corp – ‘DEF 14A’ for 6/30/02

On:  Wednesday, 5/22/02, at 4:31pm ET   ·   For:  6/30/02   ·   Accession #:  355019-2-12   ·   File #s:  0-10248, 0-10248 (PRE 14A)   ·   Correction:  This Filing’s metadata (e.g., “Filed as of” Date) was Corrected by the SEC on 6/21/02. ®

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Definitive Proxy Solicitation Material   —   Sch. 14A
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Document/Exhibit                   Description                      Pages   Size 

 1: DEF 14A     Definitive Proxy Solicitation Material               126±   545K 

Document Table of Contents

DEF 14A
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SCHEDULE 14A INFORMATION

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

Filed by Registrant [X]                                     

Filed by a Party other than the Registrant [ ]              

Check the appropriate box:                                  

[  ] Preliminary Proxy Statement                            

       [  ] Confidential,  for use of the Commission only (as permitted by
Rule 14a - 6 (e) (2) )                            

[X]  Definitive Proxy Statement                             

[  ] Definitive Additional Materials                        

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

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

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

Payment of Filing Fee (Check the appropriate box):          

[X]  No fee required                                        

       [ ] Fee  computed on table below per  Exchange  Act Rules 14a-6 (i)
(4) and 0-11.                                     

               (1)  Title of each  class  of  securities  to  which  transaction
applies:                                

               (2)  Aggregate number of securities to which transaction applies:

               (3)  Per  unit  price or other  underlying  value of  transaction
                    computed  pursuant to Exchange  Act Rule 0-11 (Set forth the
                    amount on which the filing fee is  calculated  and state how
it was determined):                     

   (4)  Proposed maximum aggregate value of transaction:

(5)  Total fee paid:                              

[ ] Fee paid previously with preliminary materials.         

          [ ]  Check  box if any   part  of the fee is  offset  as  provided  by
               Exchange  Act Rule 0-11 (a) (2) and identify the filing for which
               the  offsetting  fee was paid  previously.  Identify the previous
               filing by registration  statement number, or the Form or Schedule
and the date of its filing.                       

(1)  Amount Previously Paid:                      

(2)  Form, Schedule or Registration Statement No.:

(3)  Filing Party:                                

(4)  Date Filed:                                  

Notes:                                                                

DEF 14A
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 FONAR CORPORATION

Proxy - Annual Meeting of Stockholders - June 17, 2002

 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 17,  2002 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                    to vote for all   
contrary 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  selection  of Grassi & Co.,  CPAs,  P.C. as the  Company's
independent auditors for the fiscal year ended June 30, 2002.                   

FOR               AGAINST               ABSTAIN     

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

No. 3. 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:---------------------------, 2002

                                       ---------------------------------------
         Signature

                                       ---------------------------------------
                         Signature if jointly held

                                        PLEASE SIGN EXACTLY AS YOUR NAME APPEARS
                                        ON YOUR STOCK  CERTIFICATES.  In signing
                                        as  attorney,  executor,  administrator,
                                        trustee  or  guardian,   indicate   such
                                        capacity.  All joint  tenants must sign.
                                        If a  corporation,  please  sign in full
                                        corporate  name by  president  or  other
                                        authorized  officer.  If a  partnership,
                                        please  sign  in  partnership   name  by
                  authorized person.

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

DEF 14A
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 FONAR CORPORATION
110 Marcus Drive
Melville, New York 11747
(631) 694-2929

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
 June 17, 2002

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
17, 2002, 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 selection of Grassi & Co., CPAs, P.C. as the Company's auditors
for the fiscal year ended June 30, 2002.                                        

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

Only stockholders of record at the close of business on May 1, 2002 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

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 PROXY STATEMENT FOR ANNUAL MEETING OF
 STOCKHOLDERS TO BE HELD JUNE 17, 2002

This proxy  statement,  which is first being mailed to  shareholders on or about
May 15, 2002, 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 17, 2002 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 May 1, 2002 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 11, 2002, there were 67,703,423.889  shares of
Common  Stock  held of record  by 4,732  stockholders,  4,211  shares of Class B
Common Stock held of record by 12 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 4,027 stockholders at the
close of business on April 11, 2002) 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, NOMINEE FOR DIRECTOR AND OFFICERS                                    

Raymond  V.  Damadian,  M.D.  (age 66) 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 64) 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 74) 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 66) 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  to  various
entities,  including  Pittsburgh  National  Bank.  He founded The Beaver  County
Foundation,  a Community Foundation,  in 1992, and serves as its President.  Mr.
O'Data is a graduate  of Geneva  College,  where he  received  a B.S.  degree in
Economics in 1958.                                                              

Robert Djerejian (70), nominee for Director. 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 (53) 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, 2001 the Board of Directors unanimously consented
to action in lieu of a meeting on five occasions.                               

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 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,
2001.                                                                           

The members of the audit  committee are Messrs.  Robert J. Janoff and Charles N.
O'Data. Messrs. Janoff and O'Data are independent  directors,  as defined in the
Nasdaq Market Place Rules. Upon his election as a director, Mr. Robert Djerejian
will serve on the audit  committee,  replacing Dr. Luis E. Todd,  who previously
resigned from the Board.                                                        

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.                                                      

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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 1, 2002.                                                                  

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                4.14%            
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                     50,000                  *              
Class A Preferred                 1,999                  *              

Charles N. O'Data                                                               
Director                                                                        
Common Stock                        700                  *              

All Officers, Directors                                                         
and Nominees as a Group                                                         
(5 persons) (2) (3)                                                             
Common Stock                  2,548,220                4.24%            
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 6.286 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,  2001 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 2001 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, 2001 by the Company's Chief Executive Officer.                         

Name and                          Annual                                        
Principal                      Compensation      Long-Term                      
                        ------------    Compensation     All Other
Position             Year     Salary   Other      Awards       Compensation     
                 ----   ---------- -----    ------------    ------------
Raymond V. Damadian  2001   $86,799.96   0           0               0          
Chairman of the;                                                                
Board; President;    2000   $86,799.97   0           0               0          
Chief Executive                                                                 
Officer;             1999   $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 2001.                                     

Option/SAR Exercises and Year End Values                                        

No options or stock  appreciation  rights were exercised by the Company's  Chief
Executive  Officer during fiscal 2001. The Company's Chief Executive Officer did
not hold any unexercised stock options or stock  appreciation  rights at the end
of fiscal 2001.                                                                 

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,
1996 and ending on December 31, 2001 (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, 1996. The stock price
performance  on the graph below is not  necessarily  indicative  of future price
performance.                                                                    

(PERFORMANCE GRAPH APPEARS HERE)                                                

Relative Dollar Values                                                          

                   6/28/96  6/30/97  6/30/98  6/30/99  6/30/00  6/29/01 12/31/01
                   -------  -------  -------  -------  -------  -------  -------
Fonar Common Stock $100.00  $114.84   $89.96   $46.72   $84.18   $78.14   $47.93
NASDAQ-US          $100.00  $121.62  $160.09  $230.22  $340.43  $184.52  $166.43
NAS-MDM            $100.00   $96.46  $112.29  $149.94  $172.71  $161.90  $165.39
NAS-Hea.           $100.00   $92.41   $90.03   $84.73   $65.39   $93.31   $91.45

2. RATIFICATION OF SELECTION OF AUDITORS                                        

The Board of Directors has selected  Grassi & Co., CPAs,  P.C., as the Company's
independent  auditors for the fiscal year ending June 30, 2002. The stockholders
will be asked to ratify this action by the Board.                               

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.  Grassi & Co.,
CPA's, P.C. were the Company's auditors for the fiscal year ended June 30, 2001.

One or more  representatives  of Grassi & Co.,  CPAs,  P.C.  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 Grassi & Co.,  CPAs,  P.C.  for the audit of the
Company's  annual  financial  statements for the fiscal year ended June 30, 2001
and the reviews of the financial statements included in the Company's Forms 10-Q
for the fiscal year ended June 30, 2001 were $302,706.                          

FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION                         

No fees were billed by Grassi & Co.,  CPAs,  P.C. for the fiscal year ended June
30,  2001 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.                                            

ALL OTHER FEES                                                                  

The aggregate  fees billed by Grassi & Co.,  CPAs,  P.C. for all other  services
rendered by them during the fiscal year ended June 30, 2001 were $314,503, which
included  services in connection  with the  registration  of securities  and tax
preparation and planning.                                                       

The Company's audit committee believes that the provision by Grassi & Co., CPAs,
P.C. of services  in  addition to audit  services in fiscal 2001 was  compatible
with maintaining their independence.                                            

All persons  performing work on behalf of Grassi & Co., CPAs, P.C. in connection
with their engagement to audit the Company's financial statements for the fiscal
year ended June 30, 2001 were  full-time  permanent  employees  of Grassi & Co.,
CPAs, P.C.                                                                      

PROPOSALS OF STOCKHOLDERS                                                       

Proposals of stockholders intended to be presented at the 2003 annual meeting of
stockholders  must be received by the Company no later than  January 10, 2002 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,  and the  ratification  of 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, May 15, 2002                                         

A COPY OF THE  COMPANY'S  FORM 10-K  REPORT  FOR FISCAL  YEAR  2001,  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

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2001 ANNUAL REPORT

FONAR CORPORATION 

Dear Stockholders,                                                              

The year 2002 is the year of the Stand-Up MRI(TM)!  As many of you know, we have
invested heavily,  both in time and resources,  in developing this product. With
the R&D and the product engineering efforts finally completed,  we now offer the
most  revolutionary  product  the MRI  market  has seen  since we  created  this
industry  nearly 25 years also.  The company that  invented MR scanning has just
reinvented it!                                                                  

The Stand-Up  MRI(TM) is one of a kind.  Its unique design  enables it to detect
pathology  that no other MRI scanner can, and to provide an entirely new kind of
openness, making it the only true Open MRI. Our sales and marketing teams are in
place; the marketplace has been extremely receptive;  and we're selling! At this
writing, we have sold 18 Stand-Up MRIs.                                         

A brief status  report on each of the installed  Stand-Up MRIs will  communicate
why we at FONAR Corporation are so excited about this product:                  

Status of the First Stand-Up MRI(TM) Installations                              

Washington  Open MRI,  Inc.,  the first to purchase  and  install  the  Stand-Up
MRI(TM) (Greenbelt,  Maryland) has already ordered two more. In February,  2002,
at the time the third unit was ordered,  the  president of the company,  Phyllis
Newfield,  said,  "Based upon the very  positive  response  we've  received from
patients and referring physicians,  right from the very beginning, I knew we had
made the right choice and that we would be ordering  several more  Stand-Up MRIs
from FONAR.  There's no other scanner like it. It's definitely in a class of its
own."                                                                           

Rose Radiology  Centers,  Inc., the first in Florida to purchase and install the
Stand-Up   MRI(TM)   ordered  its  second   unit  in  April   2002.   Owner  and
board-certified  diagnostic radiologist Dr. Manuel S. Rose stated, "The response
from the local community has been very positive,  particularly  among orthopedic
surgeons.  In the past they had no choice  but to rely on what  could be seen by
the MRI of patients  scanned only in recumbent  positions.  That's no longer the
case, in the Tampa area anyway. For example, if the problem is a herniated disk,
it's quite possible that the  herniation,  when visualized with the patient in a
supine  position,  could appear far less severe than it actually is, or it could
disappear  altogether.  We've seen this happen on several occasions.  Through no
fault  of  their  own,  surgeons  are at a  serious  disadvantage,  consequently
resulting in failed  surgeries.  With the Stand-Up 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."            

The  Stand-Up  MRI(TM)  in  Islandia,  New York,  which is  managed  by  FONAR's
subsidiary,  Health Management  Corporation of America (HMCA), opened in January
of this year and is  performing  400 scans per month.  Patients have traveled to
Islandia  from  as  far  away  as  Michigan,  North  Carolina,   Tennessee,  the
Netherlands, and London.                                                        

The  Stand-Up  MRI of  Orlando  in  Florida,  which  opened in the same month is
following in Islandia's footsteps, with scan volume steadily rising. A spokesman
for the facility  described the response from the medical and legal community as
overwhelming.                                                                   

Fourteen more Stand-Up MRIs are in various stages of production or installation.

The Product                                                                     

What makes the Stand-Up  MRI(TM)  revolutionary  is its physical  configuration.
With the magnetic poles vertically oriented, rather than in the usual horizontal
orientation, patients can be scanned, for the first time, in upright positions -
standing,  sitting,  or even bending over. This allows medical  practitioners to
visualize anatomy under normal weight-bearing conditions, and in their positions
of pain or symptoms.  In the  relatively  short period of time that we have been
working with the Stand-Up  MRI(TM) in clinical  environments,  we have seen case
after  case  where  pathology,  particularly  spine  pathology,  that  had  gone
undetected on  conventional  lie-down  MRIs was clearly  visible on the Stand-Up
MRI(TM).                                                                        

Physicians  and surgeons  rely heavily on the  accuracy of  diagnostic  tests in
order to provide the best possible care and  treatment of their  patients.  They
are also  careful  to avoid  unnecessary  risks.  With the  introduction  of the
Stand-Up MRI(TM),  the decision to refer a patient with back pain to a recumbent
MRI scanner when there is the option of sending him to a nearby Stand-Up MRI(TM)
simply makes no sense.  Considering  the fact that roughly half of all MRI scans
performed today are of the spine, one immediately recognizes the enormous appeal
and sales potential of this product.                                            

I would like to underscore  the  importance of the Stand-Up MRI's unique ability
to see inside the human body with  patients  in normal,  everyday  positions  or
postures.  From your own experience,  I'm sure you understand that some pains or
symptoms  only  manifest  themselves,  or are  more  acute,  when  you  assume a
particular position. The Stand-Up MRI(TM), and only the Stand-Up MRI(TM), allows
the physician to assess such problems with the patient in those very  positions.
We call it Position Imaging(TM).  If a patient is dizzy only when he is upright,
he  should  be  scanned  upright;  if a knee  hurts  only when it's in a certain
position,  it should be scanned in that  position;  if the patient's  back hurts
only when he is upright,  he should be scanned upright. As a physician who knows
and has  worked  with  many  other  physicians,  I have no doubt  that once this
machine is in the hands of the able,  creative and innovative medical community,
its utility will skyrocket.                                                     

Patient Comfort                                                                 

The Stand-Up MRI's physical configuration also makes the scanner extraordinarily
comfortable,  roomy and patient friendly. Its front- and top-open design creates
an entirely new kind of MRI  experience.  It is entirely  free of anything  that
might induce a claustrophobic  reaction,  a common problem even among Open MRIs.
With Stand-Up MRI(TM),  there is nothing directly in front of the patient's face
or overhead; there is a clear and direct path out of the scanner; patients don't
have to lie down to be pushed into or under  something;  they feel "in control";
they don't feel  "trapped."  Indeed,  the scanner is advertised to the public as
the only true Open MRI, where the only thing in front of the patient's face is a
TV.                                                                             

In fact, we have successfully scanned a host of patients in the Stand-Up MRI(TM)
that  could  not  tolerate  any  other  MRI,  including  other  Open  MRIs.  The
extraordinary  spaciousness  of  the  scanner  also  enables  it to  accommodate
extremely large patients, such as a 400-pound man and a 5-foot,  300-pound woman
recently scanned at a Stand-Up MRI(TM) facility.                                

The  vigorous  response  from  local  advertising  of the  Stand-Up  MRI(TM)  in
Islandia, New York, is concrete proof that patient comfort is a major issue, one
of growing importance.  Most patients there are scanned in a comfortable sitting
position  watching a TV mounted on the scanner  room wall.  We have learned that
patients  invariably  prefer  sitting for their exams to lying  down...  and the
Stand-Up MRI(TM) is the only scanner that does it.                              

Not a Specialty Scanner                                                         

It is also  important to point out that the Stand-Up  MRI(TM) does not just scan
patients  standing  up, as might be inferred  from its name.  It scans  patients
lying down,  just like any other MRI, but in a host of other  positions as well.
Patients can be scanned standing, sitting, or bending. MRI images can be made of
cervical  spine in flexion or  extension,  and of the lumbar  spine in  flexion,
extension, tilted laterally or rotated at the hip. Shoulders, hips and knees can
be scanned with the joints in just about any position imaginable.  A patient can
have an MRI  scan of the  prostate,  non-invasively,  in a  comfortable  sitting
position as he watches TV. The possibilities seem endless.                      

0.6 Tesla Technology                                                            

The Stand-Up  MRI is built on proven 0.6 Tesla  technology,  a  technology  that
FONAR  pioneered  and has since  mastered.  The speed and image  quality  of the
Stand-Up  MRI(TM)  are  second  to none.  Its full  range of  advanced  software
features  and  state-of-the-art  pulse  sequences  provide the user with all the
tools necessary to achieve diagnostic precision.  In short, the Stand-Up MRI(TM)
is the finest high-field Open MRI available today.                              

Media Blitz                                                                     

We have  launched  a  national  media  blitz  that  includes  local TV and radio
advertising  in the  metropolitan  New York area,  and, at the  national  level,
journal  ads,  direct  mail  and  telemarketing.  The  response  has  been  very
encouraging.  We  have  two  goals  in mind - to  generate  sales  leads  in the
metropolitan  New York area,  and to generate  business  for the Stand-Up MRI in
Islandia,  Long Island. The realization of the latter goal will also demonstrate
to  potential  buyers the  enormous  appeal  that the  Stand-Up  MRI(TM) has for
informed  physicians and for an informed  public.  I'm pleased to report that we
are indeed  achieving our goals.  We've  accumulated a sizeable  number of sales
leads; visits to the FONAR Web site (www.fonar.com) have doubled since the start
of the advertising; and the patient volume at the Islandia facility is currently
running at 400 scans per month.  What  better  sales tool is there than a packed
MRI appointment book?                                                           

GE                                                                              

In  April  2002,  General  Electric  purchased  Stand-Up  MRIs  for  two  of its
customers.  This,  of course,  is an  important  milestone  for FONAR.  GE, as a
well-respected   provider  of  quality   medical   equipment,   has  established
longstanding  relationships with prestigious institutions and hospitals all over
the world. GE's inclusion of the Stand-Up MRI in their product line gives FONAR,
for the first time, access to these important market segments. Such exposure has
the potential to accelerate  our  penetration  of the worldwide MRI market.  The
arrangement between GE and FONAR has enormous potential for both companies.     

Ready to Sell                                                                   

There  are  many  phases  that a  company  must go  through  in the  process  of
successfully  bringing a new  product to market.  We are now in the final  phase
with  our  Stand-Up  MRI(TM).  The  design  work  has  been  completed;  we have
successfully  produced,  tested and  installed  4 scanners;  we have  another 14
scanners  in  production  to be  installed;  our  production  and field  service
departments  are ready to meet the  anticipated  sales  demand;  we have built a
national  sales and  marketing  team;  we have  launched  a  national  sales and
marketing  campaign;  the patient schedules of the first Stand-Up MRI(TM) owners
are packed;  patients and referring  physicians  are delighted with the product;
and we  finally  have  operating  Stand-Up  MRI(TM)  sites  that  we can  invite
prospective customers to visit. Everything is in place, which is why we say that
2002 is year of the Stand-Up MRI(TM).                                           

Thank You                                                                       

I believe that FONAR is entering the most  exciting  and  promising  time in its
history.  Over the past few years we have invested in making the transition from
the R&D  company to a  full-scale  MRI  manufacturing  company.  We  plowed,  we
planted, we watered and now it's finally harvest time. I offer my special thanks
to our loyal FONAR shareholders who have waited so patiently for this day.      

Sincerely,                                                                      

Raymond V. Damadian                                                             
President and Chairman                                                          

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

 FORM 10-K/A
 ---------------------

[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, 2001 

OR

[ ]  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 _______                                                     

As of September 20, 2001,  60,044,124  shares of Common  Stock,  4,211 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  57,521,655  shares of Common
Stock held by  non-affiliates  as of such date (based on the  closing  price per
share on September 20, 2001 as reported on the NASDAQ System) was  approximately
$82.3 million.  The other outstanding classes do not have a readily determinable
market value.                                                                   

 DOCUMENTS INCORPORATED BY REFERENCE
None

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REASONS FOR ADMENDMENT                                                          

     Fonar  Corporation's  10-K has been admended to unconsolidate  the physical
rehabilitation  and medical  practices  which are  managed by Health  Management
Corporation of America, Fonar's wholly-owned subsidiary.                        

     The Company no longer  consolidates any medical practices which it manages.
In the  original  10-K  for  2001  and  also  in  2000  and  1999,  the  Company
consolidated  certain  medical  practices  managed  as  a  result  of  the  1998
acquisitions of A & A Services,  Inc. and Dynamic Health Care  Management,  Inc.
The Company  also  consolidated  the  practices  conducted  by Superior  Medical
Services,  P.C. The Company has determined  that  consolidation  of such medical
practices is not appropriate because the underlying management agreements do not
meet all of the six criteria of Emerging  Issues Task Force  ("EITF")  Consensus
No. 97-2.                                                                       

     Accordingly,  the consolidated financial statements have been restated. The
significant effect of such restated financial statements for 2001, 2000 and 1999
has been to decrease revenue and related costs by $4.2 million, $3.8 million and
$3.7  million,  respectively.  Consequently,  these changes had no effect on the
results  of  operations  for the  years  ended  June 30,  2001,  2000 and  1999.
Additional   disclosure  has  also  been  added  concerning   HMCA's  management
agreements in the Description of Business,  Management's Discussion and Analysis
of  Financial  Condition  and Certain  Relationships  and  Related  Transactions
sections of the 10-K.                                                           

     All  financial  information  provided  in the  10-K/A  has been  revised to
reflect the restatement.                                                        

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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  introduced
the  first  MRI  scanner  in  1980  and  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 MRI
scanner,  the QUAD MRI, the Open Sky MRI and its works in progress MRI operating
room.                                                                           

     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 21 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 (dubbed the "Fonar Seven") are
intended  to  significantly  improve the  Company's  competitive  position.  The
Company's  products are the "Stand-Up  MRI" also called  "Indomitable  (TM), the
Fonar 360(TM), the "QUAD(TM)" MRI scanner and the Echo(TM) MRI scanner.         

     Indomitable(TM)  permits,  for the first time,  MRI diagnoses to be made in
the   weight-bearing   state.  It  is  also   anticipated  that  in  the  future
Indomitable(TM) will enable MRI-guided surgical and interventional procedures to
be performed when the patient is upright.  The Company received FDA approval for
Indomitable in October, 2000.                                                   

     The  Fonar  360,  approved  for  marketing  by the FDA on March  16,  2000,
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 version of the Fonar 360 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 to give physicians  direct 360 access to
patients and the availability of MRI compatible  surgical  instruments will also
enable the Fonar 360, in its future  "OR-360(TM)"  version, to be used for image
guided surgery.                                                                 

     The "QUAD(TM) 12000" MR scanner utilizes a electromagnet  and is accessible
from four  sides.  The QUAD 12000 is the first  "open" MR scanner at high field.
The  greater  field  strength  of  the  QUAD'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 12000 scanner magnet is the highest field "open MRI" 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 "Pinnacle(TM)"  which
combines  many of the  features  of the  QUAD  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 increased its internal sales force to  approximately  24 persons,
concentrating  on domestic sales.  Fonar continues to use  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.                                                             

     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 19  diagnostic  imaging  centers and 11 primary
care and specialty medical  practices located  principally in New York State and
Florida.                                                                        

PRODUCTS                                                                        

     The  Company's  principal  products  are  its  Stand-Up  MRI,  also  called
Indomitable, the Fonar 360, the QUAD 12000 series and the Echo.                 

     The  Company's  Indomitable(TM)  scanner will allow  patients to be scanned
while standing,  sitting or reclining. As a result, for the first time, MRI will
be able to be used to show abnormalities and injuries under full  weight-bearing
conditions, particularly the spine and joints.                                  

     A floor-recessed  elevator brings the patient to the height appropriate for
the targeted image region. A custom-built  adjustable bed will allow patients to
sit or lie on their backs, sides or stomachs.                                   

     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.                                                                         

     Indomitable(TM)  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 Company  received  approval  from the FDA for  Indomitable  in October,
2000.                                                                           

     The Fonar 360 has an enlarged  room sized  magnet in which the magnet frame
is incorporated into the floor, ceiling and walls of the scan room. 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.  Physicians  and family members are able to actually enter the
scanner and approach the patient. In its Open Sky version,  the Fonar 360 serves
as an open patient  friendly  scanner  which allows 360 access to the patient on
the scanner bed. The walls can be decorated with panoramic murals and the entire
scan room can be decorated to be incorporated into the pictured  landscape.  The
Company received approval from the FDA for the Fonar 360 in March 2001.         

     In its future interventional OR-360 version, which is still in the planning
stages, the enlarged room sized magnet and 360 access to the patient afforded by
the Fonar 360  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 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 version of the Fonar 360 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.              

     To optimize the patient-friendly  character of the Open Sky MRI, the walls,
floor, ceiling and magnet poles are decorated with landscape murals. The patient
gap is twenty inches and the magnetic field strength,  like that of FONAR's QUAD
12000, is 0.6 Tesla.  The Open Sky MRI shares the fundamental  technology of the
QUAD 12000 and offers the same speed, precision and image quality.              

     The QUAD(TM) 12000 MR scanner utilizes a 6000 gauss iron core electromagnet
and is accessible from four sides. The QUAD 12000 is the first "open" MR 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  scanners'  open design,  the QUAD 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
QUAD'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'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 marked openness of FONAR's QUAD scanners  enables
surgeons to perform a wide range of surgical procedures inside the magnet.      

     The "QUAD"  scanners  are unique MR  scanners  in that four sides are open,
thus  allowing  access  to the  scanning  area  from four  vantage  points.  The
starshaped  open  design  of the QUAD  will  also  make  possible  a host of new
applications,   particularly   MRI  breast  imaging  and  MRI  directed  surgery
(Interventional MRI).                                                           

     With the QUAD's multi-bed  patient  handling  system,  many more short scan
procedures  such as those used in breast imaging can be done in a day,  allowing
the  price  of MRI  breast  imaging  to  drop  without  reducing  the  scanner's
revenue-generating  capacity.  At  the  same  time,  there  is not  the  painful
compression of the breast characteristic of X-ray mammography.                  

     The  principal  difference  between  the QUAD  scanners  and other open MRI
scanners is in field strength.  Other open MRIs operate at  significantly  lower
magnetic field strengths and, therefore, are unable to produce the amount of MRI
image-producing  signal  necessary to make  high-quality MRI images (measured by
signal-to-noise ratios, S/N).                                                   

     The QUAD 12000 scanner utilizes a 6000 gauss (.6 Tesla field strength) iron
core  electromagnet.  The greater field strength of the 6000 gauss magnet,  when
enhanced by the electronics already utilized by the Company's scanners, produces
images of a higher  quality and clarity than other open MRI  scanners.  The QUAD
12000  scanner  magnet is the  highest  field  "open  MRI" in the  industry  and
operates at a field strength that is almost two times its closest competitor (.6
Tesla field strength versus .35 Tesla field strength).                          

     The QUAD 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 QUAD's design over its predecessors also
include increased image-processing speed and diagnostic flexibility.            

     Maximal S/N is achieved  when the  direction of the magnetic  field and the
direction of the receiving coil axis are perpendicular to one another, as is the
case with the QUAD scanners.  The  orientation of the magnetic field is vertical
and when  combined  with any one of FONAR's  array of  solenoidal  (wrap-around)
surface coils, the QUAD 12000,  for example,  produces as much S/N as a supercon
MRI at twice the field strength. So that prospective buyers can make an accurate
comparison,  the number  12,000 is used to describe the S/N  equivalency  of the
QUAD 12000 to 12,000-gauss superconductive machines.                            

     Several technological  advances have been engineered into the QUAD scanners
for extra  improvements  in S/N,  including:  new  high-S/N  Organ  Specific(TM)
receiver  coils\;  new ceramic magnet poles that provide  advanced  eddy-current
control\;    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 QUAD  12000  scanners  operate
squarely in the optimum C/N range. In addition, the Company's works-in-progress,
the OR-360, Open Sky MRI and Stand-Up MRI are also designed to operate with said
C/N range.                                                                      

     The QUAD  provides  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's
also Evolving  Images(TM),  Multi-Angle  Oblique (MAO)(TM) imaging,  and oblique
imaging.                                                                        

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

     Prior to the  introduction  of the QUAD  scanners,  the  Ultimate(TM)  7000
scanner,  introduced in 1990, was the Company's principal product.  The Ultimate
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 2001,  sales of the Company's  QUAD  scanners  accounted for
approximately  7.3% of the  Company's  total  revenues  and  29% of its  medical
equipment segment  revenues,  as compared to 7.6% of total revenues and 46.4% of
medical equipment  revenues during fiscal 2000. During fiscal 2001, sales of the
Company's  Stand-Up scanners  accounted for approximately 3.8% of total revenues
and 15.5% of medical equipment  revenues,  and sales of Echo scanners  accounted
for 2.5% of total revenues and 10% of medical equipment revenues.  There were no
sales of  Stand-Up  scanners  or Echo  scanners  in fiscal  2000 or of  Ultimate
scanners in fiscal 2001 or 2000.  There were no sales of Beta scanners in fiscal
2001,  but 0.2% of total  revenues  and 1.4% of medical  equipment  revenues  in
fiscal 2000 were derived from the sale of a refurbished Beta scanner.           

     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%.                             

     On the other  hand the soft  tissue  contrasts  with  which to  distinguish
cancers on images by MRI are up to 180%.  This is because the nuclear  resonance
signals from the body's tissues differ so dramatically. Liver cancer and healthy
liver signals  differ by 180%.  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.                       

     Among its other  uses,  the  Company  envisions  that its Open Sky  MRI(TM)
scanner will meet the public need for an MRI breast scanner.                    

     The Company is developing a superconductive  version of its open iron frame
magnets, the "Pinnacle" (TM), and has completed construction of a prototype with
a 0.6 Tesla superconductive  magnet. The Company's design of its superconductive
magnet  anticipated  the  possibility of making its other products  available as
superconducting  magnets.  Therefore,  it is the  Company's  objective  to  make
Indomitable(TM)  and the Fonar 360  available  to  FONAR's  customers  as either
iron-frame resistive models or iron-frame  superconductive  magnets depending on
customer preference and pricing.                                                

     The  Pinnacle  will have a field  strength  between  0.6 to 1.0 Tesla and a
18-inch gap  vertical  field.  This MRI scanner will combine the benefits of its
open non claustrophobic  patented iron-frame,  vertical field magnet design with
the high field strength of a  superconducting  magnet.  The Company received FDA
approval for the Pinnacle 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 has increased its internal sales force to  approximately  24 persons.
Our internal  sales force  handles the domestic  market while we continue to use
independent  distributors  for foreign  markets.  In  addition  to its  internal
domestic sales force,  Fonar and G.E.  Medical,  a division of General Electric,
have  entered  into an  arrangement  pursuant to which G.E.  Medical will act as
independent distributor for Fonar's Stand-Up 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.                                                         

     The Company has exhibited its new products at the annual trade show held by
the  Radiological  Society of North America  ("RSNA") in Chicago since  November
1995 and plans to attend the RSNA trade show in November  2001 and future years.
The RSNA trade show is held  annually and is attended by most  manufacturers  of
MRI scanners.                                                                   

     The Company is directing its marketing  efforts to meet the demand for both
"open" and high field strength MRI scanners. Fonar plans to devote its principal
efforts to  marketing  the  Stand-Up  MRI,  which has the unique  capability  of
scanning patients under weight-bearing  conditions. In addition the Company will
continue to market its Fonar 360, QUAD and Echo MRI  scanners.  Utilizing a 6000
gauss (0.6 Tesla field strength) iron core  electromagnet,  the Stand-Up,  Fonar
360 and QUAD 12000  scanner  magnets  are the  highest  field  "open MRI" in the
industry.                                                                       

     The  Company  also  will seek to  introduce  new MRI  applications  for its
scanners such as MRI-directed surgery and head-to-toe MRI preventive screening. 

     Fonar's areas of operations are  principally  in the United States.  During
the fiscal year ended June 30, 2001, 0% of the Company's revenues were generated
by  foreign  sales,  as  compared  to 2.8%  and 3.4%  for  fiscal  2000 and 1999
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
installed base were  approximately  $2.3 million in fiscal 1999, $1.7 million in
fiscal 2000 and $2.0  million in fiscal  2001.  The  decrease in fiscal 2000 was
principally  the result of the  retirement of old scanners.  This trend has been
reversed in 2001.                                                               

     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.  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 current
MRI angiograms to synchronize  the angiograms to the cardiac cycle.  By doing so
the dynamics of blood vessel filling and emptying can be visualized with movies.
Such enhancements are attractive to the 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  $14,500 in
fiscal 1999, $36,000 in fiscal 2000 and $0 in fiscal 2001.                      

     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,  2001,  the  Company   incurred
expenditures of $6,621,225  ($754,804 of which was  capitalized) on research and
development,  as compared to  $5,893,648($361,323  of which was capitalized) and
$6,647,555  (none of which was  capitalized)  incurred  during the fiscal  years
ended June 30, 2000 and June 30, 1999, respectively.                            

     Research  and  development  activities  have  focused  principally,  on the
development  and  enhancement  of the new  Indomitable  (TM) and  Fonar  360 MRI
scanners  and its new  extremities  scanner.  The  Indomitable  (TM) MRI,  Fonar
360(OR-360  and  Open  Sky  MRI),  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. The Company
received FDA approval for the Sympulse upgrade in January, 2001.                

BACKLOG                                                                         

     The Company's  backlog of unfilled orders at July 1, 2001 was approximately
$10.8  million,  as compared to $2.05 million at July 1, 2000. Of these amounts,
approximately  $1.6  million  and $0.45  million had been paid to the Company as
customer  advances  as at July 1, 2001 and July 1,  2000,  respectively.  Of the
backlog  amounts  at  July  1,  2001,  $4.4  million   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 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
59 patents  issued  and 62  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 59 issued patents expire at various
times between June 23, 2004 and November 25, 2018.                              

     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 1998  the  size of the  MRI  market  in the  United  States  was
approximately  $957  million.  The market share of high field air core MRI's was
approximately  57%. In 1999 the size of the MRI market in the United  States was
approximately $1.074 billion. FONAR's open iron frame MRI scanners are competing
principally with high field air core scanners. The QUAD 12000 scanner,  however,
utilizing a 6,000 gauss (0.6 Tesla field strength) iron core  electromagnet,  is
the first  "open"  MR  scanner  at high  field  strength.  In  addition  FONAR's
works-in-progress  include a  superconductive  version  of its open  iron  frame
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 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; Marconi Medical (formerly Picker International), 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 and 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 market for MRI scanners is
less than 1.0%.  FONAR  introduced the first "Open MRI" in 1982.  "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
1982 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 1994 all (with one
exception) added the iron frame "open" magnet to their MRI product line. In 1997
the sale of iron frame "open" magnets  exceeded the sale of traditional air core
superconductive magnets. 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  version of the Fonar 360  explicitly  addresses this
growing  market  reception  of MRI  guided  surgical  procedures  but is not yet
available as a product.  Fonar's  Indomitable  and QUAD series  magnets do also.
Although not  enabling a full  operating  theater as the OR-360  does,  the iron
frame  "Open" QUAD 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
1.0%,  FONAR expects to be a leader in domestic open market for several reasons.
In MRI,  scanning  speed and image  quality is controlled by the strength of the
magnetic  field.  Fonar's QUAD 12000 scanner  operates at almost twice the field
strength of the next highest field strength open magnet, manufactured by Toshiba
(0.6 Tesla vs. 0.35 Tesla).  The Company's  Fonar 360 and  Indomitable  scanners
also operate at this field strength.  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. This
is the principal reason GE's 1.5 Tesla air core superconductive scanner achieved
market dominance in the MRI market before the marketplace shifted and registered
an  increased  demand for the iron frame  "Open MRI." No  companies  possess the
Fonar 360 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  3000 and Beta  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 Magnetic Resonance
Imaging Scanner as a Class II device. Fonar received FDA clearance to market the
QUAD 7000 in April 1995 and the QUAD 12000 in November  1995. On March 16, 2000,
Fonar received FDA clearance to market the Fonar 360 for diagnostic imaging (the
Open Sky version).  On August 9, 2000, the Company applied for FDA clearance for
the Stand-Up  MRI. The Company  anticipates  that it will need FDA clearance for
Pinnacle MRI scanners and may need clearance for the OR-360 version of the Fonar
360.                                                                            

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.                                                            

     Two of the required  elements under the QS regulation  are design  controls
and  labeling.  Each  manufacturer  is required by  regulation  to establish and
maintain design control procedures and proper labeling.                         

     Because the intrinsic quality level of devices and processes is established
during the design  phase,  the quality  system  program  includes  this phase to
assure overall quality, meet customer requirements, meet company quality claims,
and comply with the intent of the Food Drug & Cosmetics Act.                    

     By a formal  process under a total quality  system during the design phase,
clear and concise printed and/or software labeling are written and reviewed; and
the ink substrate and  attachment  methods for printed  labeling are  developed.
Such  labeling  is  designed  to  meet  customer  and  regulatory  requirements.
Thereafter, the procurement, use of the correct label, and correct attachment of
labels will be assured  under the quality  system  element for these  activities
during manufacturing.                                                           

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 scanners in the EU in May, 1999
and is working on obtaining clearance for the Fonar 360 and Stand-Up scanners.  

     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 MANAGEMENT SERVICES 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 as a  wholly-owned  subsidiary  for the purpose of engaging in the
business of providing comprehensive management services to physicians' practices
and other medical providers, including diagnostic imaging centers and ancilliary
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.                     

     Since its  formation,  HMCA has completed  five  acquisitions.  HMCA became
actively engaged in the physician and diagnostic  management  services  business
through its initial two acquisitions  which were consummated  effective June 30,
1997.  Following these two initial  acquisitions,  HMCA completed two additional
acquisitions  in fiscal 1998 and one additional  acquisition in fiscal 1999. Dr.
Raymond  V.  Damadian,  the  President,  Chairman  of the  Board  and  principal
stockholder  of Fonar,  was the owner of Raymond V.  Damadian,  M.D. MR Scanning
Centers  Management   Company,   which  was  acquired  by  HMCA  in  the  second
acquisition. The entities acquired in the other acquisitions were not affiliates
of either Fonar or Dr. Damadian.                                                

     The first acquisition was of a group of several interrelated  corporations,
limited  liability  companies  and a  partnership  engaged  in the  business  of
managing three diagnostic  imaging centers and one  multi-specialty  practice in
New York  State.  The  transaction  was  effected  through  a merger  between  a
wholly-owned  subsidiary  of HMCA  (formed  for the  purpose  of  effecting  the
transaction)  and Affordable  Diagnostics,  Inc., one of the acquired  companies
which  immediately  prior to the merger had  acquired the assets and assumed the
liabilities  of  the  other  acquired  companies   (together,   the  "Affordable
Companies").  The consideration paid for the Affordable  Companies  consisted of
2,340,000 shares of the common stock of Fonar.                                  

     The business of the Affordable Companies, which is being continued by HMCA,
consisted  of  providing  management,  space,  equipment,  personnel  and  other
resources  to  the  four  managed  facilities.  The  services  provided  at  the
facilities include MRI scans, CAT scans, x-rays, physical rehabilitation, and in
connection    with   physical    rehabilitation,    ultra-sound   and   SSEP/EMG
electromygographic  diagnostics.  The four  managed  facilities  are  located in
Brewster,  New York (MRI),  Yonkers,  New York (MRI and x-ray),  Bronx, New York
(MRI and CT) and Riverdale, New York (multi-specialty practice,  ultra-sound and
SSEP/EMG  electromygographic  diagnostics).  The  assets  acquired  through  the
acquisition  include  three MRI  scanners,  one CT scanner,  one x-ray  machine,
rehabilitation  equipment and ultra-sound and  electromygographic  machines. The
equipment is leased to and used at the managed  facilities.  In  addition,  HMCA
consummated the acquisition of an additional MRI scanner  pursuant to a contract
entered into prior to the acquisition.                                          

     The  second  completed  acquisition  was of Raymond V.  Damadian,  M.D.  MR
Scanning  Centers  Management  Company  ("RVDC").  Pursuant  to the terms of the
transaction, HMCA purchased all of the issued and outstanding shares of stock of
RVDC from Raymond V.  Damadian in exchange for 10,000 shares of the Common Stock
of FONAR. Raymond V. Damadian, the principal stockholder, President and Chairman
of the Board of FONAR, was the sole stockholder,  director and President of RVDC
immediately  prior to the  acquisitions.  The  business of RVDC,  which is being
continued by HMCA, was the management of MRI diagnostic  imaging  centers in New
York, Florida, Georgia and other locations. The assets of RVDC included nine MRI
scanners,  office equipment and office  furnishings.  RVDC also held partnership
interests in three partnerships owning MRI scanning centers.                    

     As a result of the  acquisition  of RVDC,  HMCA  acquired  the  business of
managing 21 MRI scanning centers.  Eighteen of the scanning centers were managed
pursuant to management  agreements,  and 3 of the centers are partnerships  with
RVDC as the general  partner.  Effective  July 1, 1997,  HMCA  entered  into new
management agreements with the centers.  Pursuant to the management  agreements,
HMCA  provided  comprehensive  management  services,   including  administrative
services,  office facilities,  office equipment,  supplies and personnel (except
for physicians) to the centers.  Service for the centers' MRI scanning equipment
is provided under the management agreements in these cases. MRI scanning systems
are  provided  to 9 of the  centers  pursuant  to scanner  leases  entered  into
effective July 1, 1997. All of the facilities previously managed by RVDC are MRI
scanning centers.                                                               

     The third  completed  acquisition,  consummated on January 20, 1998, was an
acquisition  of  the  business  and  assets  of  Central  Health  Care  Services
Management Company, LLC (Central Health). Central Health is a management service
organization (MSO) managing a multi-specialty practice in Yonkers, New York. The
assets acquired include therapy and rehabilitation  equipment,  x-ray equipment,
office  equipment and office  furnishings.  The purchase price of Central Health
was $1,454,160,  of which $601,665 was paid in cash, $551,665 by notes,  $25,000
by assumptions  of  liabilities  and the balance in shares of Fonar common stock
valued at $275,830.                                                             

     The fourth completed acquisition, consummated effective March 20, 1998, was
the acquisition of A & A Services, Inc. ("A & A Services"), an MSO managing four
primary care practices in Queens County,  New York. A & A Services  provides the
practices  with  management  services,  office  space,  equipment,   repair  and
maintenance  service  for the  equipment  and  clerical  and other  non  medical
personnel.  The office  locations  for the  practices  are located in Woodhaven,
Richmond Hill,  Corona and Ridgewood in Queens County,  New York and account for
over  39,000  primary  care  patient  visits per year.  The assets  owned by A&A
Services  included  medical and office  equipment  and office  furnishings.  The
purchase price for A&A was $10 million,  $4 million of which was paid in cash at
closing and $6 million of which is payable  pursuant to promissory  notes over a
total of six years  from  closing.  The notes are  secured  by the assets of the
acquired businesses as of the date of the acquisition.  Additional consideration
is payable if net income for the  acquired  business  exceeds $2.3 in any of the
five years  following  the closing as follows:  in each year,  75% of net income
between $2.3 million and $2.8  million;  50% of net income  between $2.8 million
and $3.5  million  and 25% of net income in excess of $3.5  million.  During the
fiscal  year  ended  June  30,  2001,  the net  operating  income  from  the A&A
acquisition was approximately $234,000 and for the years ended June 30, 2000 and
June 30, 1999 approximately $1.2 million and $1.6 million, respectively.        

     In connection with the  acquisition,  one of the companies  managed by HMCA
entered into fifteen year term employment  agreements with the two former owners
of A & A Services.  The agreements provides for a base annual salary of $150,000
per annum for the first five  years and of  $315,000  per annum for sixth  year.
Thereafter  the  salaries  increase  5%  per  year  up to  $500,000  per  annum.
Additionally,  each agreement  provides for a bonus commencing in the sixth year
of the agreement, contingent upon meeting thresholds of net income.             

     The fifth completed acquisition, consummated effective August 20, 1998, was
the acquisition of Dynamic Health Care Management, Inc. ("Dynamic").  Dynamic is
an MSO which manages three physician practices in Nassau and Suffolk Counties on
Long Island,  New York. The office locations for these practices are in Bellmore
and Hempstead in Nassau  County and Deer Park in Suffolk  County and account for
approximately  109,000  patient visits per year. The assets of Dynamic  included
therapy and rehabilitation  equipment,  office equipment and office furnishings.
The purchase  price for Dynamic was  $11,576,231,  consisting of $2.0 million in
cash and the balance  payable  pursuant to  promissory  notes over an  aggregate
period of five years from the  closing.  The notes are  secured by the assets of
the acquired business as of the date of the acquisition.                        

     In connection with the  acquisition of Dynamic,  HMCA entered into ten year
term employment agreements with the two former owners of Dynamic. Each agreement
provides for base compensation of $150,000 in the first year with annual cost of
living increases for the first five years and an increase of $100,000 commencing
in the sixth year. In addition,  the agreements  provide for bonus  compensation
contingent upon the pretax earnings of Dynamic.                                 

HMCA GROWTH STRATEGY                                                            

     In  addition  to  purchasing  management  companies,  HMCA may also  pursue
acquisitions  in which HMCA would purchase the assets of physicians'  practices.
Simultaneously  with the  acquisition  of the  assets,  HMCA  would  enter  into
agreements  with the  physicians (or a  professional  corporation  employing the
physicians) pursuant to which HMCA would lease the use of the assets and provide
management  services to the physicians or their professional  corporations.  The
professional  corporation  could be either  affiliated with HMCA or owned by the
selling  physicians.  This second  alternative  has not been utilized by HMCA to
date.                                                                           

     HMCA believes that there are numerous existing medical practices that could
benefit from improved management  techniques which would allow the physicians to
spend more time treating  patients  (thereby  increasing their revenue) and less
time  being  concerned  with the day to day  tasks  of  managing  the  business.
Although the  disadvantages to physicians would be the increased  administrative
costs in the form of  management  fees  payable to HMCA,  and the lack of direct
accountability  of the  nonprofessional  staff to the  physicians,  the  Company
believes the ability of the  physicians to spend more time  practicing  medicine
will more than compensate for these disadvantages.                              

     In  addition,  expansion  plans for HMCA's  clients  include  opening  more
offices and expanding  existing  offices so as to enable practices to treat more
patients more efficiently.                                                      

     HMCA is seeking to create a network of physicians to participate in managed
care and to promote an expansion of the medical  services offered by its medical
practice clients.                                                               

     HMCA  believes  that the  creation  of this  network  will be  particularly
helpful to its clients  where  capitated  fee  agreements  are  negotiated  with
insurers  since  its  clients  will be able to offer  more  services  from  more
locations and thereby obtain a higher  capitation rate than they might otherwise
have been able to obtain. Capitated fee arrangements are arrangements with HMO's
whereby the physician or physician practice is paid a fixed monthly fee based on
the age and  gender  of  covered  person.  The fees vary from HMO to HMO and are
essentially set by the HMO's.                                                   

     HMCA's growth strategy is intended to enable its medical  practice  clients
to retain and enhance revenues and to offer patients cost-effective medical care
within an integrated  practice  offering a broad range of  evaluation,  testing,
diagnostic,  treatment  and  therapeutic  services.  In the longer term,  as the
network of offices to which it provides  its  management  services  grows,  HMCA
believes  that it will be in an  excellent  position  to  attract  managed  care
contracts for its clients from employers and insurance carriers.                

     During the fiscal  years  ended June 30, 2001 and June 30,  2000,  however,
HMCA did not conclude any additional  acquisitions  primarily because it has not
had the capital  resources to acquire  suitable  businesses on favorable  terms.
HMCA was unable in  negotiations to offer  substantial  cash payments at closing
but had to seek  longer  payout  terms.  HMCA has been  unable to  identify  any
businesses available for acquisition which it believed represented good value on
such terms.                                                                     

PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES                                    

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

(1)  Offices and  Equipment.  HMCA  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,  as  well as  process  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 ensure full and timely  regulatory
     compliance and appropriate cost reimbursement  under no-fault insurance and
workers' compensation guidelines.                                     

(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,  pharmaceuticals
and other inventory for its clients.                                  

(6)  Diagnostic  Imaging  and  Ancillary  Services.  HMCA can  offer  access  to
     diagnostic  imaging equipment through diagnostic imaging facilities managed
     by it. 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.
     These plans are mutually  developed.  Additional  physicians and physicians
assistants have been added where needed.                              

     HMCA advises clients on all aspects of their business,  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 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.  These agreements are for one year
terms which renew  automatically  unless  notice of  termination  is provided at
least 60 days  prior to the  commencement  of each  renewal  term.  The fees are
reviewed  and subject to  adjustment  on an annual  basis.  Adjustments  require
mutual  agreement.  Currently  the per procedure  charges to the MRI  facilities
range from $250 to $760 per MRI scan.                                           

     In the case of the physical  rehabilitation  and medical  practices,  fixed
fees  are  charged  on a  monthly  basis.  These  fees  are  adjusted  annually,
historically  on the basis of changes in HMCA's  costs  plus a  percentage.  The
agreements with the physical rehabilitation and medical practices have a term of
twenty   years.   The  monthly   fees   charged  to  the  medical  and  physical
rehabilitation  practices range from approximately $53,850 to $272,500. Only one
medical practice, located in Florida where the corporate practice of medicine is
permitted,  is owned by HMCA. Only one  chiropractic  practice  managed by HMCA,
providing HMCA with management fees of approximately $210,000 in fiscal 2001, is
owned by a seller in an acquisitions.                                           

     The practices and the  facilities  enter into  contracts  with managed care
companies. Although HMCA negotiates and administers these contracts on behalf of
the  practices and  facilities,  the contracts are with either the practices and
facilities or the individual practicing  physicians.  With the exception of some
capitated  health  plans in which the  medical  practices  participate,  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.  For the fiscal  years ended June 30, 2001 and June 30,  2000,  fees to
HMCA's clients from capitated plans amounted to approximately  $814,000 and $1.0
million,  respectively, an amount equal to 2.6% and 3.3% respectively, of HMCA's
revenues  for the  fiscal  year.  All of  these  were  attributable  to  medical
professional corporations managed by A & A Services, Inc., representing 26%, and
25% of their revenues in fiscal 2001 and fiscal 2000, respectively.             

HMCA MARKETING                                                                  

     HMCA's marketing  strategy is to increase the size, number and locations of
medical  practices  and  facilities  which it  manages.  HMCA  will also seek to
broaden the types of medical practices which it services and to develop a client
base of primary  care and  specialty  practices  as well as  diagnostic  imaging
facilities and other ancillary services. HMCA will seek to promote growth of its
clients' patient and revenue bases by developing a network of medical  providers
and  assisting  its  clients  in  the  development  of  multi-specialty  medical
practices.                                                                      

     Marketing  activities  include  locating  medical  practices which meet the
size,  quality  and  operating  parameters  set by  HMCA.  HMCA  will  focus  on
opportunities  for expanding the services  clients offer and expanding  into new
geographic areas. HMCA will also seek to increase the patient volume of clients.

     To date,  HMCA has not been able to add a  significant  number of specialty
practices to its client base. In part this difficulty  stems from HMCA's lack of
capital resources to fund acquisitions; this lack of capital resources similarly
has prevented HMCA from broading its client base generally.                     

DIAGNOSTIC IMAGING CENTERS AND OTHER ANCILLIARY SERVICES                        

     Diagnostic  imaging  centers  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 centers 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  interpreting  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.                                      

     In  addition,  HMCA is  expanding  the  ancillary  services  offered in its
network to include CT scans, virtual colonoscopies, x-rays, ultrasound and other
modalities as may be appropriate for the physician practice mix.                

     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 center  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 are becoming an increasingly important factor in the
diagnostic imaging industry.  To further its position,  HMCA will seek to expand
the imaging modalities offered at its managed centers or to create networks with
other imaging centers.                                                          

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  centers  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.                       

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 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.                           

     Approximately  8.8% of the revenues of HMCA's clients are  attributable  to
Medicare and 0.25% are 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 such State. The
existence  of  these  restrictions  have not had a  material  effect  on  HMCA's
business.                                                                       

     HMCA's clients generate revenue from patients covered by no-fault insurance
and  workers'  compensation  programs.  For the fiscal year ended June 30, 2001,
Approximately  56% of our  clients'  receipts  were  from  patients  covered  by
no-fault  insurance  and  approximately  10% of our client's  receipts were from
patients covered by worker's 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, 2001,  the Company  employed  585 persons on a full-time  and
part-time  basis. Of such employees,  29 were engaged in marketing and sales, 43
in research and development,  82 in prodution,  45 in customer support services,
348 in  administration  (including 244 on site at facilities and offices managed
by HMCA and 85 performing  billing,  collection and  transcription  services for
those  facilities)  and 38  professional  MRI  technicians on site at diagnostic
imaging centers managed by HMCA.                                                

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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
approximately $834,000,  excluding utilities,  taxes and other related expenses.
The term of one of the  leases  extends  through  2002 with  options to renew up
through 2008 and the term of the other lease  extends to the  beginning of 2009.
The Company also leases space in Harrisburg,  Pennsylvania  at a rental of $1350
per month.  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 $369,865. The term of the
lease extends through September, 2009. In addition, HMCA maintains leased office
premises for its clients at  approximately 38 site locations having an aggregate
annual rental rate of  approximately  $1.9 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.                    

 None.

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 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
----------------------------     ----   ----    
January - March         1998     3.09   2.38    
April   - June          1998     2.75   1.94    
July    - September     1998     2.50   1.25    
October - December      1998     2.00   0.97    
January - March         1999     1.78   1.19    
April   - June          1999     1.50   1.03    
July    - September     1999     1.18   0.91    
October - December      1999     3.25   0.69    
January - March         2000     5.00   1.63    
April   - June          2000     3.44   1.44    
July    - September     2000     3.47   1.50    
October - December      2000     2.31   1.03    
January - March         2001     2.00   0.97    
April   - June          2001     1.97   1.28    
July    - September 17, 2001     2.49   1.50    

     On September 20, 2001, the Company had approximately  5,340 stockholders of
record of its  Common  Stock,  12  stockholders  of record of its Class B Common
Stock,  4  stockholders  of  record  of its  Class  C  Common  Stock  and  4,063
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.  Prior
to these  dividends,  the Company had not paid any cash  dividends.  The Company
anticipates  paying  additional   dividends  on  monies  it  receives  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,  2001.  For the years  ended  June 30,  2001,  2000 and 1999,  the  selected
financial  data has been  extracted  from the  restated  consolidated  financial
statements for those fiscal years. The restated financial statements reflect the
change to no longer  consolidate any medical practices managed by HMCA. See Note
2 to the consolidated financial statements of the Company included in Item 8 for
a further explanation of the restatement.  This selected consolidated  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.                    

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Item 6.  SELECTED FINANCIAL DATA (Continued)                                    

                                                        [Enlarge/Download Table]


                                           As of, or For the Period Ended June 30,                  
                    --------------------------------------------------------------------------------
                        2001             2000             1999             1998             1997    
                    ------------     ------------     ------------     ------------     ------------
                                                                                                    
STATEMENT OF                                                                                        
OPERATIONS                                                                                          

Revenues            $42,273,301      $36,154,797      $33,289,044      $27,554,357      $17,633,066 

Cost of             $27,797,198      $26,592,069      $26,061,682     $ 23,841,844      $18,428,574 
revenues                                                                                            

Research             $5,866,421       $5,532,325      $ 6,647,555     $  6,506,995      $ 3,928,035 
and Development                                                                                     
Expenses                                                                                            

Net Income                                                                                          
(loss)             $(15,183,862)    $(10,955,987)    $(14,215,763)     $(5,653,086)    $ 56,068,771 

Basic and Diluted                                                                                   
Net income                                                                                          
(loss)                    $(.22)           $(.17)           $(.22)           $(.09)           $1.00 
per common share                                                                                    

Weighted             68,633,758       66,304,716       64,071,151       61,175,986       56,097,965 
average number                                                                                      
Of shares                                                                                           
outstanding                                                                                         

BALANCE SHEET                                                                                       
DATA                                                                                                

Working                                                                                             
capital             $17,744,379      $24,439,609      $37,863,029      $54,426,483      $62,659,470 
(deficit)                                                                                           

Total               $84,900,413      $84,413,037      $97,461,168     $108,447,780     $106,690,561 
assets                                                                                              

Long-               $21,244,149      $20,969,186      $24,821,834      $16,003,479      $ 4,626,269 
term debt                                                                                           
and obligations                                                                                     
under capital                                                                                       
leases                                                                                              

Stock-              $41,830,294      $51,284,758      $59,303,773      $72,572,486      $73,245,262 
holder's                                                                                            
equity                                                                                              

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ITEM 7.   MANAGEMENT'S   DISCUSSION   AND   ANALYSIS  OF   FINANCIAL   CONDITION
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,  also called "Indomitable"
(TM), Fonar 360, QUAD and Echo MRI scanners. The Stand-Up MRI allows patients to
be scanned for the first time under  weight-bearing  conditions.  The Company is
aggressively  seeking  new sales.  The  Stand-Up  MRI is the only MRI capable of
producing  images in the weight bearing state.  The Fonar 360, QUAD and Stand-Up
MRI scanners are highly competitive and totally new non-claustrophobic  scanners
not previously  available in the MRI market.  At 0.6 Tesla field  strength,  the
QUAD 12000  magnet is the  highest  field "Open MRI" in the  industry,  offering
non-claustrophobic  MRI together  with  high-field  image  quality for the first
time. The Fonar 360 and Stand-Up MRI(TM) share the fundamental technology of the
QUAD  scanners  and also  have a field  strength  of 0.6  Tesla.  The  Company's
work-in-progress  Pinnacle MRI scanner  will  combine  Fonar's iron frame magnet
with a superconducting  driver, and is expected to have a field strength between
0.6 and 1.0 Tesla.  Fonar also  offers  the Echo,  a low cost open MRI  scanner.
Fonar's works in progress also 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 are
earned under  contracts  with MRI  facilities,  medical  practices  and physical
rehabilitation practices.                                                       

     Between 98% and 99% of HMCA's  revenues for the fiscal years ended June 30,
2000 and June 30, 2001 were  derived from  contracts  with such  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  $250 to $760  per MRI  scan.  The fees are  reviewed  and if  appropriate,
adjusted on an annual basis by mutual agreement.                                

     The  agreements  with the medical  practices  and  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. Currently, the monthly fees under these contracts range
from approximately $53,850 to $272,500.                                         

RESTATEMENT OF FINANCIAL STATEMENTS                                   

     The Company no longer consolidates  any medical practices which it manages.
In 1999, 2000 and 2001, the Company had consolidated  certain medical  practices
managed as a result of the 1998 acquisitions of A & A Services, Inc. and Dynamic
Health Care  Management,  Inc.  The Company  also  previously  consolidated  the
practices  conducted by Superior Medical Services,  P.C. in 1999, 2000 and 2001.
The Company has determined that  consolidation of such medical  practices is not
appropriate because the underlying  management agreements do not meet all of the
six  criteria  of  Emerging  Issues  Task Force  ("EITF")  Consensus  No.  97-2.
Accordingly,  the  consolidated  financial  statements  have been restated.  The
significant effect of such restated financial statements for 1999, 2000 and 2001
has been to decrease revenue and related costs by $3.7 million, $3.8 million and
$4.2 million,  respectively.  In addition,  the balance sheet caption "Excess of
Cost Over Net  Assets of  Businesses  Acquired - Net" has been  reclassified  to
"Management Agreements - Net".                                                  

RESULTS OF OPERATIONS. FISCAL 2001 COMPARED TO FISCAL 2000            

     In fiscal  2001,  the Company  experienced  a net loss of $15.2  million on
revenues of $42.3 million,  as compared to net loss of $11.0 million on revenues
of $36.2 million for fiscal 2000.  This represents a increase in the net loss of
38% and an increase in revenues of 16.9%. The Company's  consolidated  operating
loss  increased  by 4.5% to $16.2  million  for fiscal 2001 from a loss of $15.5
million for fiscal 2000.                                                        

     Revenues  attributable to the Company's physician and diagnostic management
services  segment (HMCA)  increased by 5.3% to $31.8 million in fiscal 2001 from
$30.2 million in fiscal 2000.  Operating  income of $1.0 million was  recognized
from the Company's physician and diagnostic  management services in fiscal 2001,
as compared to an operating income of $2.5 million in fiscal 2000,  representing
a decrease of 60%.                                                              

     Revenues  attributable to the Company's medical equipment segment increased
by 75% to $10.5  million  in  fiscal  2001  from $6.0  million  in fiscal  2000,
reflecting  an increase in scanner  sales of 79.4%,  from $3.4 million in fiscal
2000 to $6.1 million in fiscal 2001 and an increase in service revenue of 11.1%,
from $1.7  million in fiscal 2000 to $2.0  million in fiscal  2001.  The Company
attributes  the increase in scanner sales to the growing  market  penetration of
its products, particularly its Stand-Up MRI, also called "Indomitable", which is
unique  in  that it  permits  MRI  scans  to be  performed  on  patients  in the
weight-bearing state.                                                           

     Notwithstanding  the Company's  expectation of increased demand for its MRI
scanners,  sales to unrelated parties increased by 113% in fiscal 2001 from $1.6
million  in fiscal  2000 to $3.4  million  in fiscal  2001.  Sales to  unrelated
parties  declined by 50% in fiscal 2000 from $3.2 million in fiscal 1999 to $1.6
million in fiscal 2000. The Company  believes that its difficulties 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 and Hitachi  and the  ability of some of its  competitors  to
offer attractive financing terms through affiliates, such as G.E. Capital.      

     Results of operations for the medical equipment segment improved by 9% from
a loss of $18.9  million  in fiscal  2000 to a loss of $17.2  million  in fiscal
2001.  Increased  license and royalty  revenue (from  $920,000 in fiscal 2000 to
$2.4 million in fiscal 2001) was a principal factor.                            

     Other  income  of $1.0  million  (principally  the  sales of a  partnership
interest) and investment  income of $1.8 million were  recognized by the Company
in fiscal  2001 as  compared  to other  income  of  approximately  $5.6  million
(principally  the net proceeds from the Company's patent  enforcement  lawsuits)
and investment income of $1.9 million in fiscal 2000. This represents a decrease
of 82% in other income and a decrease of 5.2% in investment income. As a result,
the net loss  increased  from $11.0  million in fiscal 2000 to $15.2  million in
fiscal 2001.                                                                    

     Costs of  revenues  and  expenses  increased  by 13.2% to $58.5  million in
fiscal 2001 from $51.7 million in fiscal 2000. The increase in selling,  general
and administrative  expenses was attributable primarily to the expansion of HMCA
and expansion of Fonar's internal sales force.                                  

     Cost of revenue for the Company's  physician  management  services  segment
decreased  from $19.8  million or 65.5% of related  revenues  for the year ended
June 30, 2000 to $19.3  million or 60.7% of related  revenues for the year ended
June 30, 2001.  Operating  income of this segment  declined from $2.5 million in
fiscal 2000 to $1.0 million in fiscal 2001 due to increases in selling,  general
and administrative  expenses of $1.9 million,  increases in compensatory element
of stock issueance of $1.4 million,  increases in provision for bad debt expense
of $.2 million offset by an improvement in gross profit of $2.0 million.        

     Research  and  development  expenses  increased  by 6.8% to $5.9 million in
fiscal  2001  as  compared  to  $5.5  million  in  fiscal  2000.  This  increase
represented  continued  research and development of Fonar's scanners and its new
hardware and software product, "Sympulse (TM)".                                 

     Overall, costs of revenues and expenses for the Company's medical equipment
segment, however,  increased by 13.9% to $28.7 million in fiscal 2001 from $25.3
million in fiscal 2000.                                                         

     This  reflects  an  increase  of 41% in costs of  product  sales  from $4.4
million in fiscal 2000 to $6.2  million in fiscal  2001.  This also  reflects an
increase  of 8.3% in  selling,  general  and  administrative  expenses  to $11.7
million in fiscal 2001 from $10.8 million in fiscal 2000.                       

     The increase in compensatory  element of stock issuances from approximately
$1.9 million in fiscal 2000 to $4.0 million in fiscal 2001 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 debt of $442,505 in fiscal 2001 as compared to
$177,162  in  fiscal  2000,  reflected  reserves  for  fees  from  HMCA  managed
facilities that were closed during the year.                                    

     The  amortization  expense in fiscal  2001 and 2000 of  approximately  $1.2
million  in  each  year  reflects  the  amortization  of  management  agreements
attributable to HMCA's acquisitions.                                            

     The Company  recognized  revenues of $1.6  million from the sale of its new
Stand-Up  scanners and of $1.1 million from the sale of Echo  scanners in fiscal
2001. There were no sales of Stand-Up  scanners or Echo scanners in fiscal 2000.
Revenues generated by sales of QUAD MRI scanners decreased slightly by 6.3% from
$3.2 million  (8.8% of total  revenues) in fiscal 2000 to $3.0 million  (7.1% of
total revenues) in fiscal 2001. Revenues  attributable to sales of the Company's
Ultimate scanners during the same periods were $0.00.                           

     Sales of Beta  scanners  were $0 in fiscal 2001 (0% of total  revenues) and
$84,255  (approximately  0.2% of total  revenues) in fiscal  2000.  The sales in
fiscal 2000  represented  the sale of refurbished  equipment,  as the company no
longer manufactures Beta scanners.                                              

     Product sales  revenues for fiscal 2001 included  revenues from the sale of
seven  scanners.  Product sales revenues for fiscal 2000 included  revenues from
the sales of three scanners and for fiscal 1999, five MRI scanners, two of which
were used scanners which Fonar had reacquired.                                  

     Sales to affiliated parties,  consisting of professional corporations owned
by Dr. Damadian  represented  approximately  6.4%  ($2,686,646) of the Company's
revenues  in fiscal  2001,  as compared to 4.9%  ($1,752,298)  of the  Company's
revenues in fiscal 2000.                                                        

     Negative  gross profit  margins on product sales  (negative  0.3% in fiscal
2001 and negative  31.7% in fiscal 2000) were  principally  attributable  to the
medical  equipment  segment operating at a low level of capacity and reflect the
inefficiencies  attendant to Fonar's fixed factory  overhead  expenses,  such as
salaries and benefits.  The improvement in fiscal 2001 reflects  increased sales
volume.                                                                         

     The Company is enthusiastic  about the future of its FONAR 360 product line
and  Indomitable(TM)  scanners  which will bring a new plateau of  "openness" to
diagnostic MRI and 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 increase in
product sales from  approximately $3.4 million in fiscal 2000 to $6.1 million in
fiscal 2001. 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.    

     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 2001 the
Company  continued its  investment in the  development  of its new MRI scanners,
together  with  software and  upgrades,  with an  investment  of  $6,621,225  in
research  and  development  ($754,804 of which was  capitalized)  as compared to
$5,893,648  ($361,623 of which was capitalized) in fiscal 2000. The research and
development  expenditure was approximately 108% of revenues  attributable to the
Company's  medical  equipment  segment (and 15.7% of total revenues) in 2001 and
174%  of  medical  equipment  segment  revenues  in 2000  (and  16.3%  of  total
revenues).  This  represented  a increase of  approximately  12% in research and
development expenses from fiscal 2000 to fiscal 2001.                           

     During the fiscal  year ended June 30,  2001,  the Company  realized  other
income of approximately $1.0 million, principally from the sale of a partnership
interest, as compared to other income of approximately $5.6 million (principally
from the  settlement  of patent  infringement  disputes)  in fiscal  2000.  This
represented a decline of 82%.                                                   

RESULTS OF OPERATIONS. FISCAL 2000 COMPARED TO FISCAL 1999                      

In fiscal 2000, the Company  experienced a net loss of $11.0 million on revenues
of $36.2 million as compared to a net loss of $14.2 million on revenues of $33.3
million for fiscal 1999.  This  represented an decrease in the net loss of 22.5%
and an increase in revenues of 8.6%.                                            

     Revenues  attributable to the Company's physician and diagnostic management
services  segment  (HMCA)  increased to $30.2  million in fiscal 2000 from $27.6
million in fiscal 1999, representing an increase of 9.5%.                       

     Operating  income  of  $2.5  million  was  recognized  from  the  Company's
physician  and  diagnostic  management  services in fiscal 2000,  as compared to
income of $3.1 million in fiscal 1999, representing a decrease of 19.4%.        

     Revenues  attributable to the Company's medical equipment segment increased
by 5.3% to $6.0  million  in  fiscal  2000  from $5.7  million  in fiscal  1999,
reflecting higher license fees and royalties in fiscal 2000.                    

     Results of operations for the medical equipment  segment  declined,  from a
loss of $18.7  million in fiscal 1999 to a loss of $18.9 million in fiscal 2000,
representing a 1.1% decline.                                                    

     Other  income  of $1.0  million  (principally  the net  proceeds  from  the
Company's  patent  enforcement  lawsuits) and investment  income of $2.1 million
were  recognized  by the Company in fiscal  1999 as compared to other  income of
$5.6 million (principally the net proceeds from the Company's patent enforcement
lawsuits) and investment income of $1.9 million in fiscal 2000,  representing an
increase of 460% in other income and a decrease of 9.5% in investment income.   

     Costs of revenues  and  expenses  increased  by 5.8% from $48.9  million in
fiscal 1999 to $51.7  million in fiscal 2000,  reflecting  the  expansion of the
Company's physician and diagnostic management services operations.              

     Costs of revenue and expenses for the Company's  physician  and  diagnostic
management services increased by 7.3% to $19.8 million in fiscal 2000 from $18.4
million in fiscal 1999.                                                         

     Research  and  development  expenses  decreased by 16.7% to $5.5 million in
fiscal 2000 as compared to $6.6 million in fiscal 1999.                         

     Overall, costs of revenues and expenses for the Company's medical equipment
segment,  however,  declined by 3.2% to $24.3  million in fiscal 2000 from $25.1
million in fiscal 1999.                                                         

     This  reflects  reductions  of 10.2% in costs of  product  sales  from $4.4
million in fiscal 2000 to $4.9 million in fiscal 1999.                          

     This  also  reflects  an  increase  of 13% in  general  and  administrative
expenses to $8.7 million in fiscal 2000 from $7.7 million in fiscal 1999.       

     Costs of  revenue  declined  by 16.8% to $7.9  million  in  fiscal  2000 as
compared to $9.5 million in fiscal 1999.                                        

     Revenues  generated  by  sales  of QUAD  MRI  scanners  were  $2.6  million
(approximately  8% of total  revenues)  in fiscal  1999 and $3.2  million (9% of
total  revenues)  in  fiscal  2000,   representing  an  increase  23%.  Revenues
attributable to sales of the Company's  Ultimate scanners during the same period
were $0.00.                                                                     

     Sales of Beta scanners were  $430,000 in fiscal 1999  (approximately  1% of
total revenues) and approximately $84,255 (approximately 0.2% of total revenues)
in fiscal 2000.                                                                 

     Product sales  revenues for fiscal 2000 included  revenues from the sale of
three scanners, and for fiscal 1999, five MRI scanners, two of which were used. 

     Sales to affiliated parties  represented  approximately 4.9% ($1.8 million)
of the  Company's  revenues in fiscal 2000,  as compared to  approximately  0.5%
($150,000) in fiscal 1999.                                                      

     Gross profit  margins on product  sales to unrelated  parties were negative
(49%) in fiscal 1999 and negative  (86.7%) in fiscal 2000.  This  reflected  the
losses on sales of the Company's QUAD scanners.                                 

     To reduce the cost of manufacturing its QUAD scanners, the Company expanded
its  manufacturing   capacity  in  fiscal  2000,  1999  and  1998  by  acquiring
approximately $2.1 million, $3.8 million and $1.4 million,  respectively,  worth
of new capital  equipment.  In  addition,  the Company  expanded  its  operating
capacity by hiring additional personnel.                                        

     Notwithstanding the Company's increased manufacturing activities,  revenues
attributable  to the Company's  medical  equipment  segment  declined by 4.6% to
approximately  $6.2  million in fiscal 2000 from  approximately  $6.5 million in
fiscal  1999.  This trend  reflected a decline in service  revenue of 26.1% from
$2.3 million in fiscal 1999 to $2.7 million in fiscal 2000.                     

     In fiscal 2000 the Company  continued its investment in the  development of
its new MRI scanners, together with software and upgrades, with an investment of
$5,893,648  ($361,323 of which was  capitalized)  in research and development as
compared to $6,647,555 in fiscal 1999. The research and development  expenditure
was  approximately  98%  of  revenues  attributable  to  the  Company's  medical
equipment  segment  and  16.3% of  total  revenues  in 2000 and 102% of  medical
equipment segment revenues and 20% of total revenues in fiscal 1999.            

     During the fiscal year ended June 30, 2000, the Company  realized income of
approximately $5.6 million from the settlement of various legal disputes,  which
were essentially its patent  infringement  actions, as compared to approximately
$1.0 million in fiscal 1999.                                                    

LIQUIDITY AND CAPITAL RESOURCES                                                 

     Cash, cash equivalents and marketable  securities declined by 9% from $22.9
million at June 30, 2000 to $20.1  million at June 30, 2001.  Principal  uses of
cash during fiscal 2001 included capital expenditures of $2.6 million, repayment
of  indebtedness  and capital lease  obligations  in the amount of $5.7 million,
costs of  capitalized  software  development of $800,000 and costs in connection
with debt financing of $200,000.                                                

     Marketable  securities  approximated  $6.1  million as of June 30,  2001 as
compared to $11.5  million as of June 30,  2000.  From June 30, 2000 to June 30,
2001 the Company maintained  investments in equity securities of $0, reduced its
investments in U.S.  Government  obligations from approximately $10.2 million to
$4.1 million and increased its  investments in corporate and  government  agency
bonds from approximately $1.6 million to $1.9 million. This has had the intended
effect of reducing the volatility of the Company's investment portfolio.        

     Cash  provided  by  operating   activities  for  fiscal  2001  approximated
$1,106,000.  Cash used in operating activities was attributable substantially to
the funding of the net loss for fiscal 2001.                                    

     Cash provided by investing  activities  for fiscal 2001  approximated  $2.6
million.  The principal source of cash from investing  activities  during fiscal
2001  consisted of the proceeds from the sale of  marketable  securities of $5.7
million  less  expenditures  for property and  equipment of  approximately  $2.6
million.                                                                        

     Cash used in financing activities for fiscal 2001 approximated  $1,085,000.
The principal uses of cash in financing  activities during fiscal 2001 consisted
of repayment of principal on long-term  debt of  approximately  $5.7 million and
the principal sources were proceeds from the issuance of convertible  debentures
of $4.5  million  and  proceeds  from  the  sale of a  partnership  interest  of
$750,000.                                                                       

     Total  liabilities  increased  since June 30,  2000 by  approximately  $9.8
million, or 30% to approximately $42.9 million at June 30, 2001. The increase in
liabilities from June 30, 2000 was  attributable  principally to the issuance of
convertible debentures and deferred license fee revenue.                        

     As at June 30, 2001, the Company's obligations included  approximately $2.7
million in various state taxes.  The Company has entered into payment plans with
taxing authorities with respect to $1.5 million past due taxes.                 

     As of June 30, 2001, the Company had a bank credit  facility of $5,500,000.
The unused portion of the facility was approximately  $329,000.  The interest on
loans made under the facility is either the bank's prime rate, as in effect from
time to time or 0.5% plus the bank's  cost of funds  rate,  as selected by Fonar
when the loan is made.                                                          

     Advances and notes to affiliates  and related  parties  increased by 33.33%
from $1.2 million at June 30, 2000 to $1.6  million at June 30,  2001.  As these
are long-term assets, they tend to reduce the Company's liquidity.              

     The  Company's  working  capital  surplus as of June 30, 2001  approximates
$17.7 million,  as compared to a working  capital surplus of $24.9 million as of
June 30, 2000.                                                                  

The change in the Company's working capital position resulted primarily from its
investments  in new equipment  ($2.6  million),  note payments  primarily on the
purchase prices for HMCA's  acquisitions  ($5.7 million),  its overall operating
losses, and an increase in its current liabilities of approximately $4.9 million
($23.1  million as at June 30, 2001 as compared to $18.2  million as at June 30,
2000.                                                                           

     As at June 30, 2001,  the Company had current  assets of $40.9  million and
current  liabilities  of $23.1  million,  resulting in working  capital of $17.8
million.  The Company  believes that these  resources  alone provide an adequate
reserve to fund its operations for approximately two years. For the longer term,
the Company  will need to rely on income  generated by sales of its MRI products
and the profitability of HMCA.                                                  

     In order to conserve its capital  resources,  the Company has issued common
stock under its stock bonus and stock option plans to  compensate  employers and
non-employees for services rendered. In fiscal 2001, the compensatory element of
stock  issuances  was $4.0 as compared to $1.9 for fiscal 2000.  Utilization  of
equity in lieu of cash  compensation has improved the Company's  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 2001 and 2000 approximated $2.6 million and
$2.8 million, respectively, and substantially consisted of office and production
equipment.                                                                      

     Fonar has not committed to making capital  expenditures  in the 2002 fiscal
year other than its intention to continue research and development  expenditures
at current levels.                                                              

     The Company's  business plan currently  includes an aggressive  program for
manufacturing  and selling its new line of Open MRI scanners.  In addition,  the
Company  is  enhancing  its  revenue by  participating  into the  physician  and
diagnostic management services business through its subsidiary, HMCA.           

     The  Company's  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 $1.7  million for the year ended June 30, 2000
and $2.0  million  for the year ended June 30,  2001  (transactions  between the
Company and its subsidiaries are eliminated in the consolidation).              

     The Company  believes that the above  mentioned  financial  resources  will
provide  the cash flows  needed to achieve  the sales,  service  and  production
levels  necessary  to  support  its  operations.  In  addition,  the  Company is
exploring other financing alternatives which may become available as the success
of the previously described programs accelerates.                               

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ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET                  
RISK                                                  

     The Company has  investments in fixed rate  instruments.  None of the fixed
rate instruments in which the Company invests extend beyond June 30, 2007. Below
is a tabular  presentation of the maturity profile of the fixed rate instruments
held by the Company at June 30, 2001.                                           

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

Date             Investments in Fixed Rate    Weighted Average
                        Instruments          Interest Rate

6/30/02                 512,110                    5.4%       
6/30/03               3,377,898                    5.8%       
6/30/04               1,157,820                    5.4%       
6/30/05                 353,734                    6.5%       
6/30/06                 399,569                    6.0%       
6/30/07                 200,000                    6.1%       

Total:                         6,001,131                                        

Fair Value                                                                      
at 6/30/01                     6,085,266                                        

     All of the Company's revenue, expense and capital purchasing activities are
transacted in United States dollars.                                            

     See Note 12 to the Company's  Financial  Statements for information on long
term debt.                                                                      

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Item 8.                                                                         

 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FONAR CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

INDEPENDENT AUDITORS' REPORT                                                    

CONSOLIDATED BALANCE SHEETS                                                     
At June 30, 2001 AND 2000                                                   

CONSOLIDATED STATEMENTS OF OPERATIONS                                           
For the Three Years Ended June 30, 2001, 2000 and 1999                      

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                                 
For the Three Years Ended June 30, 2001, 2000 and 1999                      

CONSOLIDATED STATEMENTS OF CASH FLOWS                                           
For the Three Years Ended June 30, 2001, 2000 and 1999                      

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                      

SELECTED FINANCIAL DATA                                               (*)       
For the Five Years Ended June 30, 2001                                      

SCHEDULE OF VALUATION ALLOWANCES                                                
For the three years ended June 30, 2001, 2000 and 1999              (**)    

(*)  Included in Part II, Item 6 of the Form.                           

(**)  Included in Part II, Item 14 of this Form.                        

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

To the Board of Directors 
FONAR Corporation and Subsidiaries

We  have  audited  the  accompanying   consolidated   balance  sheets  of  FONAR
Corporation  and  Subsidiaries  as at June 30,  2001 and 2000,  and the  related
consolidated  statements of operations,  stockholders' equity and cash flows and
schedules  for each of the three  years  ended June 30,  2001.  These  financial
statements and schedules are the responsibility of the Company's management. Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedules based on our audits.                                                  

We conducted our audit 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  audit  provides  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, 2001 and 2000, and
the  consolidated  results  of their  operations  and cash flows for each of the
years  in the  three-year  period  ended  June  30,  2001,  in  conformity  with
accounting principles generally accepted in the United States of America.       

As discussed in Note 2 to the  consolidated  financial  statements,  the Company
changed its  consolidation  policy and no longer  consolidates  certain  managed
medical practices. The accompanying  consolidated financial statements have been
retroactively restated to account for such change.                              

During  each of the  years in the  three-year  period  ended  June 30,  2001,  a
significant  portion of the  Company's  revenues was from  related  parties (see
Notes 2, 3, 5, 8 and 20).                                                       

    /s/ Grassi & Co., CPAs, P.C.
GRASSI & CO., CPAs, P.C.

New York, New York                                                              
September 28, 2001, except for Note 13,                                         
as to which the date is October 25, 2001                                    

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FONAR CORPORATION AND SUBSIDIARIES

 CONSOLIDATED BALANCE SHEETS

ASSETS
------

                                                    June 30,
                                                   -----------------------------
                                                 2001           2000
                                                   ------------    -------------

Current Assets:                                                                 
 Cash and cash equivalents                        $ 14,040,334    $ 11,429,519
 Marketable securities                               6,085,266      11,484,176
 Accounts receivable - net                             849,740       1,686,811
Accounts receivable - related medical                                       
   practices - net                                  13,180,654      12,896,851
Costs and estimated earnings in excess of                                   
   billings on uncompleted contracts                 1,768,856         968,159
 Inventories                                         3,725,375       3,536,169
Investment in sales-type leases with related                                
   parties                                             191,304          57,832
Investment in sales-type lease                        119,549            -  
 Prepaid expenses and other current assets             903,751         604,059
                                                  ------------    ------------
    Total Current Assets                            40,864,829      42,663,576

Restricted Cash                                       5,500,000       5,000,000 

Property and Equipment - Net                         10,637,397      11,227,454 

Advances  and Notes to Related  Parties,                                        
Net of  discounts  and  allowance  for                                      
doubtful accounts of $316,035 and $904,000                                  
 at June 30, 2001 and 2000, respectively             1,559,159       1,158,998

Investment in Sales-Type Leases with Related                                    
 parties                                             2,513,703         872,603

Investment in Sales-Type Lease                          861,249            -    

Notes Receivable, Net of allowance for                                          
doubtful accounts of $-0- and $477,456 at                                   
 June 30, 2001 and 2000, respectively                  375,000         500,810

Management Agreements,  Net of  accumulated                                     
amortization of $3,935,551 and $2,716,859                                   
 at June 30, 2001 and 2000, respectively            20,438,298      21,656,990

Other Intangible Assets, Net                          1,853,506       1,035,924 

Other Assets                                            297,272         296,682 
                                                  ------------    ------------
    Total Assets                                  $ 84,900,413    $ 84,413,037
                                                  ============    ============

See accompanying notes to consolidated financial statements.                    

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FONAR CORPORATION AND SUBSIDIARIES

 CONSOLIDATED BALANCE SHEETS

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

                                                June 30,
                                                  ------------------------------
                                                 2001             2000
                                                  ------------     -------------

Current Liabilities:                                                            
Current portion of long-term                                                
   debt and capital leases                        $  6,634,863    $  6,224,727
 Accounts payable                                    3,020,832       1,738,847
 Other current liabilities                           6,175,757       8,780,929
 Customer advances                                   1,672,522         582,551
 Income taxes payable                                  764,884         896,913
Billings in excess of costs                                                 
and estimated earnings on                                               
uncompleted contracts                               351,592            -
Convertible debenture                               4,500,000            -  
                                                  ------------    ------------
    Total Current Liabilities                       23,120,450      18,223,967

Long-term Debt and Capital Leases,                                              
 Less Current Maturities                            10,109,286      14,744,459

Deferred Revenue - License Fee                        9,360,000            -    

Other Liabilities                                       327,411         138,338 
                                                  ------------    ------------
     Total Liabilities                              42,917,147      33,106,764
                                                  ------------    ------------
Minority Interest                                       152,972          21,515 
                                                  ------------    ------------

Commitments,  Contingencies and                                                 
Other  Matters  (Notes 1, 2,                                                
3, 5, 11, 12, 13, 16 and 21)                                                

See accompanying notes to consolidated financial statements.                    

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FONAR CORPORATION AND SUBSIDIARIES

 CONSOLIDATED BALANCE SHEETS

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

                                                      June 30,
                                                    ----------------------------
                                                    2001            2000
                                                    ------------    ------------

Stockholders' Equity:                                                           
Common stock - $.0001 par value; authorized                                 
-  85,000,000 and 60,000,000 shares;                                    
issued  -  59,524,455  and  56,315,471                                  
shares  at June 30,  2001 and  2000,                                    
respectively;  outstanding - 59,233,391                                 
and  56,026,207  shares at June 30,                                     
   2001 and 2000, respectively                     $     5,952    $      5,631
Class B common stock (10 votes per share) -                                 
$.0001 par value;  authorized - 4,000,000                               
shares;  issued and outstanding - 4,211                                 
shares at June 30, 2001 and 2000, respectively         -              - 
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, 2001 and 2000                        956             956
Class A non-voting preferred stock - $.0001                                 
par value; authorized - 8,000,000 shares;                               
issued and outstanding - 7,836,287 shares                               
   at June 30, 2001 and 2000                               784             784
Preferred stock - $.001 par value;                                          
authorized - 10,000,000 shares; issued                                  
and outstanding - none                                 -               -
 Paid-in capital in excess of par value            104,984,020      98,581,757
  Accumulated other comprehensive income                 84,133        (264,808)
  Accumulated deficit                               (60,000,686)    (44,816,824)
  Notes receivable from stockholders                 (1,040,457)     (1,338,005)
  Unearned compensation                              (1,529,018)       (213,374)
Treasury stock - 291,064 and 289,264  shares                                
of common stock at June 30, 2001 and 2000,                              
    respectively                                       (675,390)       (671,359)
                                                  ------------    ------------
   Total Stockholders' Equity                       41,830,294      51,284,758
                                                  ------------    ------------
   Total Liabilities and Stockholders' Equity     $ 84,900,413    $ 84,413,037
                                                  ============    ============

See accompanying notes to consolidated financial statements.                    

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FONAR CORPORATION AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF OPERATIONS

                                                        [Enlarge/Download Table]

                                                          For the Years Ended June 30,           
                                                  -----------------------------------------------
                                                      2001             2000             1999     
                                                  -------------   --------------    -------------
                                                                                                 
Revenues                                                                                         
  Product sales - net                             $  3,370,826    $   1,606,229     $  3,230,467 
  Product sales - related parties - net              2,686,646        1,752,298          150,000 
  Service and repair fees - net                      2,016,337        1,692,537        2,301,488 
  Patient revenue - net                              1,285,028          996,337          203,261 
  Management and other fees - related                                                            
    medical practices - net                         30,490,464       29,187,396       27,361,828 
  License fees and royalties                         2,424,000          920,000           42,000 
                                                  -------------   --------------    -------------
      Total Revenues - Net                          42,273,301       36,154,797       33,289,044 
                                                  -------------   --------------    -------------
Costs and Expenses                                                                               
  Costs related to product sales                     3,206,385        2,281,709        4,786,773 
  Costs related to product sales -                                                               
    related parties                                  2,956,668        2,141,207          145,030 
  Costs related to service and repair fees           2,361,026        2,396,609        2,697,695 
  Costs related to patient revenue                   1,138,569          953,619          317,740 
  Costs related to management and other                                                          
    fees - related parties                          18,134,550       18,818,925       18,114,444 
  Research and development                           5,866,421        5,532,325        6,647,555 
  Selling, general and administrative               19,118,276       16,211,414       14,383,842 
  Compensatory element of stock issuances for                                                    
    selling, general and administrative expenses     4,044,826        1,929,706          275,242 
  Provision for bad debts                              442,505          177,162          260,836 
  Amortization of management agreements              1,218,692        1,218,693        1,225,942 
                                                  -------------   --------------    -------------
      Total Costs and Expenses                      58,487,918       51,661,369       48,855,099 
                                                  -------------   --------------    -------------
Loss from Operations                               (16,214,617)     (15,506,572)     (15,566,055)

Interest Expense                                    (1,255,440)      (1,710,188)      (2,051,290)
Investment Income                                    1,841,869        1,919,744        2,110,780 
Other Income                                           964,488        4,655,375        1,001,119 
Minority Interests in Income of partnerships          (480,166)        (270,669)        (300,235)
                                                  -------------   --------------    -------------
Loss Before Provision (Benefit) for Taxes          (15,143,866)     (10,912,310)     (14,805,681)

Provision (Benefit) for Income Taxes                    39,996           43,677         (589,918)
                                                  -------------   --------------    -------------
      Net Loss                                    $(15,183,862)    $(10,955,987)    $(14,215,763)
                                                  =============   ==============    =============

Basic and Diluted Net Loss Per Share                     $(.22)           $(.17)           $(.22)
                                                         =====            =====            ===== 
Weighted Average Number of Shares                   68,633,758       66,304,716       64,071,151 
  Outstanding                                     =============   ==============    =============

See accompanying notes to consolidated financial statements.                    

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

                                                        [Enlarge/Download Table]

                                                                       Class A                            
                                                                         Non-     Paid-in                 
                               Per   Class A Common Stock   Class C    Voting     Capital in    Treasury  
                             Share   --------------------   Common    Preferred   Excess of      Stock    
                             Amount    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 losses on                                                                                 
       securities arising                                                                                 
       during the year,                                                                                   
       net of tax               -          -         -          -          -             -           -    
Less:                                                                                                     
Reclassification                                                                                          
adjustment                                                                                                
       for (gains)losses                                                                                  
       included in net loss     -          -         -          -          -             -           -    

Exercise of stock options      1.17      24,000         2       -          -           28,170        -    
Purchase of common stock       1.44        -         -          -          -             -         (4,031)
Stock issued to employees                                                                                 
  under stock bonus plans      1.61   1,636,602       164       -          -        2,636,417        -    
Issuance of stock for                                                                                     
  professional services        1.50     435,976        44       -          -          653,895        -    
Shares returned in                                                                                        
  cancellation of notes                                                                                   
  receivable                    -          -         -          -          -             -           -    
Issuance of stock under                                                                                   
  consulting contracts         1.77     923,482        92       -          -        1,632,980        -    
Issuance of stock for                                                                                     
  research and development                                                                                
  expenses                     1.87     183,924        18       -          -          344,839        -    
Issuance of stock for note                                                                                
  receivable shareholders      2.06       5,000         1       -          -           10,311        -    
Value assigned to                                                                                         
  warrants issued in                                                                                      
  debt financing               1.14        -         -          -          -        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.                    

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

                                                        [Enlarge/Download Table]

                                  Notes                     Accumulated                                              
                               Receivable                      Other                                                 
                                  from         Unearned    Comprehensive   Accumulated                 Comprehensive 
                               Stockholders  Compensation     Income         Deficit        Total      Income (Loss) 
                               ------------  ------------  -------------  -------------  ------------  --------------
                                                                                                                     
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: Reclassification                                                                                          
       adjustment for                                                                                                
       (gains) losses                                                                                                
       included in net loss           -             -             6,891           -          348,941           6,891 

Exercise of stock options             -             -              -              -           28,172            -    
Purchase of common stock              -             -              -              -           (4,031)           -    
Stock issued to employees                                                                                            
  under stock bonus plans             -             -              -              -        2,636,581            -    
Issuance of stock for                                                                                                
  professional services               -             -              -              -          653,939            -    
Shares returned in                                                                                                   
  cancellation of notes                                                                                              
  receivable                          -             -              -              -             -                -   
Issuance of stock under                                                                                              
  consulting contracts                -       (1,247,813)          -              -          385,259             -   
Issuance of stock for research                                                                                       
  and development expenses            -             -              -              -          344,857            -    
Issuance of stock for notes                                                                                          
  receivable shareholders          (10,312)         -              -              -             -               -    
Value assigned to warrants                                                                                           
  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            -    
                               ------------  ------------  -------------  -------------  ------------  --------------
                               $(1,040,457)  $(1,529,018)  $     84,133   $(60,000,686)  $41,830,294   $ (14,834,921)
BALANCE - JUNE 30, 2001        ============  ============  =============  =============  ============  ==============

See accompanying notes to consolidated financial statements.                    

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FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2000

                                                        [Enlarge/Download Table]

                                                                       Class A                           
                                                                         Non-      Paid-in               
                               Per    Class A Common Stock  Class C     Voting   Capital in    Treasury  
                              Share   --------------------  Common    Preferred   Excess of      Stock   
                              Amount    Shares     Amount    Stock      Stock    Par Value      Amount   
                              ------  ----------  --------  --------  ---------  -----------  -----------
                                                                                                         
Balance - June 30, 1999       $  -    53,793,042  $  5,378  $    956  $    784   $95,385,863  $ (592,239)

Net loss                         -          -         -         -         -             -           -    

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

Exercise of stock options       1.13     389,000        39                           455,780        -    
Purchase of common stock         .95        -         -         -         -             -        (79,120)
Stock issued to employees                                                                                
  under stock bonus plans       2.00     193,523        20      -         -          396,662        -    
Issuance of stock for                                                                                    
  professional services         1.51     490,000        49      -         -          742,323        -    
Shares returned in                                                                                       
  cancellation of notes                                                                                  
  receivable                     -          -         -         -         -             -           -    
Issuance of stock under                                                                                  
  consulting contracts          1.07   1,429,574       143      -         -        1,539,378        -    
Issuance of stock for                                                                                    
  acquisition of Central                                                                                 
  Health Care                   3.19      19,332         2      -         -           61,751        -    
Net reduction in notes                                                                                   
  receivable from                                                                                        
  stockholders                   -          -         -         -         -             -           -    
Amortization of unearned                                                                                 
  compensation                   -          -         -         -         -             -           -    
Conversion of Class B                                                                                    
  common stock to Class A                                                                                
  common stock                   -         1,000      -         -         -             -           -    
                                      ----------  --------  -------- ---------   -----------  ---------- 
BALANCE - JUNE 30, 2000               56,315,471  $  5,631  $    956  $    784   $98,581,757  $ (671,359)
                                      ==========  ========  ======== =========   ===========  ========== 

See accompanying notes to consolidated financial statements.                    

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FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2000

                                                        [Enlarge/Download Table]

                                 Notes                     Accumulated                                              
                               Receivable                     Other                                   Comprehensive 
                                  from        Unearned    Comprehensive   Accumulated                     Income    
                              Stockholders  Compensation     Income         Deficit        Total          (Loss)    
                              ------------  ------------  -------------  -------------  ------------  ------------- 
                                                                                                                    
Balance - June 30, 1999       $(1,226,148)  $  (206,878)  $   (203,106)  $(33,860,837)  $59,303,773                 

Net loss                             -             -              -       (10,955,987)  (10,955,987)  $ (10,955,987)

Other comprehensive income,                                                                                         
      net of tax:                                                                                                   
    Unrealized losses on                                                                                            
      securities arising                                                                                            
      during the year, net                                                                                          
      of tax                         -             -           (47,830)          -          (47,830)        (47,830)
    Less: Reclassification                                                                                          
      adjustment for (gains)                                                                                        
      losses included in net                                                                                        
      loss                           -             -           (13,872)          -          (13,872)        (13,872)

Exercise of stock options        (391,250)         -              -              -           64,569            -    
Purchase of common stock             -             -              -              -          (79,120)           -    
Stock issued to employees                                                                                           
  under stock bonus plans            -             -              -              -          396,682            -    
Issuance of stock for                                                                                               
  professional services              -             -              -              -          742,372            -    
Shares returned in                                                                                                  
  cancellation of notes                                                                                             
  receivable                         -             -              -              -             -               -    
Issuance of stock under                                                                                             
  consulting contracts               -         (726,962)          -              -          812,599            -    
Issuance of stock for                                                                                               
  acquisition of Central                                                                                            
  Health Care                        -             -              -              -           61,753            -    
Net reduction in notes                                                                                              
  receivable from                                                                                                   
  stockholders                    279,393          -              -              -          279,393            -    
Amortization of unearned                                                                                            
  compensation                       -          720,466           -              -          720,466            -    
Conversion of Class B                                                                                               
  common stock to Class A                                                                                           
  common stock                       -             -              -              -             -               -    
                              ------------  ------------  -------------  -------------  ------------  ------------- 
BALANCE - JUNE 30, 2000       $(1,338,005)  $  (213,374)  $   (264,808)  $(44,816,824)  $51,284,758   $ (11,017,689)
                              ============  ============  =============  =============  ============  ============= 

See accompanying notes to consolidated financial statements.                    

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FONAR CORPORATION AND SUBSIDIARIES  
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY  
FOR THE YEAR ENDED JUNE 30, 1999  

                                                        [Enlarge/Download Table]

                                                                       Class A                            
                                                                         Non-      Paid-in                
                              Per    Class A Common Stock   Class C     Voting   Capital in     Treasury  
                             Share   --------------------   Common    Preferred   Excess of       Stock   
                             Amount    Shares     Amount     Stock      Stock    Par Value       Amount   
                             ------  ----------  --------   --------  ---------  -----------   -----------
                                                                                                          
Balance - June 30, 1998      $  -    52,954,465  $  5,294   $    956  $    784   $94,502,717   $ (395,445)

Net loss                        -         -         -          -          -            -            -     

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

Purchase of common stock       2.03       -         -          -          -            -         (196,794)
Stock issued to employees                                                                                 
  under stock bonus plans      1.54     161,180        16      -          -          206,267        -     
Issuance of stock for                                                                                     
  professional services         -       463,161        47      -          -          664,609        -     
Shares returned in                                                                                        
  cancellation of notes                                                                                   
  receivable                    -      (190,000)      (19)     -          -         (539,357)       -     
Issuance of stock under                                                                                   
  consulting contracts         1.37     202,018        20      -          -          275,817        -     
Issuance of stock for                                                                                     
  acquisition of Central                                                                                  
  Health Care                  1.37     202,018        20      -          -          275,810        -     
Net change in notes                                                                                       
  receivable from                                                                                         
  stockholders                  -         -         -          -          -            -            -     
Amortization of unearned                                                                                  
  compensation                  -         -         -          -          -            -            -     
Conversion of Class B                                                                                     
  common stock to Class A                                                                                 
  common stock                  -           200     -          -          -            -            -     
                                     ----------  --------   -------- ---------   -----------   -----------
BALANCE - JUNE 30, 1999              53,793,042  $  5,378   $    956  $    784   $95,385,863   $ (592,239)
                                     ==========  ========   ======== =========   ===========   ===========

See accompanying notes to consolidated financial statements.                    

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FONAR CORPORATION AND SUBSIDIARIES  
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY  
FOR THE YEAR ENDED JUNE 30, 1999  

                                                        [Enlarge/Download Table]

                                Notes                     Accumulated                                              
                              Receivable                     Other                                    Comprehensive
                                 from        Unearned    Comprehensive   Accumulated                     Income    
                             Stockholders  Compensation      Income        Deficit        Total          (Loss)    
                             ------------  ------------  -------------  -------------  ------------  --------------
                                                                                                                   
Balance - June 30, 1998      $(1,854,450)  $      -      $    (42,296)  $(19,645,074)  $72,572,486                 

Net loss                            -             -              -       (14,215,763)  (14,215,763)   $(14,215,763)

Other comprehensive income,                                                                                        
      net of tax:                                                                                                  
    Unrealized losses on                                                                                           
      securities arising                                                                                           
      during the year, net                                                                                         
      of tax                        -             -          (194,647)          -         (194,647)       (194,647)
    Less: Reclassification                                                                                         
      adjustment for losses                                                                                        
      included in net loss          -             -            33,837           -           33,837          33,837 

Purchase of common stock            -             -              -              -         (196,794)                
Stock issued to employees                                                                                          
  under stock bonus plans           -             -              -              -          206,283                 
Issuance of stock for                                                                                              
  professional services             -             -              -              -          664,656                 
Shares returned in                                                                                                 
  cancellation of notes                                                                                            
  receivable                     539,376          -              -              -             -                    
Issuance of stock under                                                                                            
  consulting contracts              -         (275,837)          -              -             -                    
Issuance of stock for                                                                                              
  acquisition of Central                                                                                           
  Health Care                       -             -              -              -          275,830                 
Net change in notes                                                                                                
  receivable from                                                                                                  
  stockholders                    88,926          -              -              -           88,926                 
Amortization of unearned                                                                                           
  compensation                      -           68,959           -              -           68,959                 
Conversion of Class B                                                                                              
  common stock to Class A                                                                                          
  common stock                      -             -              -              -             -                    
                             ------------  ------------  -------------  -------------  ------------  --------------
BALANCE - JUNE 30, 1999      $(1,226,148)  $  (206,878)  $  (203,106)   $(33,860,837)  $59,303,773    $(14,376,573)
                             ============  ============  =============  =============  ============  ==============

See accompanying notes to consolidated financial statements.                    

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FONAR CORPORATION AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                        [Enlarge/Download Table]

                                                      For the Years Ended June 30,          
                                             -----------------------------------------------
                                                  2001            2000          1999        
                                             -------------   --------------    -------------
                                                                                            
CASH FLOWS FROM OPERATING ACTIVITIES                                                        
  Net loss                                   $(15,183,862)   $ (10,955,987)    $(14,215,763)
  Adjustments to reconcile net loss                                                         
   to net cash provided by (used in)                                                        
   operating activities:                                                                    
     Minority interest in income of                                                         
       partnerships                               480,166          270,669          300,235 
     Depreciation and amortization              4,712,767        4,670,473        4,657,819 
     Amortization of unearned license fee      (2,340,000)            -                -    
     License fee                               11,700,000             -                -    
     Gain on sale of partnership interest        (750,000)            -                -    
     Issuance of stock for research and                                                     
       development expenses                       344,839             -                -    
     Gain on sale of equipment                   (150,000)            -             (53,573)
     Imputed interest on deferred payment                                                   
       obligations                                 52,087          397,521          482,716 
     Provision for bad debts                      442,505          177,162          260,836 
     Compensatory element of stock                                                          
       issuances                                4,049,210        1,929,706          275,242 
     Stock issued for professional services       653,895          742,372          664,656 
     Liabilities assumed by purchaser                                                       
       on sale of subsidiary                       -              (824,394)            -    
     Deferred income taxes                         -                  -            (793,794)
     (Increase) decrease in operating                                                       
       assets, net:                                                                         
         Accounts receivable                      110,763         (859,090)      (2,385,223)
         Notes receivable                         125,810         (476,014)          40,955 
         Costs and estimated earnings                                                       
           in excess of billings on                                                         
           uncompleted contracts                 (800,697)         495,291         (629,835)
         Inventories                             (189,206)         701,609         (724,156)
         Sales-type lease receivable -                                                      
           related party                       (1,895,000)        (935,000)            -    
         Sales-type lease receivable           (1,083,192)           4,565             -    
         Principal payments received on                                                     
           sales-type lease - related                                                       
           parties                                120,428             -                -    
         Principal payments received on                                                     
           sales-type lease                       102,394             -                -    
         Prepaid expenses and other current                                                 
           assets                                (299,692)          97,374         (415,468)
         Other assets                                (590)          (3,064)         239,817 
         Receivables and advances to                                                        
           related parties                       (400,161)         275,691           65,425 
     Increase (decrease) in operating                                                       
           liabilities, net:                                                                
             Accounts payable                   1,281,985         (434,425)         372,374 
             Other current liabilities         (1,556,133)        (673,669)        (130,242)
             Customer advances                  1,089,971          487,033         (574,213)
             Billings in excess of costs                                                    
               and estimated earnings on                                                    
               uncompleted contracts              351,592             -             (31,032)
             Other liabilities                    189,073            6,709           17,966 
             Income taxes payable                 (52,029)         (60,227)           2,498 
                                             -------------   --------------    -------------
          NET CASH (USED IN) PROVIDED                                                       
            BY OPERATING ACTIVITIES             1,106,923       (4,965,695)     (12,572,760)
                                             -------------   --------------    -------------

See accompanying notes to consolidated financial statements.                    

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FONAR CORPORATION AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                        [Enlarge/Download Table]


                                                       For the Years Ended June 30,          
                                              -----------------------------------------------
                                                   2001            2000          1999        
                                              -------------   --------------    -------------
                                                                                             
CASH FLOWS FROM INVESTING ACTIVITIES                                                         
  Investment in marketable securities         $  5,747,851    $   8,651,820     $   (106,676)
  Expenditures for acquisitions                       -                -          (2,651,665)
  Purchases of property  and  equipment         (2,556,982)      (2,807,264)      (4,774,603)
  Costs of capitalized software development       (752,285)        (361,323)            -    
  Proceeds from sale of equipment                  150,000             -                -    
  Cost of patents and copyrights                      -                -             (19,686)
                                              -------------   --------------    -------------
      NET CASH PROVIDED BY (USED IN)                                                         
       INVESTING ACTIVITIES                      2,588,584        5,483,233       (7,552,630)
                                              -------------   --------------    -------------

CASH FLOWS FROM FINANCING ACTIVITIES                                                         
  Proceeds from convertible debenture            4,500,000             -                -    
  Proceeds from long-term debt                     500,000             -                -    
  Increase in restricted cash                     (500,000)            -                -    
  Costs in connection with debt financing         (270,729)            -                -    
  Repayment of borrowings and capital                                                        
    lease obligations                           (5,739,395)      (3,750,205)      (2,097,596)
  Proceeds from exercise of stock options                                                    
    and warrants                                    28,172           64,569             -    
  Proceeds from sale of partnership interest       750,000             -                -    
  Dividends paid                                      -                -          (3,909,366)
  Purchase of common stock                          (4,031)         (79,120)        (196,794)
  Distributions to holders of minority                                                       
    interests                                     (348,709)        (347,067)        (398,754)
                                              -------------   --------------    -------------
      NET CASH USED IN FINANCING ACTIVITIES     (1,084,692)      (4,111,823)      (6,602,510)
                                              -------------   --------------    -------------

INCREASE (DECRERASE) IN CASH                     2,610,815       (3,594,285)     (26,727,900)

CASH - BEGINNING OF YEAR                        11,429,519       15,023,804       41,751,704 
                                              -------------   --------------    -------------
CASH - END OF YEAR                            $ 14,040,334    $  11,429,519     $ 15,023,804 
                                              =============   ==============    =============

See accompanying notes to consolidated financial statements.                    

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

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  effective June 30, 1997, two acquisitions,
which were  consummated  during fiscal 1998, and one acquisition  consummated in
August of 1998. 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.                                                         

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.   

The Company no longer  consolidates any medical  practices which it manages.  In
1999,  2000 and 2001, the Company had  consolidated  certain  medical  practices
managed as a result of the 1998 acquisitions of A & A Services, Inc. and Dynamic
Health Care  Management,  Inc.  The Company  also  previously  consolidated  the
practices  conducted by Superior Medical Services,  P.C. in 1999, 2000 and 2001.
The Company has determined that  consolidation of such medical  practices is not
appropriate because the underlying  management agreements do not meet all of the
six  criteria  of  Emerging  Issues  Task Force  ("EITF")  Consensus  No.  97-2.
Accordingly,  the  consolidated  financial  statements  have been restated.  The
significant effect of such restated financial statements for 1999, 2000 and 2001
has been to decrease revenue and related costs by $3.7 million, $3.8 million and
$4.2 million,  respectively.  In addition,  the balance sheet caption "Excess of
Cost Over Net  Assets of  Businesses  Acquired - Net" has been  reclassified  to
"Management Agreements - Net".                                                  

Net revenue from the Company's wholly-owned Florida multi-specialty  practice is
reflected in the  accompanying  Consolidated  Statement of Operations  under the
caption  "Patient  Revenues - Net".  Net revenue from the  management of related
medical  practices is reflected in the accompanying  Consolidated  Statements of
Operations  under  the  caption  "Management  and Other  Fees - Related  Medical
Practices - Net".                                                               

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                 

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

The  preparation of the  consolidated  financial  statements in conformity  with
generally accepted  accounting  principles 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
contractual and other  allowances,  income taxes,  contingencies  and the useful
lives of equipment.  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.                                                                

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

The Company accounts for its investments using Statement of Financial Accounting
Standards  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,
2001,  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 the Consolidated Statement 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  (materials,  labor and
overhead determined on the first-in, first-out method) or market.               

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE  2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                

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                                                           
---------------------                                                           

Management  agreements are being amortized using the  straight-line  method over
the 20 year term of the agreements.                                             

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

1)   Capitalized Software Development Costs                                     

Certain software  development costs incurred  subsequent to the establishment of
the  software's  technological  feasibility  and  completion of the research and
development on the product hardware,  in which it is to be used, are required to
be capitalized.  Capitalization ceases when the product is available for general
release to customers,  at which time  amortization of capitalized  costs begins.
Amortization is calculated on the straight-line basis over 5 years.             

2)   Patents and Copyrights                                                     

Amortization is calculated on the straight-line basis over 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.                                                               

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

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  material,
direct  labor and  overhead.  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  billed.  The
liability,  "Billings in Excess of Costs and Estimated  Earnings on  Uncompleted
Contracts", represents billings in excess of revenues recognized.               

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

Revenue from sales of other items are 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  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  diagnostic  imaging  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.  Fees  are  re-negotiable  at the
anniversary of the agreements and each year  thereafter.  The Company  charges a
management  fee to the  multi-specialty  and primary care  practices  based on a
fixed monthly fee adjusted annually.                                            

Patient revenue from the Company's wholly-owned Florida multi-specialty practice
is recorded in the period that the services are  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 are recognized in the period the services are
rendered.  Any differences between estimated contractual  adjustments and actual
final  settlements  are recognized as contractual  adjustments in the year final
settlements are determined.                                                     

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

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.  Certain software development
costs  are  capitalized.  See  property  and  equipment  and  intangible  assets
(capitalized software development costs) sections of this note.                 

During the year ended June 30, 2001, the Company acquired a minority interest in
a  development  stage company  through the issuance of 270,000  shares valued at
344,857.  The entire  amount of the  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 of product
sales for all periods presented.                                                

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

Deferred  tax  liabilities  and assets 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.                                            

Product Warranty                                                                
----------------                                                                

The  Company  provides  currently  for the  estimated  cost to repair or replace
products  under  warranty  provisions  in  effect  at the  time of  installation
(generally for one year).                                                       

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

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

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                 

Earnings (Loss) Per Share                                                       
-------------------------                                                       

Basic  earnings  (loss) per share is computed  based on weighted  average shares
outstanding  and excludes any potential  dilution.  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 4,036,000, 427,000 and 388,000 shares of common
stock were outstanding at June 30, 2001, 2000 and 1999,  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.
Additionally,  convertible  debentures,  which are  convertible  into  2,200,000
shares at June 30, 2001 were antidilutive.                                      

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.          

At June 30,  2001,  the Company had cash  deposits of  $13,877,660  in excess of
federally insured limits.                                                       

Restricted Cash                                                                 
---------------                                                                 

At June 30, 2001 and 2000,  $5,500,000 of cash has been pledged as collateral on
an  outstanding  bank loan and has been  classified  as  restricted  cash on the
accompanying balance sheet.                                                     

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

The financial  statements  include various  estimated fair value  information at
June 30, 2001,  2000 and 1999, as required by Statement of Financial  Accounting
Standards 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.                       

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE  2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                

Fair Value of Financial Instruments (Continued)                                 
-----------------------------------                                             

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 loans payable: The carrying amounts of debt and loans 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.                                                                        

Stock-Based Compensation                                                        
------------------------                                                        

The Company  accounts for its  compensation and stock option plans in accordance
with the  provisions of  Accounting  Principles  Board  ("APB")  Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.  As such,
compensation  expense would be recorded on the date of grant only if the current
market price of the underlying  stock exceeded the exercise price. In accordance
with SFAS No. 123, Accounting for Stock-Based Compensation, the Company provides
proforma net income and proforma  earnings  per share  disclosures  for employee
stock option grants, as if the  fair-value-based  method defined in SFAS No. 123
had been applied.                                                               

Stock-based  compensation issued to employees and consultants is valued based on
the quoted market price of the common stock at the time of issuance.            

Deferred and Unearned Financing Costs                                           
-------------------------------------                                           

Financing  costs in  connection  with  the May 24,  2001  convertible  debenture
offering is being amortized over one-year period of the obligation.             

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

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

Computer Software                                                               
-----------------                                                               

Effective  July 1,  1998,  the  Company  adopted  the  provisions  of SOP  98-1,
"Accounting  for the  Costs of  Computer  Software  Developed  or  Obtained  for
Internal Use", which revises the accounting for software  development  costs and
requires the  capitalization of certain costs. No adjustments were required as a
result of this adoption.                                                        

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                 

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

In fiscal 2001,  the Company  adopted SFAS No. 133,  "Accounting  for Derivative
Instruments and Hedging  Activities",  SFAS No. 137,  "Accounting for Derivative
Instruments and Hedging  Activities - Deferral of the Effective Date of SFAS No.
133",  and SFAS No. 138,  "Accounting  for Certain  Derivative  Instruments  and
Certain  Hedging  Activities  an amendment of SFAS No.  133".  These  statements
outline the accounting  treatment for all  derivative  activity and the adoption
did not have a  significant  effect on the  Company's  consolidated  results  of
operations or financial position.                                               

In fiscal 2001, the Company adopted the Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition". SAB 101 provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements.  The adoption of SAB 101 had no effect on the Company's consolidated
results of operations or financial position.                                    

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

In June 2001,  the  Financial  Accounting  Standards  Board issued SFAS No. 141,
"Accounting  for  Business  Combinations"  and SFAS  No.  142,  "Accounting  for
Goodwill and Other Intangible  Assets".  SFAS No. 141 requires that all business
combinations  be  accounted  for using the  purchase  method of  accounting  and
prohibits   the   pooling-of-interests   method  of   accounting   for  business
combinations initiated after June 30, 2001. According to SFAS No. 142, goodwill,
which  arises  from  business  combinations  after  June  30,  2001,  cannot  be
amortized.  In addition,  SFAS No. 142 requires the  discontinuation of goodwill
amortization and the amortization of intangible assets with indeterminate  lives
effective  the date the Company  adopts the  statement,  which is expected to be
June 30,  2002.  The Company has six months from the date it adopts SFAS No. 142
to test for  impairment  and any  impairment  charge  resulting from the initial
application  of the new rule must be  classified as the  cumulative  effect of a
change in accounting principle.  Thereafter, goodwill and intangible assets with
indeterminate lives should be tested for impairment annually or as needed.      

The Company  does not  anticipate  any  significant  impact to the  consolidated
financial  statements  as the result of the adoption of SFAS No. 142 and expects
to continue to amortize all identifiable intangible assets.                     

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

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

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE  3 - ACQUISITIONS                                                          

Affordable Diagnostics, Inc.                                                    
----------------------------                                                    

On June 30, 1997, the Company's  wholly-owned  subsidiary consummated the merger
of the assets,  liabilities  and  operations  of  Affordable  Diagnostics,  Inc.
("Affordable"),  a New  York  corporation,  which  managed  and  operated  three
diagnostic imaging centers and managed one multi-specialty practice in the Bronx
and  Westchester,  New York.  The merger was  consummated  pursuant  to a Merger
Agreement   ("Agreement")   effective   June  30,  1997,  by  and  among  HMCA's
wholly-owned subsidiary,  HMCM, Inc. ("HMCM").  Pursuant to the agreement,  HMCM
acquired all of the assets and liabilities of Affordable through the issuance of
1,764,000  shares of the Company's  common stock,  valued at $3,630,312,  and an
additional  576,000 shares of the Company's  common stock were issued in June of
1998 valued at $923,442. The additional 576,000 shares were issued in connection
with a one-year earnout provision, which was achieved during fiscal 1998.       

Affordable Diagnostics, Inc. (Continued)                                        
----------------------------                                                    

The merger was accounted for as a purchase,  under which the purchase  price was
allocated to the acquired assets and assumed  liabilities based upon fair values
at the date of the merger. The fair value of the managemnent  agreement amounted
to approximately $3,719,000 and is being amortized on a straight-line basis over
20  years.  The  accompanying  consolidated  financial  statements  include  the
operations of Affordable from the date of the acquisition (June 30, 1997).      

Concurrent with the above described  transactions,  HMCM entered into consulting
agreements with the shareholders of Affordable.  Under such agreements,  400,000
registered  shares of FONAR's common stock,  valued at  $1,096,000,  were issued
pursuant to one year consulting  agreements with HMCM. The entire $1,096,000 was
charged to operations during the year ended June 30, 1998.                      

Acquisition of RVDC                                                             
-------------------                                                             

Effective June 30, 1997, FONAR's wholly-owned subsidiary, HMCA, acquired Raymond
V.  Damadian,  M.D. MR Scanning  Centers  Management  Company  ("RVDC")  and two
affiliates,  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 business of
RVDC,  continued by HMCA, was the management of MRI diagnostics  imaging centers
in New York, Florida and Georgia.                                               

The  Company  has  accounted  for the  acquisition  in a manner  similar  to the
pooling-of-interests  method due to Dr. Damadian's control over both the Company
and RVDC.                                                                       

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE  3 - ACQUISITIONS (Continued)                                              

Central Health Care Management Service, Inc.                                    
-------------------------------------------                                     

On January 23, 1998, a wholly-owned subsidiary of HMCA acquired the business and
assets  of  Central  Health  Care  Management  Services,  Inc.  ("Central"),   a
management service  organization  ("MSO"),  operating in Westchester County, New
York. The purchase price was determined  based on a multiple of the net positive
cash flow from the acquired  business over the succeeding  twelve-month  period.
The purchase price was determined to be  $1,454,160,  $601,665  payable in cash,
$551,665 payable in notes,  assumption of liabilities  aggregating  $25,000, and
the balance payable in shares of common stock of FONAR valued at $275,830.      

The acquisition was accounted for as a purchase,  under which the purchase price
was allocated to the acquired  assets and assumed  liabilities,  based upon fair
values  at the  date  of the  acquisition.  The  fair  value  of the  management
agreement amounted to $1,254,160 and is being amortized on a straight-line basis
over 20 years. The accompanying  consolidated  financial  statements include the
operations of Central from the date of the acquisition (January 23, 1998).      

In April of 1999,  HMCA  entered  into  consulting  agreements  with the  former
shareholders of Central.  Under such agreements,  202,018  registered  shares of
FONAR's  common stock,  valued at $275,837,  were issued  pursuant to consulting
agreements  covering the one-year period  commencing  April 1999. For the period
ended  June 30,  2001  $206,878  was  charged  to  operations  related  to these
agreements.                                                                     

A&A Services, Inc.                                                              
------------------                                                              

On March 20, 1998, the Company's physician and diagnostic management subsidiary,
HMCA,  consummated  the  acquisition  of the common stock of A&A Services,  Inc.
("A&A"),  a New York  corporation,  which manages four primary care practices in
Queens, New York.                                                               

Pursuant to the A&A agreements, HMCA acquired all of the common stock of A&A for
$4,000,000 in cash, a note payable for $4,000,000  bearing  interest at 6.0% per
annum,  payable in 16 equal  quarterly  installments  of interest and principal,
commencing  March of 1999, a note payable for  $1,293,000,  bearing  interest at
6.0% per annum,  payable  in 60 equal  monthly  installments  of  principal  and
interest,  commencing April 20, 1998, a deferred payment  obligation face amount
of  $2,000,000  and a  contingent  payment  based  on  the  acquired  operations
achieving  certain  earnings  objectives over the five-year period following the
acquisition date.                                                               

The  promissory  notes are  collateralized  by all of the assets of the acquired
operations and are guaranteed by FONAR.                                         

Contemporaneously  with the acquisition of the management company,  Dr. Damadian
acquired 100% of the stock of the medical practices for nominal consideration.  

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE  3 - ACQUISITIONS (Continued)                                              

A&A Services, Inc. (continued)                                                  
------------------                                                              

The acquisition was accounted for as a purchase,  under which the purchase price
was  allocated to the acquired  assets and assumed  liabilities  based upon fair
values  at the  date  of the  acquisition.  The  fair  value  of the  management
agreement  amounted to  approximately  $10,448,000  and is being  amortized on a
straight-line  basis  over 20 years.  The  accompanying  consolidated  financial
statements include the operations of A&A from the date of the acquisition.      

Additional  consideration  is  payable  to the former  shareholders  of A&A,  if
operating income, as defined for the acquired business,  exceeds $2.3 million in
any of the five years  following  the closing as follows:  in each year,  75% of
operating  income,  as defined,  between $2.3 million and $2.8  million;  50% of
operating income, as defined,  between $2.8 million and $3.5 million, and 25% of
operating  income,  as  defined,  in  excess  of $3.5  million.  The  contingent
additional  purchase  price  is  not  determinable  as of  June  30,  2001  and,
accordingly,  has not been included in the allocated  purchase price in light of
the  contingent  nature  of the  arrangement.  If the  earnings  objectives  are
ultimately  achieved,   the  additional  purchase  price  will  be  recorded  as
additional value of the management  agreement,  subject to amortization over the
stated period.  No additional  payments were due under the earnout provision for
the years ended June 30, 2001, 2000 and 1999.                                   

Dynamic Health Care Management, Inc.                                            
------------------------------------                                            

On  August  20,  1998,  the  Company's   physician  and  diagnostic   management
subsidiary,  HMCA,  consummated  the  acquisition of the common stock of Dynamic
Health Care Management, Inc. ("Dynamic"), a New York corporation,  which manages
three  physician  practices on Long Island,  New York. The practices  consist of
internal medicine, physiatry and physical rehabilitation.                       

Pursuant to the Dynamic  agreements,  HMCA  acquired  all of the common stock of
Dynamic for $2,000,000 in cash, a note payable for $1,216,230  bearing  interest
at 7.5% per annum, payable in sixty monthly  installments,  commencing one month
following the closing date, a note payable for  $2,870,000  bearing  interest at
7.5% per annum  payable in three annual  installments  of principal and interest
commencing one year after the closing date, and promissory  notes face amount of
$5,490,000,   payable  in  thirty-six  monthly  installments  of  principal  and
interest, commencing two years after the closing date.                          

The  promissory  notes are  collateralized  by all of the assets of the acquired
operations and are guaranteed by the Company.                                   

Contemporaneously  with the acquisition of the management company,  Dr. Damadian
acquired 100% of the stock of the medical practices for nominal consideration.  

The acquisition was accounted for as a purchase,  under which the purchase price
was  allocated to the acquired  assets and assumed  liabilities  based upon fair
values  at the  date  of the  acquisition.  The  fair  value  of the  management
agreement amounted to $8,951,907 and is being amortized on a straight-line basis
over 20 years. The accompanying  consolidated  financial  statements include the
operations of Dynamic from the date of acquisition, August 20, 1998.            

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE  4 - MARKETABLE SECURITIES                                                 

The following is a summary of marketable securities at June 30, 2001 and 2000:  

                        2001
                         -------------------------------------------
                        Unrealized
                                          Holding        Fair Market
                          Cost           Gain            Value
                         -----------     ----------     ------------
U.S. Government Obligations    $ 4,128,191     $  63,849      $ 4,192,039       
Corporate and government         1,872,942        20,285        1,893,227       
agency bonds                 -----------     ----------     ------------    
                         $6,001,132     $  84,134      $ 6,085,266
                         ===========     ==========     ============

                        2000
                         -------------------------------------------
                        Unrealized
                                         Holding       Fair Market
                           Cost          Loss            Value
                         -----------     ----------     ------------
U.S. Government Obligations    $10,198,273     $(210,045)     $  9,988,228      
Corporate and government                                                        
agency bonds                   1,550,711       (54,763)        1,495,948    
                         -----------     ----------     ------------
                         $11,748,984     $(264,808)     $ 11,484,176
                         ===========     ==========     ============

All debt  securities  are due within five years.  Of the cost, at June 30, 2001,
$512,110 is due within one year.                                                

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 5  -  ACCOUNTS   RECEIVABLE  AND  ACCOUNTS  RECEIVABLE  -  RELATED  MEDICAL
PRACTICES, NET                                                        

Accounts receivable and accounts receivable - related medical practices, net are
comprised of the following:                                                     

                         As of June 30, 2001
                              ------------------------------------------------
                             Allowance
                              For Doubtful
                              Accounts and
             Gross           Contractual
                          Receivable         Allowances            Net
                              -----------       ------------       -----------
Receivable from equipment      $ 1,885,071        $ 1,033,331       $   849,740 
sales and service                                                           
contracts                                                                   
Receivable from medical               -                  -                 -    
services                                                                    
                              -----------       ------------       -----------
                              $ 1,885,071        $ 1,033,331       $   849,740
                              ===========       ============       ===========
Receivable from related PC's   $13,718,951       $    538,297       $13,180,654 
                              ===========       ============       ===========

                         As of June 30, 2000
                              ------------------------------------------------
                             Allowance
                              For Doubtful
                              Accounts and
             Gross           Contractual
                          Receivable         Allowances            Net
                              -----------       ------------       -----------
Receivable from equipment      $ 2,036,960        $   788,331       $ 1,248,629 
sales and service                                                           
contracts                                                                   
Receivable from medical            533,621             95,439       $   438,182 
services                                                                    
                              -----------        -----------       -----------
                              $ 2,570,581            883,770       $ 1,686,811
                              ===========        ===========       ===========
Receivable from related PC's   $13,050,583        $   153,732       $12,896,851 
                              ===========        ===========       ===========

The Company's customers are concentrated in healthcare industry.                

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

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 5 - ACCOUNTS  RECEIVABLE  AND ACCOUNTS  RECEIVABLE - RELATED  PARTIES,  NET
(Continued)                                                           

The Company's  receivables  from medical  services  consist of receivables  from
patients and third-party  payors for medical services  provided by the Company's
wholly owned Florida multi-specialty practice.                                  

Collection  by the  Company of its  accounts  receivable  may be impaired by the
uncollectibility of 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
56%, 48% and 33%,  respectively,  of the medical  practices' 2001, 2000 and 1999
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  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  72%, 81% and 82% of the  consolidated net revenues
for the years ended June 30, 2001, 2000 and 1999, respectively.                 

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

Summarized  financial  information  related  to  the 28  unconsolidated  medical
practices  managed by the Company is not available.  Substantially  all of these
medical  practice  books and  records  are  maintained  on the cash  basis,  and
depreciates  its assets on an  accelerated  tax basis and has a December 31 year
end.                                                                            

During the year ended June 30, 2001, the 28 unconsolidated medical practices had
collections of approximately  $36.8 million.  As of June 30, 2001, the estimated
net  realizable  value of the medical  receivables  of these  medical  practices
approximated $16.2 million.                                                     

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

1)   Information relating to uncompleted  contracts as of June 30, 2001 and 2000
is as follows:                                                        
                                                As of June 30,
                                               ---------------------------
                                               2001             2000
                                               ----------       ----------
Costs incurred on uncompleted                                 
        contracts                              $2,248,706       $  829,441
      Estimated earnings                          560,558          138,718
                                               ----------       ----------
                                                2,809,264          968,159
   Less: Billings to date                    1,392,000             -
                                               ----------       ----------
                                               $1,417,264       $  968,159
                                               ==========       ==========

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

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,
                                               ---------------------------
                                              2001            2000
                                               ----------       ----------
Costs and estimated earnings in                               
excess of billings on                                     
        uncompleted contracts                  $1,768,856       $  968,159
Billings in excess of costs and                               
estimated earnings on                                     
     uncompleted contracts                     351,592             -
                                               ----------       ----------
                                               $1,417,264       $  968,159
                                               ==========       ==========

2) Customer advances consist of the following:                                  

                                              As of June 30,
                                               ---------------------------
                                              2001            2000
                                               ----------       ----------
      Total advances from customers            $3,064,522       $  582,551
Less: Advances from customers                                 
on contracts under                            
           construction                      1,392,000             -
                                               ----------       ----------
                                               $1,672,522       $  582,551
                                               ==========       ==========

NOTE  7 - INVENTORIES                                                           

Inventories included in the accompanying consolidated balance sheets consist of:

                                              As of June 30,
                                               ---------------------------
                                              2001            2000
                                               ----------       ----------
Purchased parts, components and                               
        supplies                               $3,049,879       $2,916,753
      Work-in-process                             675,496          619,416
                                               ----------       ----------
                                               $3,725,375       $3,536,169
                                               ==========       ==========

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE  8 - INVESTMENT IN SALES-TYPE LEASES                                       

During  the year  ended  June 30,  2001,  the  Company  entered  into two  lease
agreements,  totaling $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 lease 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, 2001, the Company entered into a $1,050,000 lease
agreement  with  an  outside  party  for an MRI  scanner,  which  is  considered
sales-type  lease.  The lease is payable in 75 monthly  installments  of $18,389
each,  plus at the end of the 25-month  lease,  the lessee can elect to continue
the  lease for an  additional  five  years,  at a monthly  payment  of  $18,389,
including interest at 12.5% per annum, or pay a lump sum of $200,000.           

During the year ended June 30, 2000,  the Company  entered into a $935,000 lease
agreement  with a  related  party  for an MRI  scanner  which  is  considered  a
sales-type  lease. The lease is payable in 120 monthly  installments of $12,356,
including interest at 10% per annum. The lessee can also elect to pay a lump sum
of  $581,544 at the end of 60 months.  If the lease term is  extended  beyond 60
months,  the lease may elect to  purchase  the  scanner at the end of the second
60-month period for a purchase price of $1.                                     

The Company's  investment in sales-type lease as at June 30, 2001 and 2000 is as
follows:                                                                        

                                              As of June 30,
                                               ---------------------------
                                              2001            2000
                                               ----------       ----------
Net minimum lease payments                                    
        receivable                             $5,029,225       $1,310,548
      Less: Unearned income                     1,343,420          380,113
                                               ----------       ----------
      Net Investment in Sales-type Lease       $3,685,805       $  930,435
                                               ==========       ==========

      Current portion                          $  310,853       $   57,832
      Non-current portion                       3,374,952          872,603
                                               ----------       ----------
                                               $3,685,805       $  930,435
                                               ==========       ==========

Future minimum lease payments are as follows:                                   

Years Ended June 30:                                          
-------------------                                           
2002                               $  310,853     
2003                                  329,883     
2004                                  366,611     
2005                                  981,558     
2006                                1,417,872     
                                 279,028
                              ----------
                              $3,685,805
                              ==========

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE  9 - PROPERTY AND EQUIPMENT                                                

Property and equipment, at cost, less accumulated depreciation and amortization,
at June 30, 2001 and 2000, is comprised of:                                     

                                              As of June 30,
                                               ---------------------------
                                              2001            2000
                                               ----------       ----------
      Diagnostic equipment under lease        $ 1,263,181      $ 1,263,181
      Diagnostic equipment                      4,485,217        6,776,653
      Research, development and                 7,916,447        7,217,601
        demonstration equipment                 6,265,041        6,106,145
      Machinery and equipment                   3,222,076        3,181,390
      Furniture and fixtures                    2,444,947        2,364,088
      Equipment under leases                    3,185,611        2,572,728
      Leasehold improvements                  -----------      -----------
                                               28,782,520       29,431,786

      Less: Accumulated depreciation           18,145,123       18,204,332
              and amortization                -----------      -----------
                                              $10,637,397      $11,227,454
                                              ===========      ===========

Depreciation and amortization of property and equipment for the years ended June
30, 2001, 2000 and 1999 was $3,323,516, $3,237,384 and $3,139,585, respectively.

The equipment  under lease has a net book value of $1,684,083  and $1,285,760 at
June 30, 2001 and 2000, respectively.                                           

NOTE 10 - OTHER INTANGIBLE ASSETS                                               

Other intangible assets, net of accumulated  amortization,  at June 30, 2001 and
2000 are comprised of:                                                          
                                                  As of June 30,
                                                ------------------------------
                                                2001                2000
                                                ----------          ----------
 Capitalized software development costs         $2,315,744          $1,560,941
 Patents and copyrights                          1,125,808           1,125,808
Deferred financing costs                          270,729                -  
                                                ----------          ----------
                                                 3,712,281           2,686,749
 Less: Accumulated amortization                  1,858,775           1,650,825
                                                ----------          ----------
                                                $1,853,506          $1,035,924
                                                ==========          ==========

Capitalized  computer  software costs are being amortized over 5 years.  Patents
costs are being  amortized  over 17 years.  Deferred  financing  costs are being
amortized over the life of the related debt agreement (see Note 13).            

Amortization of other intangible  assets for the years ended June 30, 2001, 2000
and 1999 was $207,951, $214,391 and $292,295,  respectively,  of which $141,727,
$148,167 and $208,098, respectively, relate to amortization expense for software
development costs.                                                              

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

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  shall be  payable  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). Pursuant to such
dividend  entitlement,  the Company  recorded an  obligation of  $2,551,146,  or
approximately $.05 per share of common stock, during fiscal 1997, which was paid
during 1998 and 1999.                                                           

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, 2000,  1,000  shares of Class B common stock were  converted to common stock
leaving 4,211 of such shares outstanding as of June 30, 2000 and 2001.          

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

On April 3, 1995, the  shareholders  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. During the year ended June
30,  1996,  approximately  3.2  million  shares  of  Class B common  stock  were
converted to Class C common stock.                                              

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

On April 3,  1995,  the  shareholders  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.                            

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 11 - CAPITAL STOCK (Continued)                                             

Class A Non-Voting Preferred Stock (continued)                                  
----------------------------------                                              

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 amount
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.
Pursuant to such  dividend  entitlement,  the Company  recorded an obligation of
$5,086,695, or $.65 per share of Class A preferred stock, during fiscal 1997 and
$217,226,  or $.03 per share of Class A preferred  stock,  during  fiscal  1996.
During fiscal 1998 and 1999, these dividend obligations were paid.              

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).                                     

The above  described  features  essentially  enable  the  holders of the Class A
non-voting  preferred stock to share in the earnings potential of the Company on
substantially the same basis as the common stock.  Accordingly,  the Company has
classified the Class A non-voting  preferred stock as a common stock equivalent.
Earnings per share and weighted average shares outstanding have been restated to
reflect the Class A non-voting preferred stock dividend.                        

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.                                                   

Stock option share  activity and weighted  average  exercise  prices under these
plans  and  grants  for the years  ended  June 30,  2001,  2000 and 1999 were as
follows:                                                                        

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 11 - CAPITAL STOCK (Continued)                                             

Options (continued)                                                             
-------                                                                         

                                           Number of      Weighted Average
                                            Shares        Exercise Price
                                           ---------      ----------------
Outstanding, June 30, 1998             182,735          $ 4.62
Granted                                205,000            1.23
Exercised                                 -                -  
Forfeited                                 -                -  
                                           ---------      ----------------
Outstanding, June 30, 1999             387,735            4.62
Granted                                413,000            1.52
Exercised                             (374,000)           1.15
Forfeited                                 -                -  
                                           ---------      ----------------
Outstanding, June 30, 2000             426,735            2.83
Granted                                672,896            1.52
Exercised                              (24,000)           1.18
Forfeited                                 -                -  
                                           ---------      ----------------
Outstanding, June 30, 2001           1,075,631          $ 2.05
                                           =========      ================
Exercisable at:                                               
  June 30, 1999                        387,735          $ 4.62
  June 30, 2000                        426,735          $ 2.83
  June 30, 2001                        402,735          $ 2.93

The exercise price for options outstanding as of June 30, 2001 ranged from $0.75
to $5.00.                                                                       

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 (as adjusted for
the 8,000-for-1 stock split effective  December 15, 1998) of the common stock of
HMCA. Options to purchase 1,600,000 shares at an option price of $0.10 per share
(as adjusted)  were granted on March 10, 1997.  One half of the options  granted
will not become  exercisable  unless and until the  earlier of such time as HMCA
successfully  completes a public offering of its securities,  or HMCA recognizes
at least  $10,000,000  in revenues  for two  consecutive  fiscal  quarters.  The
remainder of the options will not become  exercisable until one year thereafter.
The options will expire on March 9, 2007.  No options have vested as of June 30,
2001.                                                                           

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  500,000 shares at an option price of
$1.00 per share were granted on December 16, 1998. The options  granted will not
become exercisable  unless and until such time as HMCA successfully  completes a
public offering of its securities. The options will expire on December 15, 2008.
No options have vested as of June 30, 2001.                                     

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 11 - CAPITAL STOCK (Continued)                                             

Options (Continued)                                                             
-------                                                                         

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, 2001.        

Stock option share activity and weighted  average exercise prices under the HMCA
plans and grants for the three years ended June 30, 2001,  2000 and 1999 were as
follows:                                                                        
                                            Number of   Weighted Average
                                            Shares      Exercise Price
                                            ---------   ----------------
Outstanding - June 30, 2000 and 1999            2,770,000        $ .48          
Granted - June 30, 2001                              -              -           
                                            ---------   ----------------
Outstanding - June 30, 2001 and 2000            2,770,000        $ .48          
                                            =========   ================
Exercisable at June 30, 2001, 2000 and 1999          -           $ -            
                                            =========   ================

The Company  accounts for its stock option plans under APB Opinion No. 25, under
which no compensation cost has been recognized.  Had compensation cost for these
plans been determined  consistent with FASB Statement No. 123, the Company's net
loss and loss per share  would have been  effected  for the years ended June 30,
2001, 2000 or 1999 as follows:                                                  
                             2001               2000                1999
                           -------------      -------------       ------------
Net Loss:                                                                     
  As reported              $(15,183,862)      $(10,955,987)       $ 14,215,763
  Proforma                 $(15,183,862)      $(11,059,237)       $ 14,256,763

Loss Per Share:                                                               
   As reported                    $(0.22)            $(0.17)             $(0.22)
   Proforma                       $(0.23)            $(0.17)             $(0.22)

The fair value of the options  granted  under all plans is  estimated  at $0.52,
$0.20 and  $0.46,  respectively,  on the date of grant  using the  Black-Scholes
option-pricing model based on the following assumptions for the years ended June
30, 2001, 2000 and 1999:                                                        

                                  2001               2000                 1999
All Plans:                        ------             ------    -          ------
 Dividend yield                     0%                 0%                   0%
 Expected volatility               98%                33%                  33%
Expected life (years)              3                  3                    3

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 11 - CAPITAL STOCK (Continued)                                             

Options (Continued)                                                             
-------                                                                         

The  risk-free  interest  rates were based  upon a rate with  maturity  equal to
expected term. U.S.  Treasury  instruments  were utilized.  The weighted average
interest rate amounted to 5.0%.                                                 

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

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

During fiscal 2001,  2000 and 1999,  3,001,060,  2,148,429  and 826,359  shares,
respectively,  were issued  under the stock  bonus  plans,  of which  1,636,602,
234,677  and  161,180  shares,  respectively,  were  charged  to  operations  as
compensation expense,  435,976, 490,000 and 463,161 shares,  respectively,  were
issued for professional  services,  5,000, 19,332 and -0- shares,  respectively,
were issued in  exchange  for notes,  923,482,  1,403,420  and  202,018  shares,
respectively,  were issued in connection  with consulting  agreements,  and -0-,
1000 and -0- shares,  respectively,  were issued upon  conversion  of Class B to
Class A common stock.                                                           

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 is estimated at $1.14 on the date of grant using the  Black-Scholes
pricing  model.  In  addition,  the  Company  granted to the  investor  callable
warrants to purchase a total of 2,000,000  shares of common stock at fluctuating
prices (Note 13).                                                               

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

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

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

                                                      As of June 30,
                                                    --------------------------
                                                     2001           2000
                                                    -----------    -----------

Construction loan converted into a capital lease                                
obligation  during August 1998.  The  obligation                                
requires  equal  monthly  payments   aggregating                                
$13,097,  including interest at 13.2% per annum,                                
through   August   2003.   The   obligation   is                                
collateralized  by  the  related  equipment.         $   274,931    $   387,580 

Promissory    note    payable    to   a    bank,                                
collateralized  by  $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, 2001) with payment                                
of the entire principal due on March 20, 2003.         5,000,000      5,000,000 

Note payable to the former  shareholders  of A&A                                
Services,  Inc.  The note calls for 16 quarterly                                
payments of  $300,044,  including  interest at a                                
rate of 6%,  commencing March 20, 1999. The note                                
is  collateralized  by all of the  assets of the                                
acquired   business  and  guaranteed  by  FONAR.       1,709,406      2,767,060 

Note  payable to the former  shareholder  of A&A                                
Services,  Inc.  The  note  calls  for 60  equal                                
monthly  installments  of principal and interest                                
of $25,000,  including  interest at a rate of 6%                                
per annum,  commencing  April 20, 1998. The note                                
is  collateralized  by all of the  assets of the                                
acquired   business  and  guaranteed  by  FONAR.         497,199        758,788 

Note  payable  calling for  monthly  payments of                                
$9,034,  including  interest at a rate of 8.875%                                
through July 2002. The loan is collateralized by                                
equipment  located in Ellwood,  Pennsylvania.            101,779        205,262 

Note  payable  to  the  former  shareholders  of                                
Dynamic  Health Care  Management,  Inc. The note                                
calls for three  annual  payments of  principal,                                
including  interest at a rate of 6%,  commencing                                
August 20, 1999. The note is  collateralized  by                                
all of the assets of the  acquired  business and                                
guaranteed by FONAR.                                     972,824      1,877,776 

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

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

                                                    As of June 30,
                                                    --------------------------
                                                     2001           2000
                                                    -----------    -----------

Note  payable  to  the  former  shareholders  of                                
Dynamic  Health Care  Management,  Inc. The note                                
calls for monthly  installments of principal and                                
interest   of  $65,417   for  the  first   eight                                
installments,   followed   by  $16,667  for  the                                
remaining  52  installments.   The  installments                                
include  interest  at a rate of 7.5% per  annum.                                
The note is  collateralized by all of the assets                                
of  the  acquired  business  and  guaranteed  by                                
FONAR.                                               $   399,881    $   564,341 

Deferred   payment    obligation,    aggregating                                
$5,490,000,  payable to the former  shareholders                                
of Dynamic  Health  Care  Management,  Inc.  The                                
obligation   is  payable   over   three   years,                                
commencing  August 20,  2000,  with  interest at                                
7.5%  per  annum.   The   obligation   has  been                                
recorded,   net   of   discount   of   $739,324,                                
representing   the   value   of   the   two-year                                
interest-free  provision of this  obligation.  A                                
$100,000  principal payment was made in November                                
1998. The obligation is collateralized by all of                                
the  assets  of  the   acquired   business   and                                
guaranteed by FONAR.                                   3,842,057      5,337,913 

Deferred   payment    obligation,    aggregating                                
$2,000,000, payable to the former shareholder of                                
A&A  Services,  Inc. The  obligation  is payable                                
over four years,  commencing  December 20, 2000,                                
with  interest at 6% per annum.  The  obligation                                
has  been   recorded,   net  of  a  discount  of                                
$220,000,  representing  interest  imputed  at a                                
rate of 6% over two  years.  The  obligation  is                                
collateralized  by  all  of  the  assets  of the                                
acquired   business  and  guaranteed  by  FONAR.       1,277,770      2,000,000 

Four  promissory  notes  payable  to the  former                                
shareholders  of Central Health Care  Management                                
Services,  LLC.  Each  note  calls for two equal                                
annual installments of $11,458, plus interest at                                
prime rate,  plus 2%, per annum  (11.50% at June                                
30,   2000),    commencing   April   2000.   The                                
obligations  under each note are  guaranteed  by                                
FONAR.                                                    18,197         68,749 

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

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

                                                    As of June 30,
                                                    --------------------------
                                                     2001           2000
                                                    -----------    -----------

Four  promissory  notes  payable  to the  former                                
shareholders  of Central Health Care  Management                                
Services,  LLC.  Each  note  calls for two equal                                
annual installments of $57,500, plus interest at                                
prime  rate,  plus 2% per annum  (11.50% at June                                
30,   2000),    commencing   March   2000.   The                                
obligations  under each note are  guaranteed  by                                
FONAR.                                               $   127,119    $   283,247 

Capital  lease  requiring  monthly  payments  of                                
$28,997,  including  interest at a rate of 9.95%                                
per  anum  through  April  2004.   The  loan  is                                
collateralized by the related equipment.                 856,055           -    

Note payable in monthly installments of $15,686,                                
including  interest  at a rate of 9.25% per anum                                
through February 2003.                                   289,697           -    

Promisory note payable to a bank, collateralized                                
by $500,000  certificate  of deposit,  requiring                                
monthly payments of interest only, at a variable                                
rate  based on the bank's  prime rate  (6.75% at                                
June 30,  2001)  with a  payment  of the  entire                                
princiapl due on July 2, 2001.                           500,000           -    

Capital  lease  requiring  monthly  payments  of                                
$12,595,  including  interest  at a  rate  of 9%                                
through   October   1,   2002.   The   loan   is                                
collateralized  by  related  equipment.                  112,479        247,824 

Capital lease dated October 13, 1995 - $513,692,                                
due $11,173 per month,  commencing October 1995,                                
including  interest  of 11% for 60  months.  The                                
lease   is   collateralized   by   the   related                                
equipment.                                                  -           183,243 

Capital lease dated June 4, 1996 - $412,550, due                                
$8,972   per   month,   commencing   July  1996,                                
including  interest  of 11% for 60  months.  The                                
lease   is   collateralized   by   the   related                                
equipment.                                                  -           174,407 

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

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

                                                    As of June 30,
                                                    --------------------------
                                                     2001           2000
                                                    -----------    -----------

Other (including capital leases for property and                                
equipment)                                               764,755      1,112,996 
                                                    -----------    -----------
                                                     16,744,149     20,969,186
         Less: Current maturities                     6,634,863      6,224,727
                                                    -----------    -----------
                                                    $10,109,286    $14,744,459
                                                    ===========    ===========

The maturities of long-term debt, including debt in arrears,  over the next five
years and thereafter are as follows:                                            

Years Ended                   
June 30,                    
-----------                   
     2002              $ 6,634,863
     2003                9,518,656
     2004                  548,156
     2005                   40,900
     2006                    1,574
                       -----------
                       $16,744,149
                       ===========

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
on that date for an aggregate purchase price of $4.5 million:                   

     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  purchase  an  aggregate  of  959,501  shares of the
     Company's  common stock at an initial  exercise  price of $1.801 per share,
subject to adjustment; and                                            

     Callable  warrants to  purchase an  aggregate  of  2,000,000  shares of the
     Company's  common  stock at a  fluctuating  exercise  price which will vary
depending on the market price for the Company's common stock.         

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.                                                

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 13 - CONVERTIBLE DEBENTURES (Continued)                                    

The debentures are  convertible at the option of the holder at a price of $2.047
per share. If the holders decide not to convert, the debenture is payable in ten
monthly  installments of $450,000  commencing  October 1, 2001. At the option of
the Company,  the principal  installments can be either in cash or shares of the
Company's'  common stock,  valued at the lesser of: a) 90% of the average of the
four lowest closing bid prices during the preceding  month, or b) the average of
the four lowest  closing bid prices during the preceding  calendar  month,  less
$0.125. By amendment dated October 25, 2001,  however,  the payments  originally
due  October 1, 2001 and  November  1, 2001,  have been  extended to November 5,
2001,  and for those  payments,  the stock would be valued at the average of the
two lowest closing bid prices for October, 2001 less $0.25.                     

The purchase  warrants cover 959,501 shares of common stock and have an exercise
price of $1.801 per share, subject to adjustment. The exercise period extends to
May 24, 2006.                                                                   

The callable warrants cover 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 has 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.                 

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

The terms of the registration  rights  agreement with the investor  requires the
Company to register  approximately  two times the number of shares  necessary to
repay the  debentures  in  common  stock at the lower of the  market  price,  as
computed under the agreement, or the conversion price, plus the number of shares
underlying the warrants.                                                        

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FONAR CORPORATION AND SUBSIDIARIES    
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 14 - INCOME TAXES                                                          

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

                                2001            2000            1999
                                 --------        --------        ---------
Current:                                                      
    Federal                  $   -           $   -           $   -
        State and local            39,996          43,677          203,876
                                 --------        --------        ---------
                                   39,996          43,677          203,876
                                 --------        --------        ---------

Deferred:                                                     
         Federal                      -               -            (659,794)
         State and local              -               -            (134,000)
                                 --------        --------        ---------
                                      -               -            (793,794)
                                 --------        --------        ---------
           Totals                 $ 39,996        $ 43,677        $(589,918)
                                 ========        ========        =========

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

                                   2001            2000             1999
                                   -------        -------          -------
Taxes at federal statutory                                    
        Rate                       (34.0)%        (34.0)%          (34.0)%
State and local income                                        
taxes, net of federal                                     
      benefit                      0.3            0.4              0.3
    Permanent differences          0.7            1.1              0.8
Unutilized net operating                                      
      losses and tax credits      33.3           32.9             28.9
                                   -------        -------          -------
      Effective income tax rate      0.3 %          0.4%            (4.0)%
                                   =======        =======          =======

As of June 30,  2001,  the  Company  has net  operating  loss  carryforwards  of
approximately $52,392,000 that will be available to offset future taxable income
at  various  dates  through  June 2020.  Additionally,  for  federal  income tax
purposes,  the Company has research  and  development  tax credit  carryforwards
aggregating  $2,142,081,  which are accounted for under the flow-through method.
The tax credit carryforwards expire as follows:                                 

June 30:                      
-------                       
 2006               $  101,334
 2007                  258,200
 2008                  172,207
 2016                   70,145
 2017                  402,590
 2018                  432,195
 2019                  378,193
 2020                  327,217
                    ----------
                    $2,142,081
                    ==========

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 14 - INCOME TAXES (Continued)                                              

In addition,  for New York State income tax purposes, the Company has tax credit
carryforwards  aggregating  $1,070,000,   which  are  accounted  for  under  the
flow-through  method. The tax credit  carryforwards expire during the years 2007
to 2016.                                                                        

Significant  components,  tax effected, of the Company's deferred tax assets and
liabilities at June 30, 2001 and 2000 are as follows:                           

                                               2001             2000
                                              -----------      -----------
Deferred tax assets:                                          
        Allowance for doubtful accounts       $ 1,045,768      $ 1,022,807
        Non-deductible accruals                   772,072          621,067
        Net operating carryforwards            20,675,405        9,896,000
        Tax credits                             3,211,726        3,136,906
Inventory capitalization for                              
          tax purposes                             84,000           84,000
                                              -----------      -----------
                                               25,788,970       14,760,780
       Valuation allowance                     (24,393,453)     (13,924,203)
                                              -----------      -----------
      Net deferred tax assets                   1,395,517          836,577
                                              -----------      -----------

Deferred tax liabilities:                                     
        Fixed assets and depreciation             974,462          661,019
        Capitalized software costs                421,055          175,558
                                              -----------      -----------
      Gross deferred tax liabilities            1,395,517          836,577
                                              -----------      -----------
   Net deferred tax liabilities            $      -         $      -
                                              ===========      ===========

The net change in the valuation  allowance for deferred tax assets  increased by
approximately $10,469,000.                                                      

NOTE 15 - OTHER CURRENT LIABILITIES                                             

Included in other current liabilities are the following:                        

                                                2001            2000
                                               ----------       ----------

      Unearned revenue on service contracts    $  906,602       $  775,032
      Accrued bonuses                             397,012          729,546
      Accrued payroll taxes                       250,475          282,158
      Accrued interest                            140,309          259,224
      Accrued salaries and commissions            764,146          684,663
      Accrued professional fees                   224,882          653,102
      Litigation judgements                       268,091        2,440,037
      Excise and sales taxes                    2,655,678        1,847,805
      Other                                       568,562        1,109,362
                                               ----------       ----------
                                               $6,175,757       $8,780,929
                                               ==========       ==========

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

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.                    

Future minimum lease commitments consisted of the following at June 30, 2001:   

                              Facilities
Year Ended                                 and                
     June 30,                                Equipment         Capital
      ----------                              -----------      -----------
         2002                                 $ 2,949,273      $   730,801
         2003                                   2,628,258          591,688
         2004                                   2,383,492          312,611
         2005                                   1,563,482           18,432
      2006                                   1,505,441             -
   Thereafter                                5,143,688             -
                                              -----------      -----------
      Total minimum obligations               $16,173,634        1,653,532
                             ===========
Less: Amount representing                                     
               interest                                            (222,163)
                                                               -----------
Present value of net minimum                                  
        lease obligations                                      $ 1,431,369
                                                               ===========

Rent  expense for  operating  leases  approximated  $3,307,000,  $3,235,000  and
$3,266,000 for the three years ended June 30, 2001, 2000 and 1999, respectively.

Litigation                                                                      
----------                                                                      

On April 27,  2000,  Beal  Bank,  S.S.B.  filed a motion for  summary  judgement
against Melville Magnetic Resonance Imaging,  P.C. ("Melville Magnetic") and the
Company in a  litigation  in the New York Supreme  Court,  Suffolk  County.  The
summary judgement motion sought recovery of the principal, plus accrued interest
on a  promissory  note  executed  by Melville  Magnetic  and  guaranteed  by the
Company. The court subsequently granted Beal Bank's motion and entered judgement
against  Melville  Magnetic  and the Company in the amount of $1.4  million.  On
February 5, 2001,  the Company  paid the  judgement in full in order to stop the
accrual of  interest.  On February 6, 2001,  Melville  Magnetic  and the Company
filed an appeal  from the  judgement.  The Company  has  charged  back  Melville
Magnetic  $754,000  related to this  payment.  Such  amount is included in notes
receivable as of June 30, 2001. Included in accrued liabilities at June 30, 2000
was $650,000  related to this  judgement.  No additional  charge to earnings was
necessary for the year ended June 30, 2001.                                     

During  the  quarter  ended  March 31,  2001,  the  Company  settled  its Kivitz
judgement  litigation  for a payment of $1.225  million.  The full amount of the
judgement was accrued for as of June 30, 2000. No additional  charge to earnings
was necessary for the year ended June 30, 2001.                                 

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)                             

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  NMR
imaging  apparatus.  Royalty  expense  charged to operations for the years ended
June  30,  2001,  2000 and  1999  approximated  $33,000,  $36,000  and  $50,000,
respectively.                                                                   

The Company is self-insured with respect to product liability. During the fiscal
years ended June 30, 2001, 2000 and 1999, 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 March 20, 1998, an affiliate of HMCA entered into two  employment  agreements
with the former owners of A&A. Each agreement  provides for a base annual salary
of  $150,000  for the  first  five  years and  $315,000  per annum for each year
thereafter and shall be increased by 5% per annum up to a minimum base salary of
$500,000 per annum. Additionally, each agreement provides for a bonus commencing
in the sixth year of the contract, contingent upon meeting certain thresholds of
net income. The employment agreements expire fifteen years from March 20, 1998. 

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 Ended                         
June 30,                          
-----------                         
  2002                  $  600,000
  2003                     683,000
  2004                   1,097,000
  2005                   1,190,000
  2006                   1,220,000
Thereafter                2,613,000 
                        ----------
                        $7,403,000
                        ==========

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 16 - COMMITMENTS AND CONTINGENCIES (Continued)                             

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, 2001, 2000 and 1999.                                             

The  shareholders of the Company  approved the 2000 Employee Stock Purchase Plan
("ESPP") at the Company's annual  shareholders'  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, 2001.                                                                       

Letters of Credit                                                               
-----------------                                                               

At June  30,  2001,  the  Company  had  outstanding  letters  of  credit  with a
commercial  bank for  $390,000  for purposes of  collateralizing  the  Company's
obligation to a third party for the purchase of inventory.                      

In connection with various  operating leases for its operating  facilities,  the
Company is required to maintain standby letters of credit with a commercial bank
of approximately  $68,000 for purposes of collateralizing  future lease payments
under the respective lease agreements.                                          

NOTE 17 - OTHER INCOME (EXPENSE) AND SUPPLEMENTARY PROFIT AND LOSS DATA         

Other income (expense) consists of:                                             

                                  For the Years Ended June 30,
                              --------------------------------------------
                              2001             2000             1999
                              ----------       ----------       ----------
Other income                     $  101,725       $   93,425       $   32,950   
Gain on sale of subsidiary/                                                     
partnership interest              712,781        1,021,950             -    
Gain on settlement of                                                           
various legal disputes and                                                    
other claims                          -           3,540,000        1,618,169  
Gain on sale of property            150,000             -                -      
Litigation provision                  -                 -            (650,000)  
                              ----------       ----------       ----------
                              $  964,506       $4,655,375       $1,001,119
                              ==========       ==========       ==========

In October  1999,  the Company  sold the stock of its  subsidiary,  Medical SNI.
Medical  SNI,  based in Haifa,  Israel,  designs and  develops  products for the
medical  imaging and  archiving  industry.  The effects of the sale  include the
removal  of  liabilities  of  approximately  $1  million  and a  pretax  gain of
$1,021,950. The Company has a non-exclusive,  perpetual,  royalty-free worldwide
license to use and sublicense the then existing technology.                     

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 17 -  OTHER  INCOME  (EXPENSE)  AND  SUPPLEMENTARY  PROFIT  AND  LOSS  DATA
(Continued)                                                           

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 subsidiary,  Medical Specialties,  Inc.
and Diagnostic Services, Inc. for a promissory note for $50,000,  resulting in a
loss of $37,000.                                                                

Advertising expense approximated  $2,022,000,  $2,140,000 and $2,191,000 for the
years ended June 30, 2001, 2000 and 1999,  respectively.  Maintenance and repair
expenses totalled  approximately  $905,000,  $758,000 and $491,000 for the years
ended June 30, 2001, 2000 and 1999, respectively.  Royalty expenses approximated
$33,000,  $36,000 and $49,000 for the years ended June 30, 2001,  2000 and 1999,
respectively.  Amortization of intangible assets was  approximately  $1,427,000,
$1,433,000  and  $1,518,000  for the years ended June 30,  2001,  2000 and 1999,
respectively.                                                                   

NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION                                    

During  the  years  ended  June  30,  2001,  2000 and  1999,  the  Company  paid
$1,261,379,  $1,596,931 and $1,768,481  for interest,  respectively.  During the
years ended June 30, 2001, 2000 and 1999, the Company paid $39,997,  $20,144 and
$201,388 for income taxes, respectively.                                        

During the year ended June 30, 1999, the Company acquired the assets and assumed
the liabilities of various entities.  The transaction had the following non-cash
impact on the balance sheet:                                                    

Accounts receivable                      $1,900,000           
Equipment                                    60,000           
Intangibles                               9,356,067           
Accrued liabilities                       1,000,000           
Notes payable to sellers                 (9,388,572)          
Equity                                     (275,830)          
                              ----------
Net Cash Used for Acquisitions           $2,651,665           
                              ==========

Non-Cash Transactions                                                           
---------------------                                                           

During the year ended June 30, 2001:                                            

a)   The Company issued 415,976 shares of common stock for professional services
of $625,500.                                                          

b)   Property and  equipment,  costing  $636,504,  was acquired  under a capital
lease obligation.                                                     

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)                        

Non-Cash Transactions (continued)                                               
---------------------                                                           

c)   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.            

d)   The Company issued 923,482 shares of its common stock, valued at $1,632,980
for consulting services.                                              

e)   The Company issued 183,924 shares of its common stock,  valued at $344,839,
for research and development expenses.                                

f)   The Company  acquired  equipment of $176,480 under  equipment notes payable
obligations.                                                          

During the year ended June 30, 2000:                                            

a)   The Company issued 490,000 shares of common stock for professional services
of $742,372.                                                          

b)   Property and  equipment,  costing  $215,086,  was acquired  under a capital
lease obligation.                                                     

c)   In connection with the sale of its foreign subsidiary, the Company issued a
note payable aggregating $115,000.                                    

d)   The Company issued 19,332 shares of its common stock, valued at $61,753, in
     connection   with  the  repayment  of  long-term  debt  incurred  with  the
acquisition of Central.                                               

During the year ended June 30, 1999:                                            

a)   The Company issued 463,161 shares of common stock for professional services
of $664,656.                                                          

b)   Property and equipment  costing $741,663 was acquired under a capital lease
obligation.                                                           

c)   The  Company  sold  equipment  to  a  related  party  costing   $96,427  in
consideration of a note receivable aggregating $150,000.              

d)   The Company converted a current liability aggregating $303,000 to long-term
debt.                                                                 

e)   The Company issued 202,018 shares of its common stock valued at $275,830 in
connection with the acquisition of Central.                           

f)   The Company  issued  202,018 shares of its common stock valued at $275,837,
   pursuant to consulting contracts with the former shareholders of Central.

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 19 - GOVERNMENT REGULATIONS                                                

The  healthcare  industry is highly  regulated  by numerous  laws,  regulations,
approvals and  licensing  requirements  at the federal,  state and local levels.
Regulatory authorities have very broad discretion to interpret and enforce these
laws and  promulgate  corresponding  regulation.  The Company  believes that its
operations under agreements pursuant to which it is currently providing services
are in material compliance with these laws and regulations.  However,  there can
be no assurance that a court or regulatory authority will not determine that the
Company's  operations  (including  arrangements  with new or  existing  clients)
violate applicable laws or regulations.                                         

If the  Company's  interpretation  of  the  relevant  laws  and  regulations  is
inaccurate,  the Company's  business and its prospects  could be materially  and
adversely affected. The following are among the laws and regulations that affect
the Company's  operations  and  development  activities;  corporate  practice of
medicine; fee splitting; anti-referral laws; anti-kickback laws; certificates of
need,   regulation  of  diagnostic   imaging;   no-fault   insurance;   worker's
compensation; and proposed healthcare reform legislation.                       

NOTE 20 - 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, 2001 was $96,419.                                                           

Effective December 1, 1993, RVDC assigned its purchase option under the lease to
Daytona  Beach  Magnetic  Resonance  Imaging,   P.A.,  a  Florida   professional
association, of which Raymond V. Damadian is the sole shareholder,  director and
president  ("Daytona  Beach Center") and the Daytona Beach Center  exercised the
option and  purchased  the  scanner  from the  Company  for a purchase  price of
$1,416,717.  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  each,  commencing  May 1999.
During  fiscal 2001,  the Company took back the scanner in  satisfaction  of the
outstanding  indebtedness.  The Daytona  Beach Center then  purchased a new QUAD
scanner  under a  sales-type  lease from the  Company  for a  purchase  price of
$960,000,  which is payable with interest rate of 8.5% per annum,  in 59 monthly
payments of $11,903 each,  commencing  May 2001,  and one final  installment  of
$850,149.                                                                       

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 20 - ADVANCES AND NOTES TO RELATED PARTIES (Continued)                     

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 $2,959.50
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.              

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-computation  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.                                                                 

Pompano  MRI  Associates  ("Pompano"),  a joint  venture  partnership,  of which
Guardian MRI, Inc.  ("Guardian") 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 September 2001,  Pompano entered into an agreement to purchase a stand-up
MRI.  The  agreement  calls for a  purchase  price of $1.4  million  payable  as
follows: (1) $420,000 downpayment (received during September 2001); (2) $980,000
in progress payments to be received upon acceptance on completed sub-assemblies.
The Company will account for the sale under the percentage-of-completion method.
For the year ended June 30, 2001, revenue recognized was $-0-. Timothy Damadian,
the son of Raymond V.  Damadian,  is a  stockholder,  Director and  President of
Pompano.                                                                        

As at June 30, 2001 and 2000,  the aggregate  indebtedness  of  Specialties  and
Canarsie to the Company was $22,476 and $22,476, respectively, and the aggregate
indebtedness  of Guardian  and  Pompano to the Company was $18,550 and  $18,550,
respectively.                                                                   

During fiscal 2001, the Company entered into an agreement with  Tallahassee MRI,
PA, a Florida professional association, of which Raymond V. Damadian is the sole
stockholder, director and president, agreed to purchase a QUAD 12000 MRI scanner
recognizing,  on a  percentage-of-completion  basis,  revenue of  $379,485.  The
agreement  provides  for a  purchase  price  of  $975,000,  to be  payable  upon
acceptance of completed sub-assemblies.                                         

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 JUNE 30, 2001

NOTE 20 - ADVANCES AND NOTES TO RELATED PARTIES (Continued)                     

During fiscal 2001,  the Company  entered into an agreement with Damadian MRI in
Orlando P.A., a Florida professional  association,  of which Raymond V. Damadian
is the sole stockholder,  director and president to purchase a stand-up MRI. The
agreement calls for a purchase price of $1.350 million,  payable as follows: (1)
$405,000  downpayment  (received  during  June 2001);  (2)  $945,000 in progress
payments to be received upon acceptance on completed sub-assemblies. The Company
will account for the sale under the percentage-of-completion  method. As of June
30, 2001, revenue recognized was $-0-.                                          

During fiscal 2001,  the Company  entered into an agreement with Damadian MRI at
Islandia,  P.C.,  a New  York  professional  corporation,  of which  Raymond  V.
Damadian is the sole stockholder, director and president, to purchase a stand-up
MRI recognizing,  on a percentage-of-completion  basis, revenue of $116,959. The
agreement calls for a purchase price of $1.350 million,  payable as follows: (1)
$405,000  downpayment  (received  during  June 2001);  (2)  $945,000 in progress
payments to be received upon acceptance of completed sub-assemblies.            

During fiscal 2001,  the Company  entered into an agreement with Damadian MRI at
Elmhurst,  P.C.,  a New  York  professional  corporation,  of which  Raymond  V.
Damadian is the sole  stockholder,  director and president,  to purchase an Echo
MRI  scanner  recognizing,  on  a  percentage-of-completion  basis,  revenue  of
$399,180.  The agreement  calls for a purchase  price of $565,000,  payable upon
acceptance  of completed  sub-assemblies.  The Company will account for the sale
under the percentage-of-completion method.                                      

During fiscal 2001, the Company  entered into an agreement with Black Bear, LLC,
a New York limited liability company, to purchase a stand-up MRI recognizing, on
a percentage-of-completion basis, revenue of $216,449. The agreement calls for a
purchase  price of $1.4 million,  payable as follows:  (1) $280,000  downpayment
(received during April 2001); (2) $1,120,000 in progress payments to be received
upon acceptance of completed sub-assemblies.                                    

During  fiscal  2001,  the Company  entered  into an  agreement  with  Deerfield
Magnetic Resonance Imaging, P.A., a Florida professional  association,  of which
Raymond V. Damadian is the sole shareholder, director and president, to purchase
a new QUAD scanner  under a sales-type  lease for a purchase  price of $935,000,
which is payable with interest rate of 10.0% per annum, in 120 monthly  payments
of $12,356.09  each,  commencing  August 2000 the lessee can also elect to pay a
lump sum of $581,544 at the end of 60 months.                                   

During fiscal 2000,  the Company  entered into an agreement with Damadian MRI in
Garden City, a New York professional  corporation,  of which Raymond V. Damadian
is the sole shareholder,  director and president, to purchase a new QUAD scanner
under a sales-type lease for a purchase price of $935,000, which is payable with
interest rate of 10.0% per annum,  in 120 monthly  payments of $12,356.09  each,
commencing  August  2000 the lessee can also elect to pay a lump sum of $581,544
at the end of 60 months.                                                        

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 21 - 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:                                       

                               Physician
                 Medical        Management
                               Equipment        Services          Totals
                                -------------    ------------     ------------
Fiscal 2001:                                                                    

Net revenues from external                                                      
 customers                      $ 10,497,839     $ 31,775,462     $ 42,273,301
Intersegment net revenues        $  1,039,499     $      -         $  1,039,499 
Operating (loss) income          $(17,205,614)    $    990,997     $(16,214,617)
Depreciation and amortization    $  2,203,591     $  2,509,176     $  4,712,767 
Compensatory element of stock                                                   
 issuances                      $  1,684,136     $  2,360,690     $  4,044,826
Total identifiable assets        $ 45,938,960     $ 38,961,453     $ 84,900,413 
Capital expenditures             $  3,039,866     $  1,082,385     $  4,122,251 

Fiscal 2000:                                                                    

Net revenues from external                                                      
 customers                      $  5,971,064     $ 30,183,733     $ 36,154,797
Intersegment net revenues        $  1,227,075     $     -          $  1,227,075 
Operating (loss) income          $(17,984,534)    $  2,477,962     $(15,506,572)
Depreciation and amortization    $  1,817,547     $  2,638,529     $  4,456,076 
Compensatory element of stock                                                   
 issuances                      $    926,421     $  1,003,285     $  1,929,706
Total identifiable assets        $ 43,045,691     $ 41,367,346     $ 84,413,037 
Capital expenditures             $  2,081,551     $    940,795     $  3,022,346 

Fiscal 1999:                                                                    

Net revenues from external                                                      
 customers                      $  5,723,955     $ 27,565,089     $ 33,289,044
Intersegment net revenues        $    845,834     $       -        $    845,834 
Operating (loss) income          $(18,688,341)    $  3,122,286     $(15,566,055)
Depreciation and amortization    $  1,847,216     $  2,810,603     $  4,657,819 
Compensatory element of stock                                                   
 issuances                      $    190,851     $     84,391     $    275,242
Total identifiable assets        $ 56,310,557     $ 41,150,611     $ 97,461,168 
Capital expenditures             $  4,180,447     $  1,299,392     $  5,479,839 

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 21 - SEGMENT AND RELATED INFORMATION (Continued)                           

Export Sales                                                                    
------------                                                                    

The Company's  areas of operations are  principally in the United States.  There
are no export  sales for the year ended June 30,  2001.  The  Company had export
sales of  medical  equipment  amounting  to 2.8% and  3.4% of  consolidated  net
revenues for the years ended June 30, 2000 and 1999, respectively.              

The sales were made principally to the following locations:                     

                                 2001              2000             1999
                                 ------            ------           ------
     Spain                        -                2.8%             3.2%
    Saudi Arabia                 -                 -                .2
                                 ------            ------           ------
                                  - %              2.8%             3.4%
                                 ======            ======           ======

The Company does not have any material assets outside of the United States.     

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

Net revenues from related parties accounted for  approximately  78%, 86% and 83%
of the  consolidated  net revenues  for the years ended June 30, 2001,  2000 and
1999, respectively.                                                             

NOTE 22 - PROFORMA INFORMATION (UNAUDITED)                                      

The Company's consolidated financial statements for the year ended June 30, 1999
do not include the results of  operations of Dynamic for the period July 1, 1998
through August 20, 1998. The following summarizes the unaudited proforma results
of  operations  for the  years  ended  June  30,  1999  assuming  the  foregoing
acquisition had occurred on June 30, 1999 (in thousands, except per share data):

                                  1999
                                 -----------
                                 (Unaudited)
Revenue, net                       $   37,624   
Loss from operations               $  (15,447)  
Loss before income taxes           $  (14,344)  
Basic and diluted net loss                      
per share                             $(.22)

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FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2001

NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)                                  

    (000's omitted, except per share data)

                         Sept. 30,      Dec. 31,     March 31,    June 30,
Quarter Ended:                2000          2000          2001        2001      
--------------              ---------     ---------     ---------    --------   
Total Revenues - Net        $  9,091      $  9,946      $ 11,978     $11,259    
Total Costs and Expenses      13,090        13,904        14,804      16,690    
Loss from Operations          (3,999)       (3,958)       (2,826)     (5,432)   
Net Loss                      (3,907)       (3,014)       (2,801)     (5,422)   
Basic and Diluted                                                               
Net Loss Per Share        $  (0.06)     $  (0.04)     $  (0.04)    $ (0.08) 

                         Sept. 30,     Dec. 31,      March 31,    June 30,
Quarter Ended:                1999         1999           2000          2000    
--------------              ---------     ---------      --------    --------   

Total Revenues - Net        $  8,872      $  9,020       $ 8,927     $ 9,336    
Total Costs and Expenses      12,086        12,856        12,866      13,853    
Loss from Operations          (3,214)       (3,836)       (3,939)     (4,518)   
Net Loss                      (3,343)       (2,664)       (3,963)       (986)   
Basic and Diluted                                                               
Net Loss Per Share        $  (0.05)     $  (0.04)     $  (0.06)    $ (0.02) 

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ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE.                                         

 None.

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.          65   President, Chairman   
                                             of the Board and a Director

      David B. Terry                     54   Vice President and Secretary

Claudette J.V. Chan                64   Director              

Robert J. Janoff                   74   Director              

Charles N. O'Data                  65   Director              

     Raymond V. Damadian,  M.D. has been the Chairman of the Board and President
of FONAR since its inception.  Dr. Damadian was employed by the State University
of New York,  Downstate Medical Center,  New York, as an Associate  Professor of
Biophysics 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 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 the  brother-in-law  of Raymond V.  Damadian and
uncle of Timothy R. Damadian.                                                   

Claudette  J.V. Chan has been a Director of FONAR since October 1987.  Mrs. Chan
has been employed  since 1992 by 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.  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 and aunt of
Timothy R. 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 acts 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 valuates  the  financial  aspects of  educational
organizations.                                                                  

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 and Charles N. O'Data.                       

     There  is set  forth  in  the  following  Summary  Compensation  Table  the
compensation  provided by the Company during fiscal 2001 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 2001.                                                                    

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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. 2001  $86,799.96   -     -         -          -        -         -   
Damadian,  2000  $86,799.97   -     -         -          -        -         -   
CEO        1999  $86,799.96   -     -         -          -        -         -   
---------- ----  ---------- ----- -------  ---------- -------   -------  -------

II.  OPTION/SAR GRANTS IN LAST FISCAL YEAR                                      

                                                        [Enlarge/Download Table]

                                                               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                                   Grant      
             SARs       Employees    or Base                                     Date       
             Granted    in Fiscal    Price        Expiration                     Present    
Name         (#)        Year         ($/Sh)       Date         5% ($)   10% ($)  Value $    
----------   --------   ----------   ----------   ----------   ------   -------  --------   
                                                                                            
Raymond V.                                                                                  
Damadian,       0           -             -            -          -        -        -       
President                                                                                   
& CEO                                                                                       
-------------------------------------------------------------------------------             

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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)                
                                                  Value of
                                    Number of        Unexercised
Name         Shares Acquired    Value       Unexercised      In-the-Money       
      on Exercise (#)    Realized    Options/SARs     Options/SARs
                          ($)         at FY-End (#)    at FY-End ($)

                                     Exercisable/     Exercisable/
                                      Unexercisable    Unexercisable

---------------------------------------------------------------------------     

Raymond V.         0               -              0               -             
Damadian,                                                                       
President                                                                       
and CEO                                                                         

EMPLOYEE COMPENSATION PLANS                                                     

     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
permits the issuance of stock options  covering an aggregate of 1,500,000 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 1993 Stock Option Plan will
terminate on March 25, 2003.  As of June 30, 2001,  options to purchase  311,830
shares of Common Stock were available for future grant under the plan.          

     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,  2001,  options to
purchase  3,900,369  shares of Common Stock of FONAR were  available  for future
grant.                                                                          

     FONAR's  1997 Stock Bonus Plan,  adopted on May 9, 1997,  permits  FONAR to
issue an aggregate  of  5,000,000  shares of Common Stock of FONAR as a 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 1997 Stock Bonus Plan will  terminate on May 8, 2007. As of June
30, 2001, no shares of Common Stock of FONAR were available for future grant.   

     FONAR's 2000 Stock Bonus Plan, adopted on October 1, 2000, permits FONAR to
issue on  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 2000 Stock Bonus Plan will terminate on September 30, 2010. As of
June 30,  2001,  4,012,284  shares of Common Stock of FONAR were  available  for
future grant.                                                                   

     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, 2001,  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, 2001,  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, 2001,  options to purchase
100,000 shares of Common Stock were available for future grant.                 

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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 24, 2001.                     

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                 4.14%                 
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               50,000                   *                   
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            2,548,220                  4.24%                
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 6,286 shares of Common Stock held by an officer.

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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 of even date. 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.                                    

NEW 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 ("Management Agreements").                              

     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, 15
of the Centers  previously  managed by RVDC and three additional  Centers opened
after the acquisition, have Management Agreements with HMCA.                    

     With  respect to the  scanners at 9 of the 18  Centers,  the lease or sales
agreement  between RVDC (or the Center in some cases) and FONAR were terminated.
In substitution  for the previous  arrangements,  HMCA,  effective as of July 1,
1997,  entered into new scanner  leases  ("Scanner  Leases")  with these Centers
pursuant to which the scanners are provided to the Centers.                     

     The fees  payable to HMCA are on a per  procedure  basis,  which  currently
range from $250 to $760 per MRI scan.  These fees are  reviewed  and  subject to
adjustment on an annual basis by mutual  agreement.  The  agreements  have a one
year term which automatically  renews unless notice of termination is given. Dr.
Damadian is the owner of all of the Centers.                                    

     During  the fiscal  years  ended  June 30,  2001 and June 30,  2000 the net
revenues  received  by  HMCA  from  the  Centers  owned  by  Dr.  Damadian  were
approximately $14.8 million and $17.2 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.                                                     

     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 12000 MRI
scanner  from  FONAR for a purchase  price of  $960,000,  which is payable  with
interest a rate of 8.5% per annum in 59 monthly  payments of $11,902.62 each and
one final installment of $580,148.53.                                           

     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 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  $111,431.12  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 has been increased by an additional principal amount of
$10,000 per month to be applied toward the balance due.                         

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").  During the fiscal
year ended June 30, 2001,  the net  revenues  from the  Affordable  Professional
Corporations were approximately $2.9 million.                                   

ACQUISITION 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.  Concurrently  with the  acquisition,  Raymond  V.  Damadian
purchased the four New York  professional  service  corporations  under contract
with A & A Services (the "A & A Professional  Corporations").  During the fiscal
year  ended  June  30,  2001,  the  net  revenues  from  the A & A  Professional
Corporations were $3.1 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, 2001, the net revenues from the Dynamic  Professional
Corporations were $8.0 million.                                                 

     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  Yonkers,  Elmont,  Elmhurst  and
Riverdale,  New York.  During the  fiscal  year  ended  June 30,  2001,  the net
revenues from Superior were $5.1 million.                                       

     The  agreements  with  the  A&A  Professional  Corporations,   the  Dynamic
Professional  Corporations and Superior provide for fixed monthly fees which are
adjusted  annually.  Historically,  the  adjustments  have  been on the basis of
changes in HMCA's costs plus a percentage. Currently, the monthly fees under the
agreement range from approximately $53,850 to $272,500.  These agreements have a
term of twenty years.                                                           

     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. The partnership is also party to a service agreement
with the  Company.  The current  annual rate is $50,000 for the one year service
contract from July 1, 2001 to July 30, 2002. The rate in effect during the prior
year was also $50,000.                                                          

     Pursuant to an agreement  dated  September 30, 1993, AMD sold its interests
in a  partnership  operating an MRI  scanning  center in  Melbourne,  Florida to
Melbourne  Magnetic Resonance Imaging,  P.A. (the "Melbourne  Facility"),  for a
purchase price of $150,000.  The purchase price is payable, with interest at 10%
per  annum,  over a period of fifteen  months  commencing  September  1, 1995 as
follows:  $13,500 per month for the first fourteen  months and $1,185.60 for the
fifteenth month. The Melbourne Facility is a Florida professional corporation of
which Raymond V. Damadian is the sole stockholder,  director and President.  The
partnership is presently inactive.                                              

     Pursuant to an agreement  dated September 30, 1993, AMD sold to Dade County
MRI,  P.A. its  interests in a  partnership  which had formerly  operated an MRI
scanning  center in Miami,  Florida.  The purchase price of $100,000 is payable,
with  interest  at  10%  per  annum,in  sixty  (60)  equal  consecutive  monthly
installments  of  principal  and  interest   (including  interest  accrued  from
September 30, 1993),  commencing 90 days after the scanner is placed in service.
The  partnership  is  presently  inactive.  Dade County  MRI,  P.A. is a Florida
professional  association of which Raymond V. Damadian is the sole  stockholder,
director and President. This indebtedness has been written off by the Company as
uncollectable.                                                                  

     Pursuant to a sales  agreement dated April 1, 1996, RVDC agreed to purchase
an  MRI  scanner  with  certain  upgrades  from  the  Company  which  RVDC  then
contributed  to  Orlando  MRI  Associates,  Limited  Partnership  (the  "Orlando
Partnership"),  a limited partnership.  The Orlando Partnership is utilizing the
scanner at a site located in Orlando,  Florida. The sales agreement provides for
a purchase price of $400,000  payable in  installments  as follows:  (1) $40,000
down payment within thirty (30) days of execution and (2) $360,000 in 84 monthly
installments  of $5,611.04 each (inclusive of interest at 8% per annum) pursuant
to a  promissory  note  executed by RVDC upon  acceptance  of the  scanner.  The
Orlando  Partnership  is party to a service  agreement  for its scanner with the
Company at an annual fee of $50,000  for the period  from April 8, 2001  through
April 7, 2002. The price in effect for the prior year was also $50,000.  Timothy
Damadian, the son of Raymond V. Damadian, is a limited partner in Orlando.      

     Pursuant to an agreement  dated March 1, 1999,  Dublin  Magnetic  Resonance
Imaging, P.C., ("Dublin"),  a Georgia professional  corporation which Raymond V.
Damadian is the sole stockholder, director and President, agreed to lease a used
Fonar Beta 3000M  Mobile MRI  Scanner  from the  Company at a monthly  rental of
$4,840.08  commencing on September 1, 1999 and continuing  for  thirty-six  (36)
months.  At the  conclusion  of the lease period  Dublin will have the option to
purchase the scanner for a price of $1.00.                                      

     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 12000 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 may elect to purchase the scanner for  $581,544.42  or extend the lease for
an additional five year period at the same monthly rental.  If the lease term is
extended,  then Garden City will have the option to purchase  the scanner at the
end of the second  five year period for a purchase  price of $1.00.  The term of
the lease  commenced on June 12, 2000 upon  acceptance of the scanner.  Payments
are due on the twelfth of the month commencing June 12, 2000.                   

     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 12000 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, Deerfield may elect to purchase the scanner for $581,544.42 or extend
the lease for an additional five year period at the same monthly rental.  If the
lease term is  extended,  then  Deerfield  will have the option to purchase  the
scanner at the end of the second five year period for a purchase price of $1.00.
The term of the lease  commenced  on July 18,  2000 upon the  acceptance  of the
scanner. Lease payments are due on the first of the month,  commencing August 1,
2000.                                                                           

     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 $70,000 for the
period from  September  1, 2001  through  August 31,  2002.  The price in effect
during  the prior  year was also  $70,000.  In  addition,  during  fiscal  2001,
Canarsie  entered  into an  agreement  to purchase a QUAD 12000 MRI scanner from
FONAR for a purchase price of $850,000.  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, is party to a service agreement for
its  scanner  with the  Company at an annual fee of $70,000  for the period from
October 1, 2000 through September 30, 2001. The price in effect during the prior
year was also $70,000. In addition,  during fiscal 2002, Pompano entered into an
agreement to purchase a Stand-Up MRI scanner from FONAR for a purchase  price of
$1,400,000.  Timothy Damadian, the son of Raymond V. Damadian, is a stockholder,
director and officer of Guardian.                                               

     During  fiscal  2001,  Tallahassee  MRI,  P.A.  ("Tallahassee"),  a Florida
professional  association of which Raymond V. Damadian is the sole  stockholder,
director and  President,  agreed to purchase a QUAD 12000 MRI scanner from FONAR
for a purchase price of $975,000.                                               

     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,  agreed to purchase a Stand-Up MRI scanner
from FONAR for a purchase price of $1,350,000.                                  

     During fiscal 2001, Damadian MRI at Islandia,  P.C. ("Islandia") a New York
professional  corporation of which Raymond V. Damadian is the sole  stockholder,
director and President, agreed to purchase a Stand-Up MRI scanner from FONAR for
a purchase price of $1,350,000.                                                 

     During fiscal 2001, 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 purchase an Echo MRI scanner from FONAR for a
purchase price of $565,000.                                                     

     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  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.                                                               

     As at June 30,  2001,  the  indebtedness  of  Canarsie  to the  Company was
$22,476 and the aggregate indebtedness of Pompano to the Company was $18,550.   

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PART IV                                                                         

ITEM 14.  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.                                                               

Report of Independent Certified Public Accountants.                   

Consolidated Balance Sheets as at June 30, 2001 and 2000.             

     Consolidated  Statements of  Operations  for the Three Years Ended June 30,
2001, 2000 and 1999.                                                  

     Consolidated  Statements of Stockholders'  Equity for the Three Years Ended
June 30, 2001, 2000 and 1999.                                         

     Consolidated  Statements  of Cash Flows for the Three  Years Ended June 30,
2001, 2000 and 1999.                                                  

Notes to Consolidated Financial Statements.                           

     Schedule II  Valuation  and  Qualifying  Accounts for the Three Years Ended
June 30, 2001, 2000 and 1999 follows:                                 

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FONAR CORPORATION AND SUBSIDIARIES

 SCHEDULE II
 VALUATION AND QUALIFYING ACCOUNTS

                                                        [Enlarge/Download Table]


                                     Balance                                    Balance    
Description                       June 30, 1998       Additions   Deductions  June 30, 1999
-----------                       -------------  ---------------  ----------  -------------
                                                                                           
Receivables from equipment sales                                                           
  and service contracts           $   789,749                     $    1,000  $    788,749 
Receivables from medical                                                                   
  Services                               -                  -           -             -    
Receivables from related PC's            -       (1) $   628,836     628,836          -    
Advance and notes to related                                                               
  Parties                             904,000                                      904,000 
Notes receivable                      477,456                                      477,456 

                                                        [Enlarge/Download Table]

                                     Balance                                    Balance    
Description                       June 30, 1999       Additions   Deductions  June 30, 2000
-----------                       -------------  ---------------  ----------  -------------
                                                                                           
Receivables from equipment sales                                                           
  and service contracts           $   788,749                     $      418  $    788,331 
Receivables from medical                                                                   
  Services                               -                  -           -             -    
Receivables from related PC's            -       (1)     177,162      23,430       153,732 
Advance and notes to related                                                               
  Parties                             904,000                                      904,000 
Notes receivable                      477,456                                      477,456 

                                                        [Enlarge/Download Table]

                                     Balance                                    Balance    
Description                       June 30, 2000       Additions   Deductions  June 30, 2001
-----------                       -------------  ---------------  ----------  -------------
                                                                                           
Receivables from equipment sales                                                           
  and service contracts           $   788,331    (1) $   245,000  $     -      $ 1,033,331 
Receivables from medical                                                                   
  Services                               -                  -           -             -    
Receivables from related PC's         153,732    (1)     387,505       2,940       538,297 
Advance and notes to related                                                               
  Parties                             904,000    (1)     287,456     875,421       316,035 
Notes receivable                      477,456    (1)        -        477,456          -    

(1)  Included in bad debt expense                                               

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 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.                                 

21. Subsidiaries of the Registrant. See Exhibits.                     

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SIGNATURES

     Pursuant  to the  requirements  of Section  13 or 15 (d) of the  Securities
Exchange Act of 1934,  the  registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.             

 FONAR CORPORATION

Dated: October 30, 2001                                                         

        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                 October 30, 2001
Raymond V. Damadian             Board of Directors,                             
President and a 
   Director (Principal
  Executive Officer)

/s/ Claudette J.V. Chan         Director                        October 30, 2001
Claudette J.V. Chan                                                             

/s/ Robert J. Janoff            Director                        October 30, 2001
Robert J. Janoff                                                                

/s/ Charles N. O'Data           Director                        October 30, 2001
Charles N. O'Data                                                               

DEF 14A
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 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                                                                        

Grassi & Co., CPAs, P.C.                                                        
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                                                        

Officers                                                                        

Raymond V. Damadian, M.D.                                                       
President, Chief Executive Officer and Treasurer                                

David B. Terry                                                                  
Vice President of Administration and Secretary                                  

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘DEF 14A’ Filing		Date		First		Last			Other Filings
		11/25/18		9
		9/30/10		50		71			10-Q,  8-K,  NT 10-Q
		12/15/08		48		71
		6/30/07		14					10-K,  8-K,  NT 10-K
		5/8/07		71
		3/31/07		50					10-Q,  8-K,  NT 10-Q
		3/9/07		48		71
		5/24/06		55
		6/30/05		59					10-K,  10-K/A,  8-K,  DEF 14A,  NT 10-K
		6/23/04		9
		5/24/04		55
		3/25/03		71
		3/20/03		51
		10/1/02		53					NT 10-K
		8/31/02		73
		7/30/02		73
For Period End:		6/30/02		2		54			10-K,  NT 10-K
Changed as of / Corrected on:		6/21/02
		6/17/02		2		4
Filed on:		5/22/02
		5/15/02		4		5
		5/1/02		3		4
		4/11/02		4
		4/7/02		73
		4/1/02		5
		1/10/02		5
		12/31/01		5					10-Q,  NT 10-Q
		11/5/01		55
		11/1/01		55
		10/30/01		76					10-K/A,  S-3/A
		10/25/01		16		55
		10/1/01		55
		9/30/01		73
		9/28/01		16					10-K/A,  NT 10-K,  S-3/A
		9/24/01		72
		9/20/01		7		11
		9/1/01		73
		7/2/01		53
		7/1/01		9		73
		6/30/01		4		75			10-K,  10-K/A,  NT 10-K,  NTN 10Q
		5/24/01		35		54
		4/8/01		73
		3/31/01		58					10-Q,  10-Q/A
		2/6/01		58
		2/5/01		58
		12/20/00		52
		10/1/00		50		73
		8/20/00		52
		8/9/00		9
		8/1/00		73
		7/18/00		73
		7/1/00		9
		6/30/00		5		75			10-K,  10-K/A,  10-Q
		6/12/00		73
		4/27/00		58
		3/16/00		9
		2/1/00		73
		12/1/99		73
		9/1/99		73
		8/20/99		51
		6/30/99		8		75			10-K,  NT 10-K
		3/20/99		51
		3/1/99		73
		12/16/98		48		71
		12/15/98		48
		9/3/98		75
		8/20/98		9		75			8-K,  8-K/A
		7/1/98		35		67
		6/30/98		25		75			10-K,  NT 10-K
		4/20/98		38		51
		3/20/98		9		75			8-K,  8-K/A
		1/23/98		38
		1/20/98		9
		7/31/97		75					8-K,  8-K/A
		7/1/97		4		73
		6/30/97		9		75			10-K,  8-K,  8-K/A,  NT 10-K
		6/27/97		75
		6/17/97		75
		5/9/97		50		71
		4/29/97		46
		3/10/97		48		71
		6/30/96		5		46			10-K,  NT 10-K
		6/4/96		53
		4/1/96		73
		10/20/95		46
		10/13/95		53
		9/1/95		73
		4/3/95		46
		6/30/94		73
		12/1/93		63		73
		9/30/93		73
		3/31/93		73
		3/26/93		71
		6/25/92		9
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