Fonar Corp – ‘DEF 14A’ for 4/30/01

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

 1: DEF 14A     Definitive Proxy Solicitation Material               117±   495K 

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 (S) 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 - April 30, 2001

 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,
Luciano Bonanni,  Timothy Damadian and David B. Terry, 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
April 30, 2001 at 10:00 a.m., local time, and at any adjournment(s) thereof, and
there to vote upon all matters  specified in the notice of said meeting,  as set
forth  herein,  and upon such other  business as may properly and lawfully  come
before the  meeting,  all shares of stock of the Company  which the  undersigned
would be entitled to vote if personally present at said meeting.                

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

No. 1.  ELECTION OF DIRECTORS                                                   

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

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

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

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, 2001.                   

   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:----------------------------, 2001

                                        ----------------------------------------
         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
April 30, 2001

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,
April 30, 2001, 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, 2001.                     

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

     Only  stockholders of record at the close of business on March 21, 2001 are
entitled to notice of, and to vote at, this meeting. A list of such stockholders
will be available for  examination by any stockholder for any purpose germane to
the meeting,  during  normal  business  hours,  at the  principal  office of the
Company, 110 Marcus Drive, Melville, New York, for a period of ten days prior to
the meeting.                                                                    

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

                                  BY ORDER OF THE BOARD OF DIRECTORS

                  /s/ David B. Terry
                                  David B. Terry, Vice President and
         Secretary

 PROXY STATEMENT FOR ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD APRIL 30, 2001

     This proxy  statement,  which is first being mailed to  shareholders  on or
about March 22, 2001,  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 April 30, 2001 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 March 21, 2001 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 February 22, 2001, there were  58,551,868.889
shares of Common  Stock held of record by 5,383  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  4,028
stockholders  at the close of business on February 22, 2001) 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                           

     Four  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 65) 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 63) 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 73) 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 64) 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.                                                              

     Luis E.  Todd,  M.D.  (age  65),  nominee  for  Director.  From 1963 to the
present,  Dr. Todd has been a professor of medicine at the School of Medicine of
the University of Nuevo Leon in Monterrey, Mexico. Previously, he also served as
President  of the  University,  from 1973 to 1979.  From  1997 to 2000 Dr.  Todd
served as an advisor and chairman of the education program for Vllacero Group, a
diversified  company in Monterrey,  Mexico,  whose  operations  include food and
steel, and from 1992 to 1996 he served as the Mexican  Ambassador to UNESCO. Dr.
Todd's  public  service also included the positions of Director of Public Health
in the state of Nuevo Leon (1979 - 1982),  Secretary  of Education of Nuevo Leon
(1982 - 1985),  Undersecretary  and Minister of Higher  Education in the Mexican
Federal  Government  (1989 - 1992) and member of the  Mexican  Congress  (1982 -
1985) where he served as President of the  Committee on Science and  Technology.
He graduated from the School of Medicine of the University of Nuevo Leon in 1960
and did  postgraduate  work in the  United  States at  Cornell,  Washington  and
Georgetown Universities. Dr. Todd has also published numerous articles and books
in the fields of medicine, science and economics.                               

     David B. Terry (52) 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.                    

     The  Company's  Board  of  Directors  has an audit  committee.  There is no
standing  compensation  committee or  nominating  committee.  Drs.  Damadian and
Messrs.  Janoff  and O'Data  serve on the audit  committee.  Messrs.  Janoff and
O'Data are independent  directors,  as defined in the Nasdaq  Marketplace Rules.
Dr.  Damadian  is not  independent  by reason of the fact that he is an officer,
employee and principal stockholder of the Company.                              

     During  the year  ended June 30,  2000 the Board of  Directors  unanimously
consented to action in lieu of a meeting on four occasions.                     

     In accordance with the Nasdaq Marketplace Rules, the Board of Directors has
adopted a written  charter  for the audit  committee  which will take  effect in
June,  2001.  A copy of the  charter  is  included  as  Appendix A to this proxy
statement.  Under the  Marketplace  Rules and new charter,  all directors on the
audit committee will be required to be independent.  Commencing at that time the
audit  committee  will  consist of Mr.  O'Data,  Mr.  Janoff and Dr.  Todd.  Dr.
Damadian will no longer be eligible to serve on the committee  because he is the
President, Chief Executive Officer and principal stockholder of the Company.    

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

VOTE REQUIRED AND BOARD RECOMMENDATION                                          

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

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

     The  following  table  sets  forth  information  regarding  the  beneficial
ownership of the  Company's  common  shares by the nominees for  directors,  the
Company's Chief Executive Officer, and the directors and executive officers as a
group as of September 6, 2000.                                                  

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                  4.39%    
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                    *      

Luis E. Todd                                                                    
Nominee for Director                                                            
Common Stock                                0                     0%    

All Officers, Directors and Nominees                                            
as a Group (7 persons) (2)                                                      
Common Stock                        2,522,469                  4.45%    
Class C Stock                       9,561,174                 99.98%    
Class A Preferred                     492,744                  6.29%    
*   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.

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,  2000
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 2000 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, 2000 by the Company's Chief Executive Officer.                   

              Annual Compensation    Long-Term
Name and                       -------------------    Compensation   All Other  
Principal Position      Year     Salary      Other       Awards     Compensation
----------------------  ----   ----------    -----    ------------  ------------

Raymond V. Damadian     2000   $86,799.97      0           0             0      

Chairman of the Board;  1999   $86,799.96      0           0             0      
President; Chief                                                                
Executive Officer;      1998   $84,218.10      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 2000.                                     

Option/SAR Exercises and Year End Values                                        

     No options or stock  appreciation  rights were  exercised by the  Company's
Chief  Executive  Officer  during  fiscal 2000.  The Company's  Chief  Executive
Officer did not hold any unexercised stock options or stock appreciation  rights
at the end of fiscal 2000.                                                      

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, 1994 and ending on December 31, 2000 (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, 1994.
The stock price performance on the graph below is not necessarily  indicative of
future price performance.                                                       

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(PERFORMANCE GRAPH APPEARS HERE)                                                

                                                                [Download Table]


  Relative Dollar Values                                                           

                     6/30/95  6/30/96  6/30/97  6/30/98  6/30/99  6/30/00  12/31/00
                     -------  -------  -------  -------  -------  -------  --------
                                                                                   
Fonar Common Stock   $100.00   $85.42   $97.92   $82.50   $43.79   $71.27    $45.27
NASDAQ               $100.00  $128.38  $156.13  $205.52  $295.66  $437.09   $269.54
NAS-MDM              $100.00  $123.59  $119.24  $138.80  $185.65  $213.78   $187.40
NAS-Hea.             $100.00  $152.32  $140.75  $137.13  $129.05   $99.58   $128.71


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,  2001.  The
stockholders will be asked to ratify this action by the Board.                  

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

     One or more  representatives of 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.           

PROPOSALS OF STOCKHOLDERS                                                       

     Proposals  of  stockholders  intended  to be  presented  at the 2002 annual
meeting of  stockholders  must be received by the Company no later than December
3,  2001 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, March 22, 2001                                      

A COPY OF THE  COMPANY'S  FORM 10-K  REPORT  FOR FISCAL  YEAR  2000,  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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APPENDIX A

 CHARTER FOR AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS OF
 FONAR CORPORATION

     1.  Purpose.  The  purpose  of the Audit  Committee  shall be to assure the
Company's  continuing  compliance  with all  rules,  regulations  and  standards
applicable to its financial reporting requirements, including but not limited to
Regulation S-X and generally  accepted  accounting  principles as in effect from
time to time.                                                                   

     2.  Composition.  The Audit Committee shall consist of three (3) members of
the  Board of  Directors,  each of whom  shall  be an  independent  director.  A
director will not be  considered  independent  if among other things,  he or she
has:                                                                            

          a.   been employed by the Company or its  affiliates in the current or
past three years;                                 

          b.   accepted any  compensation  from the Company or its affiliates in
               excess of $60,000  during the  previous  fiscal year  (except for
               board service,  retirement  plan benefits,  or  non-discretionary
compensation);                                    

          c.   an immediate  family member who is, or has been in the past three
               years  employed by the Company or its  affiliates as an executive
               officer; been a partner,  controlling shareholder or an executive
               officer of any for-profit  business to which the Company made, or
               from which it  received  payments  (other  than those which arise
               solely from investments in the Company's  securities) that exceed
               five percent of the  organization's  consolidated  gross revenues
               for that year, or $200,000, whichever is more, in any of the past
three years; or                                   

          d.   been employed as an executive of another  entity where any of the
               company's   executives   serve  on  that  entity's   compensation
committee.                                        

3. Responsibilities. The Audit Committee shall be responsible for:    

          a.   Supervising the preparation of the Company's quarterly and annual
               financial statements and assuring that the reports are filed with
               the  Securities  and Exchange  Commission  and NASDAQ on a timely
basis.                                            

          b.   Reviewing  from  time  to  time  as  appropriate  the  accounting
            principles adopted by the Company and the application thereof.

          c.   Supervising  and  reviewing  the  coordination  of the  Company's
               accounting  and  other  departments  and the  procedures  for the
               provision of necessary information and documents to the Company's
accounting department.                            

          d.   Reviewing the  maintenance  of  appropriate  financial  books and
records.                                          

          e.   Consultation  with and review of the performance of the Company's
independent certified public accountants.         

          f.   Consultation  with and review of the performance of the Company's
accounting personnel.                             

4. Authority. The Audit Committee shall be authorized and directed to:

          a.   Have  access to the  Company's  financial  books and  records and
other relevant information.                       

          b.   Have access to the Company's  internal  accounting  personnel and
independent certified public accountants.         

          c.   Make recommendations and reports to the entire Board of Directors
               and to the  President  and the  Chief  Financial  Officer  of the
               Company  concerning the matters for which the Audit  Committee is
               responsible  as set forth in Section 3 of this  Charter,  at such
               times and on a  periodic  basis as the Audit  Committee  may from
time to time determine.                           

          d.   To provide a comprehensive  annual report respecting such matters
               to the entire  Board of  Directors  and the  President  and Chief
Financial Officer of the Company.                 

          e.   To review all periodic financial  statements and reports required
               to be filed  with the  Securities  and  Exchange  Commission  and
NASDAQ.                                           

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2000 ANNUAL REPORT

 FONAR CORPORATION

PRESIDENT'S MESSAGE                                                             

To Our Stockholders:                                                            

     I will begin by stating that I am very optimistic about the future of FONAR
Corporation.  The quality, variety and uniqueness of our products; the needs and
direction  of the MRI  marketplace;  the  unprecedented  readiness of our sales,
marketing,  manufacturing and customer service organizations; and the proven R&D
capability to generate  innovation after innovation make me extremely  confident
that FONAR is in excellent position for years to come. Allow me to elaborate:   

     FONAR is the only MRI manufacturer that offers a full line of MRI products,
the FONAR Seven.  Among them,  the product that has  generated an  extraordinary
amount of interest among potential customers and the product that I feel has the
greatest sales  potential for FONAR is  Indomitable(TM),  the Stand-Up  MRI(TM).
This  product is literally in a class of its own since it is the only MRI in the
world that can perform  positional MRI (pMRI),  i.e. the Stand-Up  MRI(TM) scans
patients in upright,  weight-bearing  positions, in addition to the conventional
lie-down  positions.  The Stand-Up is the only MRI that can scan patients in the
position their symptoms occur, in their position of pain.                       

     We were excited in 1996 when we first  introduced the concept of a Stand-Up
MRI(TM)  at the  annual  meeting of the  Radiological  Society of North  America
(RSNA).  Since  then our  excitement  has not waned but  intensified  as FONAR's
dedicated team has tirelessly  transformed a great idea into a great product. As
evidenced by the events of this past year,  we at FONAR aren't the only ones who
think our Stand-Up MRI(TM) is a great idea:                                     

     In August 2000,  General Electric Medical Systems and FONAR agreed that the
only MRI scanner designed for full-body,  weight-bearing MRI that GE will market
and sell is FONAR's Stand-Up MRI(TM).  This sets in motion a marketing  strategy
that I believe will be of great benefit to both companies.                      

     Early  clinical  reports   independently   confirm  the  effectiveness  and
potential of positional MRI. Among them are the results of Randy Jinkins,  M.D.,
a world-renowned  author and researcher in the field of  spine-related  imaging.
Dr. Jinkins used Indomitable(TM) to compare MRI studies of patients in recumbent
(lie-down)   positions   with  MRI  scans  of  the  same  patients  in  upright,
weight-bearing positions. He reported at the American Society of Spine Radiology
(ASSR) Symposium in Florida (February,  2001), "I will not be able to completely
trust the spine  images  from a  recumbent-only  MRI again."  Other  encouraging
results came from a leading  neuroscience team from the University of Niigata in
Japan.  The team provided  independent  objective  corroboration of the power of
upright MRI.  Experimenting  with two magnets,  one upright and one  horizontal,
they  reported  at RSNA 2000,  "Vertical  imaging  systems  are likely to be the
method of choice for non-invasive imaging analysis of the brain..."             

     The need for upright MRI was  dramatically  underscored by an experience of
one  patient.  Conventional  horizontal  MRI exams of an Alabama,  auto-accident
victim suffering with severe,  unremitting  lower back pain were  insufficiently
revealing  to convince his  attending  physicians  that  surgery  would help the
patient  and relieve  his pain.  During this past year,  the patient was scanned
standing up on  Indomitable(TM) at FONAR headquarters in New York. For the first
time,  the surgeon could see pathology  that was not visible on the other scans.
The surgery was performed because of the upright MRI scans and today the patient
is free of the pain he had suffered without relief for two years.               

     In October 2000, we were delighted to receive word from the FDA that we had
been granted permission to market Indomitable(TM).  We took our first two orders
before the close of the  calendar  year;  Indomitable(TM)  was  enthusiastically
received  at RSNA  2000;  the first  installation  is near  completion;  and the
manufacturing  department  has  been  geared  for  large-scale  production.  The
Stand-Up MRI(TM) is beginning to make its mark in the MRI marketplace.          

     Other  FONAR  products  include the  Echo(TM),  a compact,  whole-body  MRI
designed to sell at a low price;  the  QUAD(TM)  12000,  the  Company's  premier
four-post, 0.6 Tesla Open MRI; and the FONAR 360(0) (TM).  Cleared-for-marketing
by the  FDA in  March  2000,  the  "no-post"  FONAR  360(0)  (TM)  in its  fully
landscaped  "open sky"  configuration  is the most open of all open MRIs. In its
future  "interventional  360(0)"  configuration,  this  scanner will be used for
MRI-guided interventions (The MRI Operating Room).                              

     FONAR's works-in-progress  scanners include the Pinnacle(TM),  a high-field
superconducting  Open MRI,  and the  mpExtremity  MRI(TM),  a small,  in-office,
weight-bearing MRI for extremities (arms, knees,  wrists,  etc.). No matter what
the MRI need of a potential customer, FONAR and only FONAR has a product to meet
that need.                                                                      

     We have  accomplished  a great deal over the past year.  In response to the
enthusiastic  interest in our  products,  FONAR has  established  its own direct
sales force to market our scanners across the nation. This sales force continues
to be expanded.  We completed the  transformation  of our production  department
into  a  state-of-the   art   manufacturing   facility  and  achieved  ISO  9001
Certification,  a highly prized and  internationally  recognized  designation in
regard to product  quality  and  standards  of  manufacturing  practices.  We've
fine-tuned the QUAD(TM)  12000,  which now boasts the largest  installed base of
high-field  Open MRI's.  We also  received  FDA  clearance  to market  three new
products.                                                                       

     Our tradition of extraordinary  R&D achievements has continued.  Among them
was the completion of the  development of  SymPulse(TM),  FONAR's new ultra-fast
MRI computer  operating  system.  Designed for the full FONAR Seven product line
and the installed base, this innovation has recently been  cleared-for-marketing
by the FDA. Based upon Windows NT and INTEL processors,  the extraordinary speed
and power of the system is  demonstrated  by its ability to guide MRI scans over
the  internet  from  remote  locations.  Designed  to readily  employ the latest
advancements in cutting-edge chip technology, it makes FONAR systems practically
obsolescence proof.                                                             

     The  Company  continues  to assert and protect  its  intellectual  property
rights. At this writing, 53 patents have been issued to FONAR and another 47 are
pending.                                                                        

     I am  pleased  to report  that  Health  Management  Corporation  of America
(HMCA), the Company's physician and diagnostic  services management  subsidiary,
continues to grow.  Last August,  desperate for room for growth,  HMCA moved its
operations  to  a  newly  constructed  facility  near  FONAR  headquarters.  The
subsidiary now manages 34 diagnostic centers and physician offices,  including a
year 2000 start-up medical office that is already  profitable.  During the year,
two diagnostic  imaging centers have been upgraded with FONAR QUAD(TM)  12000's,
one of which has already  doubled its scan  volume.  Other  upgrades  are on the
drawing board,  including the completion of the installation of a showcase FONAR
360(0) (TM) in the Company's diagnostic imaging center in Melville.             

     I think our  stockholders  should  know  that it is my view  that  FONAR is
entering  the most  exciting and  promising  time in the history of the company.
Over the past few years, the successful  protection of our intellectual property
has allowed us to invest for the long-term future of FONAR.  The  transformation
from the R&D mode to a full-scale MRI manufacturing  company is complete. We now
look  forward  to  reaching  our  goals  of  record  sales,   profitability  and
shareholder value. Thank you for staying with us. The best is yet to come.      

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, 2000

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 6, 2000,  56,678,153  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  54,125,684  shares of Common
Stock held by  non-affiliates  as of such date (based on the  closing  price per
share on September 6, 2000 as reported on the NASDAQ  System) was  approximately
$125.2 million. The other outstanding classes do not have a readily determinable
market value.                                                                   

 DOCUMENTS INCORPORATED BY REFERENCE
None

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 REASONS FOR AMENDMENT

         The reason for this amendment was to respond to a comment letter issued
by the Securities and Exchange  Commission in connection  with its review of the
registration  statement filed by Fonar in June 2000.  Included among the changes
are the following:                                                              

         In  Item  1,  Business,   additional  discussion  of  the  acquisitions
consummated  by Fonar's  subsidiary  Health  Management  Corporation  of America
("HMCA"), the conduct of business by HMCA and governmental  regulation affecting
the health care industry.                                                       

         In  Item  5,  Market  for   Registrant's   Common  Equity  and  Related
Stockholder  Matters,  specific  disclosure  that Fonar's stock is traded on the
Nasdaq SmallCap market.                                                         

         In Item 6, Selected Financial Data, a notation indicating the per share
information is both the basic and diluted number.                               

         In Item 7, Management's Discussion and Analysis of Financial Condition,
additional  comparative  computations,  the  interest  rate  on  Fonar's  credit
facility and discussion of the adequacy of the Company's capital resources.     

         In Item 8, Financial  Statements,  Note 2, disclosure that the accounts
of certain medical practices managed by HMCA which meet the criteria of Emerging
Issues  Task  Force  consensus  97-2  are   consolidated   with  Fonar  and  its
subsidiaries.                                                                   

         In Item 10, Directors and Executive Officers,  the amount of directors'
fees to which directors are entitled.                                           

         In Item 13, Certain Relationships and Related Transactions,  additional
information on certain transactions disclosed.                                  

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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 and  maintained  its
"open" design ever since.                                                       

       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.  In connection with its entry into this new line
of business,  HMCA has completed  five  acquisitions.  HMCA provides  management
services,   administrative  services,   office  space,  equipment,   repair  and
maintenance  service and clerical and other non-medical  personnel to physicians
and other medical providers, including diagnostic imaging centers.              

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

FORWARD LOOKING STATEMENTS.                                                     

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

RECENT DEVELOPMENTS AND OVERVIEW.                                               

       The Company's products and  works-in-progress  (dubbed the "Fonar Seven")
are intended to significantly improve the Company's  competitive  position.  The
Company's products are the Fonar 360(TM),  the "QUAD(TM)" series of MRI scanners
and the Echo(TM) MRI scanner.                                                   

       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  6000  gauss  iron  core
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 6000 gauss
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.                                                     

       The Company also  produces  the  "QUAD(TM)  7000," a MR scanner  which is
similar  in  design  to the QUAD  12000  but  utilizes  a  smaller  3,500  gauss
electromagnet. The less expensive QUAD 7000 offers an economical solution to the
rising cost of medicine.                                                        

       In  addition,  the  Company  offers a low  cost  open  MRI  scanner,  the
"Echo(TM)" operating at .3 Tesla field strength. The Company's current "works in
progress" include its "Stand-Up MRI", also called  "Indomitable(TM)",  a scanner
which will allow patients to be scanned while in weight-bearing  positions,  and
the "Pinnacle(TM)" which combines many of the features of the QUAD scanners with
a superconducting magnet. (See "Works in Progress".)                            

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

       As a result of these new products and other research and development, the
Company is  positioning  itself to  dramatically  increase sales and improve its
competitive position in the marketplace.                                        

       Following  a  two  and  a  half  year  period  of  intense  research  and
development  activity the Company is now in the process of turning its attention
from predominately research and development to predominantly sales.             

       The  Company   intends  to  increase  its  sales  force  and  is  seeking
experienced medical equipment salesmen and distributors  worldwide.  Among other
things  the  Company  also  intends  to  expand  its  website  to  a  full-scale
interactive  sales  desk for  reaching  new  customers  and  assisting  existing
customers.                                                                      

       The Company will also continue to actively seek to promote foreign sales.
The Company  believes  there are and will be  significant  market  opportunities
abroad, particularly in Asia and Eastern Europe.                                

       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 entered the physician and diagnostic  management  services  business
through the  consummation  of two  acquisitions,  effective  June 30, 1997. As a
result of these two acquisitions,  three additional acquisitions and the opening
of new facilities,  HMCA currently is managing 22 diagnostic imaging centers and
12 primary care and specialty medical practices located  principally in New York
State and Florida.                                                              

PRODUCTS                                                                        

       The  Company's  principal  products are the Fonar 360, the QUAD series of
MRI scanners and the Echo.                                                      

       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.      

       In its future  interventional  OR-360  version,  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.                         

       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 rf 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.       

       To increase  the number of  patients  who can be  scanned,  patients  are
rolled into the scanner room on a special  high-throughput  gurney. Once the bed
is anchored in position, it allows for full horizontal,  vertical and rotational
positioning   for   scanning   any  region  of  the  body.   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.  The QUAD(TM)  7000 is similar in design to the
QUAD 12000 but utilizes a smaller 3,500 gauss electromagnet.                    

       In  addition  to  the  patient  comfort,  increased  throughput  and  new
applications (such as MRI directed surgery and MRI mammography) 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   mammography   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   mammography   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 7000 and
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 extremely 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 1280-pixel, 20-up, high-resolution image monitor
with features such as electronic magnifying glass and real-time, continuous zoom
and pan.                                                                        

       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 2000,  sales of the Company's  QUAD scanners  accounted for
approximately  8.6% of the  Company's  total  revenues  and 66.5% of its medical
equipment  segment  revenues,  as  compared to 7% of total  revenues  and 40% of
medical  equipment  revenues during fiscal 1999. There were no sales of Ultimate
or Beta scanners in fiscal 2000 and only one sale of a Beta scanner (1% of total
revenues and 6.6% of medical equipment segment revenues) in fiscal 1999.        

       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.                   

       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                                                               

       The Company's  current "works in progress"  center around the development
of the Indomitable(TM) and Pinnacle scanners.  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.                    

       In  addition  there  is a need  for a  treatment  modality  that can deal
effectively with the diseased tissue once it has been detected.                 

       The Company's  Indomitable(TM)  scanner will allow patients to be scanned
while standing 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 at any angle.                   

       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  is  seeking  approval  from  the  FDA for  Indomitable  and
submitted an application on August 9, 2000.                                     

       The Company is also 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
patented iron-frame, vertical field magnet design with a superconducting magnet.

       The  Company is  negotiating  with  several  universities  to install and
commence clinical trials of its new products.  The Company is working with these
universities to jointly secure research funding for these products.             

PRODUCT MARKETING                                                               

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

       Following  a  two  and  a  half  year  period  of  intense  research  and
development  activity  to  develop  and  consolidate  the  features  of its  MRI
scanners,  the Company is now turning its attention from predominantly  research
and development to predominantly sales.                                         

       The  Company   intends  to  increase  its  sales  force  and  is  seeking
experienced medical equipment sales personnel and distributors. The Company will
conduct  domestic sales through its own sales  personnel and  independent  sales
representatives  and  distributors.  In foreign  markets,  the Company  plans to
expand its existing network of independent distributors.                        

       In  addition,  the  Company  plans to expand  its  website  to include an
interactive  "sales desk" for reaching  customers  and 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  2000 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.  Utilizing a 6000 gauss (0.6
Tesla field strength) iron core electromagnet,  the QUAD 12000 scanner magnet is
the highest field "open MRI" in the industry.                                   

       The  Company  also plans to direct its  marketing  efforts to meeting the
increasing  demand for low price MRI. To date, the increased  pressure for lower
scanning prices has come largely from preferred provider  organizations,  health
maintenance  organizations  and other  private  sector  group plans and stricter
insurance requirements, but government mandated health care reform is also under
consideration.                                                                  

       To meet this demand,  the Company has set competitive prices for the QUAD
12000 and QUAD 7000 scanners. In addition to reducing the health care provider's
equipment  cost,  the  QUAD  scanners'   improved  image  processing  speed  and
extra-bed(s)  option  (allowing  patients to be prepped while another  patent is
being scanned) would enable the provider to increase  patient volume and further
reduce per scan costs.                                                          

       The  reduced  per scan costs will  enable the Company to promote the QUAD
7000 in  particular  for  short  scan  procedures  such as MRI  mammograms.  MRI
mammograms have the advantage over traditional x-rays of involving no radiation,
and an MRI  breast  scan can be  taken in most  cases  through  ordinary  street
clothes without any painful compression.                                        

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

       The Company will also focus its  marketing  efforts on  Indomitable  (TM)
which when commercially available will be the first MRI scanner to enable images
and diagnoses to be made of a patient in the weight-bearing state.              

       The Company is  actively  seeking to promote  foreign  sales and has sold
scanners  in  various  foreign  countries.  Based on  indications  of  interest,
meetings,  sales trips abroad and  negotiations,  the Company is optimistic that
foreign sales will continue to be an important source of revenue.               

       The  Company   believes  there  are  and  will  be   significant   market
opportunities abroad, particularly in Asia and Eastern Europe.                  

       During  the  fiscal  year  ended  June 30,  2000,  2.8% of the  Company's
revenues  were  generated  by foreign  sales,  as  compared to 3.4% and 4.6% for
fiscal  1999  and  1998  respectively.  See  "Note 9 to  Notes  to  Consolidated
Financial  Statements" for the percentage of foreign sales as in relation to the
Company's total revenues.                                                       

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  $3.7 million in fiscal 1998, $3.1
million in fiscal 1999 and $2.8 million is fiscal 2000.  The decreases in fiscal
1999 and 2000 were principally the result of the retirement of old scanners.    

       The  Company  anticipates  that its new line of  scanners  will result in
significant  upgrades income in future fiscal years.  The potential for upgrades
income  originates in the exceptional  versatility  and  productivity of the MRI
technology. New medical uses for the technology are constantly being discovered.
Dramatic new features can often be added to the scanner by the implementation of
little more than  versatile  new software  packages.  For example,  new software
packages make  possible the  reformatting  of scanner  slices so that a stack of
slices  across the large bowel allow one to  reconstruct  the lumen of the bowel
and through  the use of  software  navigators  visually  carry out a  "fly-thru"
through the bowel searching for polyps and tumors. The procedure  eliminates the
unpleasant  intubation  of the bowel for routine  colonoscopy.  The procedure is
presently  operative  using a CT scanner and plans are  underway to adopt it for
MRI.  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 cine 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.                                                                  

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

RESEARCH AND DEVELOPMENT                                                        

       During  the  fiscal  year  ended  June 30,  2000,  the  Company  incurred
expenditures of $5,893,648  ($361,323 of which was  capitalized) on research and
development,  as  compared to  $6,647,555  (none of which was  capitalized)  and
$6,506,995  (none of which was  capitalized)  incurred  during the fiscal  years
ended June 30, 1999 and June 30, 1998, respectively.                            

       Research and development  activities have focused,  in large part, on the
development  of the new  Fonar 360 and  Indomitable  (TM) MRI  scanners  and the
continued  development  and  enhancement of the Company's QUAD MR scanners.  The
Fonar  360(OR  360 and Open Sky  MRI),  Indomitable  (TM) MRI and QUAD  scanners
involve  significant  software  and  hardware  development  as the new  products
represented  entirely new hardware design and architecture  requiring a complete
new  operating   software  system.  The  Company's  research  activity  includes
developing  a  multitude  of new  features  for the QUAD  series  scanners  made
possible by the QUAD's high speed processing power.                             

BACKLOG                                                                         

       The  Company's  backlog  of  unfilled  orders  at  September  1, 2000 was
approximately  $2.05 million,  as compared to $1.4 million at September 1, 1999.
Of these amounts, approximately $0.45 million and $0.35 million had been paid to
the Company as customer  advances as at September 1, 2000 and September 1, 1999,
respectively. Of the backlog amounts at September 1, 1999 and September 1, 2000,
none  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                                                            

       There  are  currently  numerous  patents  in effect  which  relate to the
technology and  components of the MRI scanners,  some of which are registered in
the name of the  Company  and  others  which are  registered  in the name of Dr.
Raymond V. Damadian, the President and principal stockholder of the Company. The
Company believes that these patents, and the know-how it developed, are material
to its business.                                                                

       Dr. Damadian has granted an exclusive  world-wide  license to the Company
to make, use and sell apparatus  covered by certain domestic and foreign patents
relating to his MRI  technology.  The license  continues until the expiration of
the last patent included  within the licensed  patent rights,  but is terminable
earlier,  at the option of Dr.  Damadian,  if he is removed from his position as
Chairman of the Board or President of the Company without his consent, or if any
stockholder or group of  stockholders  acting in concert  becomes the beneficial
owner of Company  securities  having  voting  power equal to or greater than the
voting  power  of  the   securities   held  directly  by  him,  his   executors,
administrators, successors or heirs. The agreement can also be terminated by Dr.
Damadian upon the  commission  of an act of  bankruptcy  by the Company.  If Dr.
Damadian  is unable to serve the  Company by reason of his death or  disability,
the license agreement will remain in effect. Only one patent,  which will expire
in October,  2000, remains subject to this license.  No royalties have been paid
to Dr. Damadian under this license.                                             

       One of the  patents,  issued in the name of Dr.  Damadian  and covered by
said license,  is 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.                                           

       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
47 patents  issued  and 32  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 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 the 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\; Picker International,  which is a Division of General
Electric Company PLC, of England;\ 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 5%.  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,  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
5%, 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                                                           

       Under the Medical Device Amendments of 1976 to the Federal Food, Drug and
Cosmetic  Act,  all  medical  devices  are  classified  by  the  Food  and  Drug
Administration  (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.  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.  On June 25,  1992,  the  Company
received FDA clearance to market the Ultimate Magnetic Resonance Imaging Scanner
as a Class II device. The Company received FDA clearance to market the QUAD 7000
in April 1995 and for the QUAD 12000 in November  1995.  On March 16, 2000,  the
Company  received  FDA approval to market the Fonar 360 for  diagnostic  imaging
(the Open Sky version).  On August 9, 2000, the Company applied for FDA approval
for the Stand-Up MRI. The Company  anticipates  that it will need additional FDA
approvals or clearances for the OR 360 version of the Fonar 360 and Pinnacle MRI
scanners.                                                                       

       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. The Company is subject to these  requirements and has received the
necessary  approvals.  In addition,  the Company  needs to obtain any  necessary
approvals from the appropriate  foreign  governmental  and other  authorities in
connection with its export sales.                                               

       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.                                                                          

       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.                                                                     

       The Company  obtains  approvals as necessary in connection with the sales
of its  products  in  foreign  countries.  In some  cases,  U.S.  Food  and Drug
Administration  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.

       Commencing  in fiscal 1998 export sales to most  European  countries  and
certain other  countries  have  required CE  certification  (essentially  safety
requirements for electrical products).  On May 25, 1999, the Company obtained CE
certification.  Previously,  on April 9, 1999,  the Company was approved for ISO
9001  Certification for its Quality  Management  System.  The Quality Management
System is applicable to the design, manufacture,  administration of installation
and servicing of magnetic resonance imaging scanner systems.                    

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.      

       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 these  transactions  with Dr. Damadian,  HMCA has acquired
the  business of  managing  19 MRI  scanning  centers.  Sixteen of the  scanning
centers are 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 is providing  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  40,000  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.               

       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  85,000 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.              

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.                                                             

       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.                

PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES                                    

       HMCA's services to the facilities it manages encompass  substantially all
of the facilities' operations. 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.                                                          

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

       In the case of  contracts  with the MRI  facilities,  fees are charged by
HMCA based on the number of  procedures  performed.  In the case of the physical
rehabilitation and medical practices,  flat fees are charged on a monthly basis.
Fees are subject to adjustment  on an annual basis,  but must be based on mutual
agreement.  Only one medical  practice,  located in Florida  where the corporate
practice of medicine is permitted, is owned by HMCA.                            

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.

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.  The  planned  introduction  of virtual
colonoscopy at one of the managed centers is considered by HMCA to be one of the
most promising new modalities.  The device is used with a CT scanner and enables
the physician to conduct a colonoscopy  without using any invasive  instruments.
If it proves  successful,  HMCA will  introduce it to other  managed  centers as
appropriate.                                                                    

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                                        

       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.    

       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.                                                                           

       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.                           

       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.                                                                           

       HMCA's  clients  generate  revenue  from  patients  covered  by  no-fault
insurance and workers' compensation programs. In the event that changes in these
laws  alter the fee  structures  or  methods  of  providing  service,  or impose
additional  or  different  requirements,  HMCA could be  required  to modify its
business  practices and services in ways that could be more costly to HMCA or in
ways that decrease the revenues which HMCA receives from its clients.           

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

EMPLOYEES                                                                       

       As of July 1, 2000,  the Company  employed 568 persons on a full-time and
part-time  basis. Of such employees,  13 were engaged in marketing and sales, 43
in research and development,  72 in prodution,  44 in customer support services,
356 in  administration  (including 201 on site at facilities and offices managed
by HMCA and 85 performing  billing,  collection and  transcription  services for
those  facilities)  and 40  professional  MRI  technicians on site at diagnostic
imaging centers managed by HMCA.                                                

ITEM 2.  PROPERTIES                                                             

       Fonar leases approximately  135,240 square feet of office and plant space
at its  principal  offices in Melville,  New York and at two other  locations in
Melville and Farmingdale,  New York at a current aggregate annual rental rate of
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                                                      

       In January 1998, the Company filed an action against Health South,  Inc.,
in the United States District Court for the Eastern  District of New York (Civil
Action  No.  CV-98-0679)  alleging  infringement  of the  Company's  Multi-Angle
Oblique Imaging Patent (U.S. Patent No.  4,871,966).  Health South, Inc. filed a
declaratory  judgment  counterclaim  for  non-infringement  and invalidity and a
third party claim against a  manufacturer  of certain of the scanners.  The case
was settled with the manufacturer in December,  1999 and with Health South, Inc.
in June, 2000.                                                                  

       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.           

 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 bid and
asked  prices  reported  in NASDAQ  System  for the  periods  shown.  The prices
represent  quotations  between  dealers  and do not  include  certain  mark-ups,
mark-downs or commissions, and do not necessarily represent actual transactions.

Fiscal Quarter                                      
                           Bid             Ask
                          High   Low      High   Low
                            ----   ----     ----   -----
July     -  September            1997   3.87   2.72     3.94   2.75             
October  -  December             1997   4.03   2.63     4.06   2.66             
January  -  March                1998   3.03   2.38     3.13   2.41             
April    -  June                 1998   2.72   1.94     2.75   2.00             
July     -  September            1998   2.47   1.25     2.50   1.31             
October  -  December             1998   1.97   0.97     2.00   1.00             
January  -  March                1999   1.72   1.19     1.78   1.22             
April    -  June                 1999   1.41   1.03     1.50   1.09             
July     -  September            1999   1.16   0.91     1.16   0.94             
October  -  December             1999   3.19   0.69     3.25   0.72             
January  -  March                2000   4.91   1.63     4.94   1.66             
April    -  June                 2000   3.31   1.00     4.00   1.50             
July     -  September 25         2000   3.44   1.50     3.47   1.81             

       On September 6, 1999, the Company had approximately 5,387 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  4,637
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                                                

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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,  2000.  This  consolidated  selected  financial  data should be read in
conjunction  with the consolidated  financial  statements of the Company and the
related notes included in Item 8 of this form. See "Management's  Discussion and
Analysis of Financial  Condition and Results of Operations"  for a discussion of
the Company's business plan.                                                    

                                                        [Enlarge/Download Table]


STATEMENT OF                                                                             
OPERATIONS                                                                               
                                 As of, or For the Period Ended June 30,                 

                      2000           1999            1998          1997          1996    
                  -----------    -----------    ------------   -----------   ----------- 
                                                                                         
Revenues          $39,073,797    $36,945,044    $ 27,554,357   $17,633,066   $13,915,725 

Cost of           $30,431,069    $29,391,682    $ 23,841,844   $18,428,574   $14,417,384 
revenues                                                                                 

Research and       $5,532,325    $ 6,647,555    $  6,506,995   $ 3,928,035  $  3,607,703 
Development                                                                              
Expenses                                                                                 

Net Income                                                                               
(loss)           $(10,955,987)  $(14,215,763)   $ (5,653,086)  $56,068,771  $(11,407,444)

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

Weighted           66,304,716     64,071,151      61,175,986    56,097,965    51,516,470 
average number                                                                           
Of shares                                                                                
outstanding *                                                                            

BALANCE SHEET                                                                            
DATA                                                                                     

Working                                                                                  
capital           $24,439,609    $37,863,029    $ 54,426,483 $  62,659,470   $(1,575,857)
(deficit)                                                                                

Total             $84,599,039    $97,648,168    $108,447,780 $ 106,690,561   $28,057,384 
assets                                                                                   

Long-term         $20,969,186    $24,821,834    $ 16,003,479  $  4,626,269   $ 4,204,935 
debt and                                                                                 
obligations                                                                              
under capital                                                                            
leases                                                                                   

Stockholders'     $51,284,758    $59,303,773     $72,572,486  $ 73,245,262   $11,412,629 
equity                                                                                   

* Adjusted for stock dividend of Class A Non-voting  Preferred Stock declared in
October, 1995.                                                                  

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

INTRODUCTION.                                                                   

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

       FONAR's  principal  MRI  products  are its Fonar  360,  QUAD and Echo MRI
scanners.  Fonar also  considers it Stand-Up MRI  ("Indomitable(TM)")  which has
been  submitted to the FDA for  approval,  to be one of its most  promising  new
products.  The Company  believes it is in a position  to  aggressively  seek new
sales. 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. The Company expects vigorous
sales from its new  products.  Fonar also  offers the Echo,  a low cost open MRI
scanner. (See "Description of Business - Products, Works-in-Progress and Product
Marketing.")                                                                    

       As part of its scanner  marketing  program,  the Company has attended the
industry's annual trade show, RSNA (Radiological Society of North America) since
1995 and plans to do so again in November 2000. The Company  believes that it is
uniquely  positioned  to take  advantage  of the  rapidly  expanding  "Open MRI"
market,  as the  manufacturer of the only high-field "Open MRI" in the industry.
The Company expects marked demand for its products since image quality increases
as a direct proportion to magnetic field strength.  When commercially available,
Fonar's  Stand-Up MRI is expected to be the only MRI capable of producing images
in the weight bearing  state.  In addition,  the Company's new scanners  provide
improved  image quality and high speed  imaging at costs that are  significantly
less than the  competition  and more in keeping with the medical cost  reduction
demands being made by our national leaders on behalf of the public.             

       HMCA 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. HMCA has completed five acquisitions  since it was formed in March
1997.                                                                           

       The first acquisition was of a group of companies engaged in the business
of managing three diagnostic imaging centers and one multi-specialty practice in
New York State (the  "Affordable  Companies").  The  second  acquisition  was of
Raymond V. Damadian,  M.D. MR Scanning Centers  Management  Company ("RVDC"),  a
company owned by FONAR's  principal  stockholder,  President and Chairman of the
Board,  Raymond V. Damadian.  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 third  acquisition was the acquisition of the
business and assets of Central Health  Management Co., LLC ("Central  Health") a
multi-specialty  management service organization (MSO) in Yonkers, New York. The
fourth acquisition was the acquisition of A & A Services, Inc. ("A & A"), an MSO
managing four primary care practices in Queens  County,  New York, and the fifth
acquisition  was  the  acquisition  of  Dynamic  Health  Care  Management,  Inc.
("Dynamic"), an MSO managing three multi-specialty physician practices in Nassau
and Suffolk Counties in New York.                                               

       In   addition,   HMCA   sponsored   the   opening  of  and   manages  two
multi-specialty facilities. These facilities are located in Orlando, Florida and
Elmhurst, New York.                                                             

       HMCA did not actively engage in business until after June 30, 1997, which
was the effective date of its acquisitions of the Affordable Companies and RVDC.
As separate  businesses,  the Affordable  Companies had been engaged in business
since 1994 and RVDC had been  engaged in  business  since  1990.  For  financial
statement presentation the results of operations,  assets and liabilities of the
Company  and RVDC  have been  consolidated  for prior  periods.  The  Affordable
Companies,  Central Health, A & A and Dynamic, have been consolidated  effective
as of the dates of their  respective  acquisitions  (June 30, 1997,  January 23,
1998, March 20, 1998 and August 20, 1998, respectively).                        

       The Company has  assessed  the impact of the Year 2000 Issue (Y2K) on its
financial  reporting systems and operations.  The Year 2000 Issue was the result
of computer programs being written using two digits (rather than four) to define
the  applicable  year.  The Company  developed  a plan to meet this  issue,  and
reviewed all in-house  computer based systems and its existing  customer base of
MRI  Scanners.  The Company has  successfully  implemented  the Y2K plan and all
systems were  upgraded or replaced with little or no impact on  operations.  Y2K
compliant  software was installed on the  Company's  MRI scanners.  The scanners
transitioned to the year 2000 successfully.  Costs of addressing these items did
not have a material adverse impact on the Company's financial position.         

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 $39.1  million as compared to net loss of $14.2  million on revenues
of $36.9 million for fiscal 1999.  This represents a decrease in the net loss of
22.5% and an increase in revenues of 6%.                                        

       Revenues   attributable   to  the  Company's   physician  and  diagnostic
management  services segment (HMCA) increased by 8.6% to $34.0 million in fiscal
2000 from $31.3 million in fiscal 1999.                                         

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

       Revenues attributable to the Company's medical equipment segment declined
by 4.6% to $6.2  million  in  fiscal  2000  from $6.5  million  in fiscal  1999,
reflecting lower sales volume in fiscal 2000.                                   

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

       The Company's  consolidated operating loss increased by 5.1% to a loss of
$16.4  million for fiscal 2000 from a loss of $15.6  million for fiscal  1999, a
further improvement from the operating loss of $17.6 million for fiscal 1998.   

       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
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 an increase of 460% in other income and a decrease of 9.5%
in investment income.                                                           

       Costs of revenues  and expenses  increased by 5.5% from $52.6  million in
fiscal  1999 to  $55.5  million  in  fiscal  2000,  reflecting  principally  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 8.3% to $23.6 million in fiscal 2000 from $21.8
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  increased by 23% from
$2.6  million (7% of total  revenues)  in fiscal 1999 to $3.2  million  (8.4% of
total revenues) in fiscal 2000. 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 $84,255  (approximately  0.2% of total  revenues) in fiscal
2000.  These  represented the sale of refurbished  equipment,  as the company no
longer manufactures Beta scanners.                                              

       Sales to affiliated parties  represented  approximately 4.5% ($1,752,298)
of the Company's  revenues in fiscal 2000, as compared to 0.4% ($150,000) of the
Company's revenues 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.  The Company's  strategy is to
attempt  to  hold  down  the  price  of  its  QUAD   scanners  and  to  increase
profitability  by  reducing  manufacturing  costs  and  increasing  volume.  The
effectiveness of this strategy will not be discernible until higher sales volume
for the Company's QUAD scanners is achieved.                                    

       To  reduce  the cost of  manufacturing  its QUAD  scanners,  the  Company
expanded  its  manufacturing  capacity  in  fiscal  2000 and  1999 by  acquiring
approximately $2.1 million and $3.8 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.  These trends  reflected a decline in service revenue of
26.1% from $2.3  million  in fiscal  1999 to $1.7  million in fiscal  2000 and a
constant  level in product sales in fiscal 2000 ($3.4  million) from fiscal 1999
($3.4 million).  The decline in service  revenue  reflects the retirement of old
scanners by the Company's customers.  The Company does not expect the decline in
revenue to continue.  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.                          

       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 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  in
research  and  development  ($361,323 of which was  capitalized)  as compared to
$6,647,555  (none of which was  capitalized)  in fiscal  1999.  The research and
development expenditure was approximately 116.7% of revenues attributable to the
Company's  medical  equipment  segment (and 15.1% of total revenues) in 2000 and
$102% of medical equipment segment revenues in 1999 (and 18% of total revenues).
This  represented a decline of  approximately  10.6% in research and development
expenses from fiscal 1999 to fiscal 2000.                                       

       The  Company has  continued  its  efforts to  increase  scanner  sales in
foreign  countries  as well as  domestically.  Based on  sales to date,  further
indications  of interest,  meetings,  sales trips abroad and  negotiations,  the
Company is  optimistic  that foreign  sales will prove a  significant  source of
revenue.                                                                        

       The Company continued to benefit as a result of programs set in motion in
fiscal 1989;  namely  strict cost  containment  initiatives  and  expanding  the
corporate  business into a greater number of profitable  enterprises  within and
related  to the MRI and  medical  industries  (e.g.,  physician  and  diagnostic
management services, customer service, upgrades). As a result of this expansion,
the percentage of the Company's  revenue derived from sources other than scanner
sales was approximately 91.4% for fiscal 2000 and 90.9% for 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
(essentially its patent infringement  actions) as compared to approximately $1.0
million in fiscal 1999. This represented an increase of 460%.                   

RESULTS OF OPERATIONS. FISCAL 1999 COMPARED TO FISCAL 1998                      

       In fiscal 1999,  the Company  experienced  a net loss of $14.2 million on
revenues of $36.9  million as compared to a net loss of $5.7 million on revenues
of $27.6 million for fiscal 1998.  This  represented an increase in the net loss
of 149% and an increase in revenues of 33.7%.                                   

       As  a  result  of  HMCA's  acquisitions,  revenues  attributable  to  the
Company's physician and diagnostic  management services segment (HMCA) increased
dramatically, to $31.3 million in fiscal 1999 from $21.1 million in fiscal 1998,
representing an increase of 48.3%.                                              

       Operating  income  of $3.1  million  was  recognized  from the  Company's
physician  and  diagnostic  management  services in fiscal 1999,  as compared to
income of $2.7 million in fiscal 1998, representing an increase of 14.8%.       

       Revenues attributable to the Company's medical equipment segment declined
by 16.7% to $6.5  million  in  fiscal  1999 from $7.8  million  in fiscal  1998,
reflecting lower sales volume in fiscal 1999.                                   

       Results  of  operations  for  the  medical  equipment  segment  improved,
however,  from a loss of $20.3 million in fiscal 1998 to a loss of $18.7 million
in fiscal 1999, representing a 7.9% improvement.                                

       Other  income of $8.6  million  (principally  the net  proceeds  from the
Company's  patent  enforcement  lawsuits) and investment  income of $3.7 million
were  recognized  by the Company in fiscal  1998 as compared to other  income of
$1.0 million (principally the net proceeds from the Company's patent enforcement
lawsuits) and investment  income of $2.1 million in fiscal 1999,  representing a
decline of 88.4% in other income and 43.2% in investment income.                

       Costs of revenues and expenses  increased by 16.6% from $45.1  million in
fiscal 1998 to $52.6  million in fiscal 1999,  reflecting  the  expansion of the
Company's  physician  and  diagnostic  management  services  operations  and  an
increase in research and development in the medical equipment segment.          

       Costs of revenue and expenses for the Company's  physician and diagnostic
management  services  increased  by 59.1% to $21.8  million in fiscal  1999 from
$13.7 million in fiscal 1998.                                                   

       Research and  development  expenses  increased by 1.5% to $6.6 million in
fiscal 1999 as compared to $6.5 million in fiscal 1998.                         

       Overall,  costs  of  revenues  and  expenses  for the  Company's  medical
equipment  segment,  however,  declined by 10.7% to $25.1 million in fiscal 1999
from $28.1 million in fiscal 1998 reflecting, most significantly,  a decrease in
costs of product  sales of 37.2% to $4.9  million in fiscal  1999 as compared to
$7.8 million in fiscal 1998.                                                    

       Revenues  generated  by sales  of QUAD MRI  scanners  were  $4.1  million
(approximately  15% of total  revenues)  in fiscal 1998 and $2.6  million (7% of
total  revenues)  in fiscal  1999,representing  a  decrease  of 36.6%.  Revenues
attributable to sales of the Company's  Ultimate scanners during the same period
were $0.00.                                                                     

       Sales of Beta  scanners  were $0.00 in fiscal 1998 and $430,000 in fiscal
1999.                                                                           

       Sales to affiliated parties represented  approximately 0.4% ($150,000) of
the  Company's  revenues  in fiscal  1999,  as compared  to  approximately  0.3%
($100,000) in fiscal 1998.                                                      

       Gross profit margins on product sales to unrelated  parties were negative
(98%) in fiscal 1998 and  negative  (49%) in fiscal  1999.  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  1999 and  1998 by  acquiring
approximately $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
16.7% to  approximately  $6.5  million in fiscal  1999 from  approximately  $7.8
million in fiscal 1998.  This trend reflected a decline in service revenue of 8%
from $2.5  million in fiscal 1998 to $2.3  million in fiscal 1999 and a decrease
of 12.8% in product  sales in fiscal 1999 to $3.4 million from $3.9 million from
fiscal 1998.                                                                    

       In fiscal 1999 the Company continued its investment in the development of
its new MRI scanners, together with software and upgrades, with an investment of
$6,647,555 in research and development as compared to $6,506,995 in fiscal 1998.
None of these  expenditures  were  capitalized.  The  research  and  development
expenditure  was  approximately  102% of revenues  attributable to the Company's
medical  equipment  segment  and 18% of total  revenues  in 1999 and  $83.3%  of
medical equipment segment revenues and 23.6% of total revenues in fiscal 1998.  

       During the fiscal year ended June 30, 1999, the Company  realized  income
of  approximately  $1.0 million from the  settlement of various legal  disputes,
which  were  essentially  its  patent  infringement   actions,  as  compared  to
approximately $8.6 million in fiscal 1998.                                      

LIQUIDITY AND CAPITAL RESOURCES                                                 

       Cash, cash equivalents and marketable  securities  declined by 34.2% from
$35.4 million at June 30, 1999 to $23.3 million at June 30, 2000. Principal uses
of cash during  fiscal  2000  included  capital  expenditures  of $2.8  million,
repayment of  indebtedness  and capital lease  obligations in the amount of $3.8
million,  purchase  of treasury  stock of $79,000  and $4.7  million to fund the
losses for the fiscal year.                                                     

       Marketable  securities  approximated $11.5 million as of June 30, 2000 as
compared to $20.2  million as of June 30,  1999.  From June 30, 1999 to June 30,
2000 the Company reduced its investments in equity securities from approximately
$100,000 to $0, reduced its  investments  in U.S.  Government  obligations  from
approximately  $11.0  million to $10.2  million and reduced its  investments  in
corporate and government  agency bonds from  approximately  $9.3 million to $1.5
million.  This has had the  intended  effect of reducing the  volatility  of the
Company's investment portfolio.                                                 

       Cash used in  operating  activities  for fiscal  2000  approximated  $4.7
million. Cash used in operating activities was attributable substantially to the
funding of the net loss for fiscal 2000.                                        

       Cash provided by investing  activities for fiscal 2000  approximated $5.5
million.  The principal source of cash from investing  activities  during fiscal
2000  consisted of the proceeds from the sale of  marketable  securities of $8.6
million  less  expenditures  for property and  equipment of  approximately  $2.8
million.                                                                        

       Cash used in  financing  activities  for fiscal  2000  approximated  $4.1
million.  The principal uses of cash in financing  activities during fiscal 2000
consisted of repayment of  principal  on long-term  debt of  approximately  $3.8
million.                                                                        

       Total  liabilities  decreased since June 30, 1999 by  approximately  $5.0
million,  or 13.1% to approximately $33.3 million at June 30, 2000. The decrease
in  liabilities   from  June  30,  1999  was  attributable  to  a  reduction  of
approximately $5.6 million in long-term debt.                                   

       As at June 30, 2000,  the  Company's  past due  obligations  consisted of
approximately  $643,534 in past due taxes (various state taxes).  The Company is
seeking to enter into payment plans with taxing authorities with respect to past
due taxes and to restructure its other past due indebtedness.                   

       As  of  June  30,  2000,  the  Company  had a  bank  credit  facility  of
$5,000,000.  The unused portion of the facility was approximately  $863,000. 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.                                                 

       The Company's  business plan currently includes an aggressive program for
manufacturing  and selling  its new line of  scanners.  In addition  the Company
plans,  through its subsidiary,  Health  Management  Corporation of America,  to
develop and expand its physician and diagnostic  management  services)  business
(See "Description of Business").                                                

       As at June 30, 2000,  the Company had current assets of $42.8 million and
current  liabilities  of $18.4  million,  resulting in working  capital of $24.4
million.  The Company  believes that these  resources  alone provide an adequate
reserve to fund its  operations for the short to medium term. For the long term,
the Company  will need to rely on income  generated by sales of its MRI products
and the continued profitability of HMCA.                                        

       The Company has developed and begun to implement a new program to finance
a  portion  of the  purchase  price  of its  scanners  through  a  newly  formed
subsidiary,  Fonar  Acceptance  Corporation,  and  to  assist  the  customer  in
obtaining the remaining portion of its financing  through an independent  source
or sources. The new program is intended to increase the overall profitability of
the  Company by  assisting  in the sale of  scanners  and  participating  in the
profits derived from financing those sales.                                     

       Advances  and  notes to  affiliates  and  related  parties  increased  by
approximately  $597,000  from  June 30,  1999 to June  30,  2000.  As these  are
long-term assets, they tend to reduce the Company's liquidity.                  

       Capital  expenditures for each of fiscal 2000 and 1999  approximated $2.8
million and $5.5 million,  respectively,  and substantially  consisted of office
and production equipment.                                                       

       The  Company's  business  plan  initiated in September  1989,  had as its
objective the  enhancement  and  stabilization  of revenue  streams  through the
generation of additional  income from its installed base of scanners and leasing
programs. In addition,  the Company instituted strict cost containment programs.
While  continuing  to  focus on new  sources  of  income,  the  Company  now has
commenced  aggressive sales and  manufacturing of its new generation of Open MRI
scanners and is  reemphasizing  MRI Scanner sales.  In addition,  the Company is
enhancing its revenue by entering into the physician and  diagnostic  management
services business through its new subsidiary, HMCA.                             

       Cost containment  programs continue in force  notwithstanding an increase
in costs and  expenses  resulting  from  increased  manufacturing  activity  and
marketing  of its MRI  scanners  and  the  expansion  of  HMCA's  physician  and
diagnostic   management  services  business.   These  programs,   which  include
increasing  the portion of  manufacturing  conducted on the Company's  premises,
have enabled the Company to achieve significantly lower manufacturing costs than
would have  otherwise  been  experienced in the production of its QUAD scanners.
This has enabled the Company to pass on to customers a much needed  reduction in
the sales price of MRI scanners.                                                

       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 $2.3  million for the year ended June 30, 1999
and $1.7  million  for the year ended June 30,  2000  (transactions  between the
Company and its subsidiaries are eliminated in the  consolidation).  The Company
will continue to aggressively  develop and market upgrades and  enhancements for
previously installed scanners.                                                  

       The Company's  working capital  surplus as of June 30, 2000  approximates
$24.9 million,  as compared to a working  capital surplus of $37.9 million as of
June 30, 1999.                                                                  

       The change in the Company's working capital position  resulted  primarily
from its  investments  in new  equipment  ($2.8  million),  note payments on the
purchase prices for HMCA's  acquisitions  ($3.7 million),  its overall operating
losses, and an increase in its current liabilities of $560,099 ($18.4 million as
at June 30, 2000 as compared to $17.8 million as at June 30, 1999.              

       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.                               

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, 2005. Below
is a tabular  presentation of the maturity profile of the fixed rate instruments
held by the Company at June 30, 2000.                                           

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

       Date              Investments in Fixed Rate          Weighted Average
                       Instruments                         Interest Rate

6/30/01             4,156,967                             6.0%
6/30/02             2,514,105                             6.5%
6/30/03             3,378,037                             7.0%
6/30/04             1,446,141                             6.1%
6/30/05               253,734                             7.1%

Total:                      11,748,984                                          

Fair Value                                                                      
at 6/30/00                  11,484,176                                          

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

       See Note 11 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  

                                                        Page No.
                                                       -------

INDEPENDENT AUDITORS' REPORT                                       F2           

CONSOLIDATED BALANCE SHEETS                                      F3 - F5        
At June 30, 2000 AND 1999                                                       

CONSOLIDATED STATEMENTS OF OPERATIONS                               F6          
For the Three Years Ended June 30, 2000, 1999 and 1998                          

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                  F7 -   F12     
For the Three Years Ended June 30, 2000, 1999 and 1998                          

CONSOLIDATED STATEMENTS OF CASH FLOWS                            F13 - F14      
For the Three Years Ended June 30, 2000, 1999 and 1998                          

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                       F15 - F52      

SELECTED FINANCIAL DATA                                             (*)         
For the Five Years Ended June 30, 2000                                          

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

Information  required by other  schedules  called for under  Regulation S-X is  
either not applicable or is included in the consolidated  financial statements  
or notes thereto.                                                               

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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, 2000 and 1999,  and the related  
consolidated statements of operations, stockholders' equity and cash flows for  
each of the  years  in the  three-year  period  ended  June  30,  2000.  These  
financial statements are the responsibility of the Company's  management.  Our  
responsibility is to express an opinion on these financial statements based on  
our audits.                                                                     

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

In our  opinion,  the  consolidated  financial  statements  referred  to above  
present fairly, in all material respects,  the consolidated financial position  
of FONAR  Corporation  and  Subsidiaries  at June 30,  2000 and 1999,  and the  
consolidated  results of their operations and cash flows for each of the years  
in the  three-year  period ended June 30, 2000, in conformity  with  generally  
accepted accounting principles.                                                 

During  each of the years in the  three-year  period  ended June 30,  2000,  a  
significant  portion of the Company's  revenues was from related  parties (see  
Notes 2, 3, 5, 8 and 20).                                                       

                                         /S/ TABB, CONIGLIARO & McGANN, P.C.

New York, New York                                                              
September 25, 2000                                                              

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FONAR CORPORATION AND SUBSIDIARIES  

CONSOLIDATED BALANCE SHEETS 

ASSETS  
------  

                                                  June 30,
                                                 ---------------------------
                                                   2000           1999
                                                 ------------   ------------
Current Assets                                                                  
Cash and cash equivalents                           $11,810,519    $15,175,804  
Marketable securities                                11,484,176     20,197,698  
Accounts receivable, net                             14,388,662     13,936,734  
Costs and estimated earnings in excess of                                       
billings on uncompleted contracts                       968,159      1,463,450  
Inventories                                           3,536,169      4,237,778  
Investment in sales-type lease with related                                     
party                                                    57,832              -  
Prepaid expenses and other current assets               604,059        701,433  
                                                 ------------   ------------
Total Current Assets                                 42,849,576     55,712,897  

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

Property and Equipment - Net                         11,227,454     11,442,493  

Advances and Notes to Related Parties,                                          
Net of discounts and allowance for                                              
doubtful accounts of $904,000 at June 30,                                       
2000 and 1999                                         1,158,998      1,434,689  

Investment in Sales-Type Lease with Related                                     
Party                                                   872,603              -  

Notes Receivable, Net of allowance for                                          
doubtful accounts of $477,456 at June 30,                                       
2000 and 1999                                           500,810         24,796  

Excess of Cost Over Net Assets of                                               
Businesses Acquired, Net of accumulated                                         
amortization of $2,716,859 and $1,498,166                                       
at June 30, 2000 and 1999, respectively              21,656,990     22,875,683  

Other Intangible Assets, Net                          1,035,924        888,992  

Other Assets                                            296,682        268,618  
                                                 ------------   ------------
Total Assets                                        $84,599,037    $97,648,168  
                                                 ============   ============

See accompanying notes to consolidated financial statements.                    

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FONAR CORPORATION AND SUBSIDIARIES  

CONSOLIDATED BALANCE SHEETS   

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

                                                June 30,
                                                 ---------------------------
                                                   2000           1999
                                                 ------------   ------------
Current Liabilities                                                             
Current portion of debt                                                     
and capital leases                                $ 6,224,727    $ 4,474,293
Accounts payable                                    1,738,847      2,401,926
Other current liabilities                           8,966,929      9,920,991
Customer advances                                     582,551         95,518
Income taxes payable                                  896,913        957,140
                                                 ------------   ------------
Total Current Liabilities                          18,409,967     17,849,868
                                                 ------------   ------------

Long-term Debt and Capital Leases,                                          
Less Current Maturities                            14,744,459     20,347,541

Other Liabilities                                     138,338        131,629
                                                 ------------   ------------
                                                   14,882,797     20,479,170
                                                 ------------   ------------
Minority Interest                                      21,515         15,357
                                                 ------------   ------------

Commitments, Contingencies and Other                                        
Matters (Notes 1, 2, 3, 5, 10, 11,                                      
12, 14,17 and 19)                                                           

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,
                                             -------------------------------
                                                  2000            1999
                                               ------------   ------------
Stockholders' Equity                                                            
Common stock - $.0001 par value;  authorized                                
-  60,000,000  shares;  issued -                                        
56,604,735  and 53,998,906  shares at June                              
30, 2000 and 1999,  respectively;                                       
outstanding - 56,315,471 and 53,793,042                                 
shares at June 30, 2000 and 1999,                                       
 respectively                                      $  5,631       $  5,378
Class B common stock (10 votes per share) -                                 
$.0001 par value;  authorized - 4,000,000                               
shares;  issued and outstanding - 4,211                                 
and 5,211 shares at June 30, 2000 and 1999,                             
 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, 2000 and 1999                       956            956
Class A non-voting preferred stock - $.0001                                 
par value; authorized - 8,000,000 shares;                               
issued and outstanding - 7,836,286 shares                               
 at June 30, 2000 and 1999                              784            784
Preferred stock - $.001 par value;                                          
authorized - 10,000,000 shares; issued                                  
 and outstanding - none                                   -              -
Paid-in capital in excess of par value            98,581,757     95,385,863 
Accumulated other comprehensive income              (264,808)      (203,106)
Accumulated deficit                              (44,816,824)   (33,860,837)
Notes receivable from stockholders                (1,338,005)    (1,226,148)
Unearned compensation                               (213,374)      (206,878)
Treasury stock - 289,264 and 205,864 shares                                 
of common stock at June 30, 2000 and 1999,                              
  respectively                                      (671,359)      (592,239)
                                               ------------   ------------
 Total Stockholders' Equity                      51,284,758     59,303,773
                                               ------------   ------------
 Total Liabilities and Stockholders' Equity    $ 84,599,037   $ 97,648,168
                                               ============   ============

See accompanying notes to consolidated financial statements.                    

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FONAR CORPORATION AND SUBSIDIARIES  

CONSOLIDATED STATEMENTS OF OPERATIONS 

                                      For the Years Ended June 30,
                                  ------------------------------------------
                                    2000           1999           1998
                                  ------------   ------------    -----------
Revenues                                                                        
Product sales - net               $  1,606,229   $  3,380,467   $  3,937,726
Product sales - related parties                                             
- net                              1,752,298           -              - 
Service and repair fees - net        1,692,537      2,301,488      2,520,637
Management and other fees -                                                 
  related parties - net             34,022,733     31,263,089     21,095,994
                                  ------------   ------------    -----------
Total Revenues - Net                39,073,797     36,945,044     27,554,357
                                  ------------   ------------    -----------
Costs and Expenses                                                              
Costs related to product sales       2,849,046      4,931,803      7,800,569
Costs related to product sales                                              
- related parties                    1,573,870           -              -   
Costs related to service and                                                
  repair fees                        2,396,609      2,697,695      2,373,808
Costs related to management and                                             
  other fees - related parties      23,611,544     21,762,184     13,667,467
Research and development             5,532,325      6,647,555      6,506,995
Selling, general and administrative 16,211,414     14,383,842     12,489,539
Compensatory element of stock                                               
issuances for selling, general                                          
  and administrative expenses        1,929,706        275,242      1,108,362
Provision for bad debts                177,162        628,836        929,786
Amortization of excess of cost                                              
over net assets of businesses                                           
  acquired                           1,218,693      1,225,942        272,224
                                  ------------   ------------    -----------
Total Costs and Expenses            55,500,369     52,553,099     45,148,750
                                  ------------   ------------    -----------
Loss from Operations                 (16,426,572)   (15,608,055)   (17,594,393) 

Interest Expense                      (1,710,188)    (2,051,290)      (728,327) 
Investment Income                      1,919,744      2,110,780      3,708,938  
Other Income, Principally Gain on                                               
Litigation Awards                    5,575,375      1,043,119      8,610,035
Minority Interests in Income                                                    
 of Partnerships                       (270,669)      (300,235)      (146,890)
                                  ------------   ------------    -----------
Loss Before Provision for Taxes      (10,912,310)   (14,805,681)    (6,150,637) 

Provision (Benefit) for Income Taxes      43,677       (589,918)      (497,551) 
                                  ------------   ------------    -----------
Net Loss                            $(10,955,987)  $(14,215,763)  $ (5,653,086) 
                                  ============   ============    ===========

Basic and Diluted Net Loss Per Share$       (.17)  $       (.22)  $       (.09) 
                                         =====          =====          =====
Weighted Average Number of Shares                                               
Outstanding                         66,304,716     64,071,151     61,175,986
                                    ==========     ==========     ==========

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                     Notes    
                               Per    Class A Common Stock  Class C     Voting   Capital in    Treasury      Receivable 
                              Share   --------------------  Common    Preferred   Excess of      Stock          from    
                              Amount    Shares     Amount    Stock      Stock    Par Value      Amount      Stockholders
                              ------  ----------  --------  --------  ---------  -----------  ----------    ------------
                                                                                                                        
Balance - June 30, 1999       $  -    53,793,042  $  5,378  $    956  $    784   $95,385,863  $ (592,239)   $(1,226,148)

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        -          (391,250)
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 in                                                                                                    
  settlement of liabilities     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                   -          -         -         -         -             -           -            279,393
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)   $(1,338,005)
                                      ==========  ========  ======== =========   ===========  ==========    ============

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]

                                             Accumulated                                             
                                                Other                                   Comprehensive
                                Unearned    Comprehensive  Accumulated                     Income    
                              Compensation     Income        Deficit         Total         (Loss)    
                              ------------  -------------  ------------   -----------   -------------
                                                                                                     
Balance - June 30, 1999       $(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          -               -               -           64,569           -    
Purchase of common stock           -               -               -          (79,120)          -    
Stock issued to employees                                                                            
  under stock bonus plans          -               -               -          396,682           -    
Issuance of stock in                                                                                 
  settlement of liabilities        -               -               -          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           -    
Amortization of unearned                                                                             
  compensation                  720,466            -               -          720,466           -    
Conversion of Class B                                                                                
  common stock to Class A                                                                            
  common stock                     -               -               -             -              -    
                              -----------   -----------    ------------   -----------   ------------ 
BALANCE - JUNE 30, 2000       $  (213,374)  $  (264,808)   $(44,816,824)  $51,284,758   $(11,017,689)
                              ===========   ===========    ============   ===========   ============ 

See accompanying notes to consolidated financial statements.                    

F-8 

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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                     Notes    
                              Per    Class A Common Stock   Class C     Voting   Capital in     Treasury     Receivable 
                             Share   --------------------   Common    Preferred   Excess of       Stock         from    
                             Amount    Shares     Amount     Stock      Stock    Par Value       Amount     Stockholders
                             ------  ----------  --------   --------  ---------  -----------   ----------   ------------
                                                                                                                        
Balance - June 30, 1998      $  -    52,954,465  $  5,294   $    956  $    784   $94,502,717   $ (395,445)  $(1,854,450)

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 in                                                                                                    
  settlement of liabilities     -       463,161        47      -          -          664,609        -             -     
Shares returned in                                                                                                      
  cancellation of notes                                                                                                 
  receivable                    -      (190,000)      (19)     -          -         (539,357)       -           539,376 
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                  -         -         -          -          -            -            -            88,926 
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)  $(1,226,148)
                                     ==========  ========   ======== =========   ===========   ==========   ============

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]

                                            Accumulated                                             
                                               Other                                   Comprehensive
                               Unearned    Comprehensive  Accumulated                     Income    
                             Compensation     Income        Deficit         Total         (Loss)    
                             ------------  -------------  ------------   -----------   -------------
                                                                                                    
Balance - June 30, 1998      $    -        $   (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 in                                                                                
  settlement of liabilities       -              -               -           664,656                
Shares returned in                                                                                  
  cancellation of notes                                                                             
  receivable                      -              -               -             -                    
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                
Amortization of unearned                                                                            
  compensation                    68,959         -               -            68,959                
Conversion of Class B                                                                               
  common stock to Class A                                                                           
  common stock                    -              -               -             -                    
                             -----------   -----------    ------------   -----------   ------------ 
BALANCE - JUNE 30, 1999      $  (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 STATEMENT OF STOCKHOLDERS' EQUITY  
FOR THE YEAR ENDED JUNE 30, 1998  

                                                        [Enlarge/Download Table]


                                                                        Class A                                           
                                                                          Non-       Paid-in                     Notes    
                              Per      Class A Common Stock   Class C    Voting    Capital in     Treasury    Receivable  
                             Share   ----------------------   Common    Preferred   Excess of      Stock         from     
                             Amount    Shares       Amount     Stock      Stock     Par Value      Amount    Stockholders 
                             ------  ----------    --------  ---------  ---------  -----------   ----------  ------------ 
                                                                                                                          
Balance - June 30, 1997      $  -    49,133,422    $  4,913  $    956   $    785   $90,640,637   $(395,445)   $(1,918,596)

Net loss                        -         -            -         -          -            -           -              -     

Other comprehensive income,                                                                                               
     net of tax:                                                                                                          
   Unrealized gains on                                                                                                    
     securities, net of tax     -         -            -         -          -            -           -              -     
Stock issued to employees                                                                                                 
  under 1995 stock bonus                                                                                                  
  plan                         2.96     400,430          40      -          -        1,184,838       -              -     
Shares issued under 1993                                                                                                  
  incentive stock option                                                                                                  
  plan                         3.00     153,170          15      -          -          459,495       -              -     
Issuance of stock under                                                                                                   
  1986 incentive stock                                                                                                    
  option plan                   .37       3,125           1      -          -            1,171       -              -     
Issuance of stock in                                                                                                      
  settlement of liabilities    2.75     236,345          23      -          -          650,641       -              -     
Shares issued under 1997                                                                                                  
  non-statutory plan            -         2,600           1      -          -           19,836       -              -     
Issuance of stock under                                                                                                   
  consulting contracts         2.79     223,030          22      -          -          622,754       -              -     
Additional consideration                                                                                                  
  related to acquisition                                                                                                  
  of Affordable                                                                                                           
  Diagnostics, Inc.            1.60     576,000          57      -          -          923,385       -              -     
Issuance of stock in                                                                                                      
  substitution for                                                                                                        
  4,909,767 warrants            -     2,226,343         222      -          -              (40)      -              -     
Net change in notes                                                                                                       
  receivable from                                                                                                         
  stockholders                  -         -            -         -          -            -           -             64,146 
Amortization of unearned                                                                                                  
  compensation                  -         -            -         -          -            -           -              -     
Class A preferred stock                                                                                                   
  retired                       -         -            -         -            (1)        -           -              -     
                                     ----------    --------  ---------  ---------  -----------   ----------   ----------- 

BALANCE - JUNE 30, 1998              52,954,465    $  5,294  $    956   $    784   $94,502,717   $(395,445)   $(1,854,450)
                                     ==========    ========  =========  =========  ===========   ==========   =========== 

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, 1998  

                                                        [Enlarge/Download Table]

                                            Accumulated                                             
                                               Other                                   Comprehensive
                               Unearned    Comprehensive  Accumulated                      Income   
                             Compensation     Income        Deficit        Total           (Loss)   
                             ------------  -------------  ------------   -----------   -------------
                                                                                                    

Balance - June 30, 1997      $(1,096,000)  $      -       $(13,991,988)  $73,245,262                

Net loss                           -              -         (5,653,086)   (5,653,086)  $ (5,653,086)

Other comprehensive income,                                                                         
     net of tax:                                                                                    
   Unrealized gains on                                                                              
     securities, net of tax        -            (42,296)         -           (42,296)       (42,296)
Stock issued to employees                                                                           
  under 1995 stock bonus                                                                            
  plan                             -              -              -         1,184,878                
Shares issued under 1993                                                                            
  incentive stock option                                                                            
  plan                             -              -              -           459,510                
Issuance of stock under                                                                             
  1986 incentive stock                                                                              
  option plan                      -              -              -             1,172                
Issuance of stock in                                                                                
  settlement of liabilities        -              -              -           650,664                
Shares issued under 1997                                                                            
  non-statutory plan               -              -              -            19,837                
Issuance of stock under                                                                             
  consulting contracts             -              -              -           622,776                
Additional consideration                                                                            
  related to acquisition                                                                            
  of Affordable                                                                                     
  Diagnostics, Inc.                -              -              -           923,442                
Issuance of stock in                                                                                
  substitution for                                                                                  
  4,909,767 warrants               -              -              -               182                
Net change in notes                                                                                 
  receivable from                                                                                   
  stockholders                     -              -              -            64,146                
Amortization of unearned                                                                            
  compensation                 1,096,000          -              -         1,096,000                
Class A preferred stock                                                                             
  retired                          -              -              -                (1)               
                             -----------   ------------   ------------   -----------   ------------ 

BALANCE - JUNE 30, 1998      $     -         $  (42,296)  $(19,645,074)  $72,572,486   $ (5,695,382)
                             ===========   ============   ============   ===========   ============ 

See accompanying notes to consolidated financial statements.                    

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FONAR CORPORATION AND SUBSIDIARIES  

CONSOLIDATED STATEMENTS OF CASH FLOWS 

                                    For the Years Ended June 30,
                                  ------------------------------------------
                                   2000          1999           1998
                                  ------------   ------------   ------------

CASH FLOWS FROM OPERATING ACTIVITIES                                            
 Net loss                          $(10,955,987)  $(14,215,763)  $ (5,653,086)
Adjustments to reconcile net loss                                           
to net cash provided by (used in)                                         
operating activities:                                                     
Minority interest in income of                                        
     partnerships                      270,669        300,235        146,890
   Depreciation and amortization     4,670,473      4,657,819      2,917,603
    Gain on sale of equipment                 -        (53,573)              -
Imputed interest on deferred                                          
     payment obligations               397,521        482,716         27,000
   Provision for bad debts             177,162        628,836        929,786
Compensatory element of stock                                         
     issuances                       1,929,706        275,242      1,108,362
Stock issued in settlement of                                         
     current liabilities               742,372        664,656        639,715
Liabilities assumed by                                                
purchaser on sale of                                              
    subsidiary                       (824,394)            -              -
    Deferred income taxes                     -       (793,794)    (2,500,000)
(Increase) decrease in                                                
operating assets, net:                                            
Receivable from litigation                                    
         award                               -              -     77,223,460
Accounts and notes                                            
          receivable                 (1,105,104)    (2,747,268)    (3,911,903)
Costs and estimated                                           
earnings in excess of                                     
billings on uncompleted                                   
          contracts                     495,291       (629,835)      (814,750)
        Inventories                     701,609       (724,156)       (73,113)
Sales-type lease                                              
         receivable-related party     (935,000)             -              -
Principal payments received                                   
on sales-type lease -                                     
         related party                   4,565              -              -
Prepaid expenses and other                                    
         current assets                 97,374       (415,468)       123,708
        Other assets                     (3,064)       239,817       (270,830)
Receivables and advances                                      
         to related parties            275,691         65,425        578,511
Increase (decrease) in                                        
operating liabilities,                                    
net:                                                  
            Accounts payable           (434,425)       372,374       (175,483)
Other current                                         
              liabilities              (674,669)        56,758     (1,998,835)
            Customer advances           487,033       (574,213)       (94,671)
Billings in excess of                                 
costs and estimated                               
earnings on                                       
              uncompleted contracts           -        (31,032)      (161,900)
           Other liabilities             6,709         17,966         12,722
           Income taxes payable        (60,227)         2,498        802,449
                                  ------------    -----------    -----------
NET CASH (USED IN) PROVIDED                                 
          BY OPERATING ACTIVITIES   (4,736,695)   (12,420,760)    68,855,635
                                  ------------   ------------    -----------

See accompanying notes to consolidated financial statements.                    

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FONAR CORPORATION AND SUBSIDIARIES  

CONSOLIDATED STATEMENTS OF CASH FLOWS 

                                      For the Years Ended June 30,
                                 -------------------------------------------
                                     2000           1999            1998
                                   ------------   ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES                                            
Investment in marketable securities $  8,651,820   $   (106,676)  $(20,294,129) 
Expenditures for acquisitions                  -     (2,651,665)    (4,025,000) 
Purchases of property and equipment,                                            
net of capital lease obligations                                                
of $215,086, $741,663 and                                                       
$1,391,304 for the years ended                                                  
June 30, 2000, 1999 and 1998,                                                   
respectively                          (2,807,264)             -              -  
Costs of capitalized software                                                   
development                             (361,323)    (4,774,603)    (2,785,795) 
Cost of patents and copyrights                 -        (19,686)       (19,114) 
                                  ------------   ------------   ------------
NET CASH PROVIDED BY (USED IN)                                                  
INVESTING ACTIVITIES                   5,483,233     (7,552,630)   (27,124,038) 
                                  ------------   ------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES                                            
Proceeds from bank borrowings                  -              -      5,000,000  
Restricted cash for collateral of                                               
bank loan                                      -              -     (5,000,000) 
Repayment of borrowings and                                                     
capital lease obligations             (3,750,205)    (2,097,596)    (2,260,424) 
Proceeds from exercise of stock                                                 
options and warrants                      64,569              -          1,353  
Repayments of notes receivable in                                               
connection with shares issued                                                   
under stock option and bonus                                                    
plans                                          -              -        600,493  
Dividends paid                                 -     (3,909,366)    (3,945,701) 
Purchase of common stock                 (79,120)      (196,794)             -  
Distributions to holders of                                                     
minority interests                      (347,067)      (398,754)      (237,114) 
                                  ------------   ------------   ------------
NET CASH USED IN FINANCING                                                      
ACTIVITIES                            (4,111,823)    (6,602,510)    (5,841,393) 
                                  ------------   ------------   ------------

(DECREASE) INCREASE IN CASH           (3,365,285)   (26,575,900)    35,890,204  

CASH - BEGINNING OF YEAR              15,175,804     41,751,704      5,861,500  
                                  ------------   ------------   ------------
CASH - END OF YEAR                  $ 11,810,519   $ 15,175,804   $ 41,751,704  
                                  ============   ============   ============

See accompanying notes to consolidated financial statements.                    

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FONAR CORPORATION AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  

JUNE 30, 2000 

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 and  
certain medical  practices which meet the criteria of the Emerging Issues Task  
Force ("EITF") consensus no. 97-2. All significant  intercompany  accounts and  
transactions have been eliminated in consolidation.                             

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.                                                            
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FONAR CORPORATION AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  

JUNE 30, 2000 

NOTE  2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                

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  reevaluates  such  designations  as of each balance
   sheet date. At June 30, 2000, 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. 

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.                 

Excess of Cost Over Net Assets of Businesses Acquired                 
-----------------------------------------------------                 

   The excess of the purchase price over the fair market value of net assets
   of businesses acquired is being amortized using the straight-line  method
over 20 years.                                                        
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FONAR CORPORATION AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  

JUNE 30, 2000 

NOTE  2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                

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 excess of cost
   over net assets of businesses  acquired,  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.                                                     

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.       
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FONAR CORPORATION AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  

JUNE 30, 2000 

NOTE  2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                

Revenue Recognition (Continued)                                       
-------------------                                                   

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

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.                             

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

Advertising costs are expensed as incurred.                           

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, 2000 

NOTE  2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                

Per Share Data                                                        
--------------                                                        

   Net  income  (loss)  per  common  and  common  equivalent  share has been
   computed based on the weighted average number of common shares and common
   stock equivalents  outstanding  during the year. No effect has been given
   to options  outstanding  under the  Company's  Stock  Option  Plans as no
 material dilutive effect would result from the exercise of these items.

   During  fiscal  1998,  the Company  retroactively  adopted  Statement  of
   Financial  Accounting  Standards No. 128, "Earnings Per Share" ("SFAS No.
   128"),  which requires  companies to present basic earnings per share and
   diluted  earnings per share. No adjustments  were required as a result of
this adoption.                                                        

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,  2000,  the  Company  had  cash  deposits  of  approximately
$12,161,117 in excess of federally insured limits.                    

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

   At June 30,  2000 and  1999,  $5,000,000  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,  2000,  1999 and 1998,  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.              

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FONAR CORPORATION AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  

JUNE 30, 2000 

NOTE  2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                

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

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

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

Long-term  debt and 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                                                        
------------------------                                                        

Effective for fiscal year 1996, the Company adopted SFAS No. 123,  "Accounting  
for Stock-Based Compensation",  which permits entities to recognize as expense  
over the vesting period the fair value of all  stock-based  awards on the date  
of grant.  Alternatively,  SFAS No. 123 also  allows  entities  to continue to  
apply the  provisions  of APB Opinion No. 25 and 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.  
The Company has elected to continue to apply the provisions of APB Opinion No.  
25 and provide the proforma disclosure provisions of SFAS No. 123.              

Comprehensive Income                                                            
--------------------                                                            

In  November  1997,  Statement  of  Financial  Accounting  Standard  No.  130,  
"Reporting   Comprehensive   Income"  ("SFAS  No.  130"),   was  issued  which  
establishes  standards for reporting and displaying  comprehensive income in a  
full set of financial statements. SFAS No. 130 defines comprehensive income as  
changes  in equity of a business  enterprise  during  the  periods  presented,  
except  for   transactions   resulting  from   investments  by  an  owner  and  
distribution to an owner. SFAS No. 130 does not require a company to present a  
statement of comprehensive income if no items are present. The Company adopted  
SFAS No. 130 during fiscal 1998.                                                

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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE  2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)                

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

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

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.                                                                           

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 excess of the  purchase  price over the  
fair value of the net assets acquired 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, 2000

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 excess of the purchase price  
over the fair value of the net assets  acquired  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,  2000,  $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.                                         

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 excess of the purchase price  
over the fair  value of the net  assets  acquired  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.                                               

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE  3 - ACQUISITIONS (Continued)                                              

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

Subject to the acquired business  achieving  certain earnings  objectives over  
the five-year  period  following the date of  acquisition,  additional  monies  
would be due to the sellers.  The contingent  additional purchase price is not  
determinable  as of June 30, 2000 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  goodwill subject to  
amortization over the stated period. No additional payments were due under the  
earnout provision for the years ended June 30, 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.                                   

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 excess of the purchase price  
over the fair value of the net assets  acquired  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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE  4 - MARKETABLE SECURITIES                                                 

The following is a summary of marketable securities at June 30, 2000 and 1999:  

                          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
                           ===========      ==========     ===========

                          1999
                           -------------------------------------------

                            Unrealized
                                              Holding      Fair Market
                           Cost             Loss           Value
                           -----------      ----------     -----------

U.S. Government Obligations     $11,023,733      $  (18,302)    $11,005,431     
Corporate and government                                                        
agency bonds                      9,277,071        (184,304)      9,092,767     
Equity securities including                                                     
mutual stock funds                  100,000            (500)         99,500     
                           -----------      ----------     -----------
                           $20,400,804      $ (203,106)    $20,197,698
                           ===========      ==========     ===========

All debt securities are due within five years.  Of the cost at June 30, 2000,   
$4,156,967 is due within one year.                                              

NOTE 5 - ACCOUNTS RECEIVABLE, NET                                               

Accounts receivable, net is comprised                                           
of the following:                                                               

                              2000            1999
                             -----------     -----------

Receivable from equipment sales        $  2,379,609    $  1,727,535             
Receivables from related PC's            14,937,136      15,486,059             
Allowance for doubtful accounts                                                 
and contractual allowances               (2,928,083)     (3,276,860)            
                             -----------     -----------
                          $ 14,388,662    $ 13,936,734
                           ===========     ===========

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. F-24                                                             

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE  5 - ACCOUNTS RECEIVABLE, NET (Continued)                                  

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 40%, 33% and 25%, respectively,  of the PC's 2000, 1999 and 1998  
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.  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 the related PC's  accounted for  approximately  87%, 85% and  
77% of the  consolidated  net revenues for the years ended June 30, 2000, 1999  
and 1998, respectively.                                                         

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

1) Information relating to uncompleted  contracts as of June 30, 2000 and 1999  
is as follows:                                                                  

                                            As of June 30,
                                            ----------------------------
                                            2000              1999
                                            ---------         ----------
Costs incurred on uncompleted                       
            contracts                       $ 829,441         $2,522,153
          Estimated earnings                  138,718            847,047
                                            ---------         ----------
                                              968,159          3,369,200
          Less: Billings to date                    -          1,905,750
                                            ---------         ----------
                                             $968,159         $1,463,450
                                            =========         ==========

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

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,
                                             ---------------------------
                                             2000               1999
                                             --------         ----------

Costs and estimated earnings in                     
excess of billings on                           
            uncompleted contracts            $968,159         $1,463,450
Billings in excess of costs and                     
estimated earnings on                           
           uncompleted contracts                   -                 -
                                             --------         ----------
                                             $968,159         $1,463,450
                                             ========         ==========

2) Customer advances consist of the following:                                  

                                              As of June 30,
                                             ---------------------------
                                             2000               1999
                                             --------         ----------

          Total advances from customers      $582,551         $2,001,268
Less: Advances from customers                       
on contracts under                  
                  construction                      -          1,905,750
                                             --------         ----------
                                             $582,551           $ 95,518
                                             ========         ==========

NOTE  7 - INVENTORIES                                                           

Inventories  included in the accompanying  consolidated balance sheets consist  
of:                                                                             

                                              As of June 30,
                                           ---====----------------------
                                             2000               1999
                                           ----------         ----------
Purchased parts, components and                     
            supplies                       $2,916,753         $3,677,568
          Work-in-process                     619,416            560,210
                                           ----------         ----------
                                           $3,536,169         $4,237,778
                                           ==========         ==========

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE  8 - INVESTMENT IN SALES-TYPE LEASE WITH RELATED PARTY                     

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  
60 monthly  installments  of  $12,356  each,  plus at the end of the  60-month  
lease,  the  lessee can elect to  continue  the lease for an  additional  five  
years, at a monthly payment of $12,356,  including  interest at 10% per annum,  
or pay a lump sum of $581,544. The Company's investment in sales-type lease as  
at June 30, 2000 and 1999 is as follows:                                        

                                              As of June 30,
                                          ------------------------------
                                            2000                1999
                                          ----------          ----------
Net minimum lease payments                          
            receivable                     $1,310,548                $ -
          Less: Unearned income               380,113                  -
                                           ----------         ----------
Net Investment in                                   
            Sales-type Lease                 $930,435                $ -
                                           ==========         ==========

          Current portion                    $ 57,832                $ -
          Non-current portion                 872,603                  -
                                           ----------         ----------
                                             $930,435                $ -
                                           ==========         ==========
Future minimum lease payments are as follows:                                   

Years Ended   
June 30,    
-----------   
            2001          $ 57,832
            2002            63,888
            2003            70,578
            2004            77,969
            2005           660,168
                          --------
                          $930,435
                          ========

NOTE  9 - PROPERTY AND EQUIPMENT                                                

Property  and  equipment,   at  cost,  less   accumulated   depreciation   and  
amortization, at June 30, 2000 and 1999, is comprised of:                       

                                              As of June 30,
                                              --------------------------
                                               2000           1999
                                              -----------    -----------

Diagnostic equipment under                          
            lease                         $ 1,263,181        $ 1,155,039
          Diagnostic equipment              6,776,653          7,325,433
Research, development and                           
            demonstration equipment         7,217,601          5,671,375
          Machinery and equipment           6,106,145          6,122,494
          Furniture and fixtures            3,181,390          3,159,797
          Equipment under lease             2,364,088          2,331,423
          Leasehold improvements            2,572,728          2,151,819
                                          -----------        -----------
                                           29,431,786         27,917,380
Less: Accumulated depreciation                      
                  and amortization         18,204,332         16,474,887
                                          -----------        -----------
                                          $11,227,454        $11,442,493
                                          ===========        ===========

Depreciation  and  amortization  of property and equipment for the years ended  
June  30,  2000,  1999 and 1998 was  $3,237,384,  $3,139,585  and  $2,243,535,  
respectively.                                                                   

The equipment under lease has a net book value of $1,285,760 and $2,018,490 at  
June 30, 2000 and 1999, respectively.                                           

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 10 - OTHER INTANGIBLE ASSETS                                               

Other intangible assets, net of accumulated amortization, at June 30, 2000 and  
1999 are comprised of:                                                          

                                                        As of June 30,
                                                   -----------------------
                                                 2000       1999
                                                   ----------   ----------

Capitalized software development                    
             costs                                 $1,560,941   $1,199,618
           Patents and copyrights                   1,125,808    1,125,808
                                                   ----------   ----------
                                                    2,686,749    2,325,426
           Less: Accumulated amortization           1,650,825    1,436,434
                                                   ----------   ----------
                                                   $1,035,924     $888,992
                                                   ==========   ==========

Capitalized  computer software costs are being amortized over 5 years. Patents  
costs are being amortized over 17 years.                                        

Amortization  of other  intangible  assets for the years ended June 30,  2000,  
1999 and 1998 was  $214,391,  $292,295 and  $401,984,  respectively,  of which  
$148,167, $208,098 and $238,474, respectively,  relate to amortization expense  
for software development costs.                                                 

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.                                      

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 11 - CAPITAL STOCK (Continued)                                             

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

Class B  common  stock  is  convertible  into  shares  of  common  stock  on a  
one-for-one  basis.  Class B common  stock has 10 votes per share.  During the  
year ended June 30, 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.   

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.                            

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.              

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 11 - CAPITAL STOCK (Continued)                                             

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,  2000,  1999 and 1998 were as  
follows:                                                                        

                                                                  Weighted
                                                                   Average
                                             Number of            Exercise
                                                Shares               Price
                                             ---------            --------

           Outstanding, June 30, 1997          185,860              $ 4.62
           Granted                             556,200                2.99
           Exercised                          (559,325)               2.98
           Forfeited                                 -                   -
                                              --------              ------
           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
                                              ========              ======
Exercisable at:                                     
             June 30, 1998                     182,735              $ 4.62
             June 30, 1999                     387,735              $ 4.62
             June 30, 2000                     426,735              $ 2.83

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 11 - CAPITAL STOCK (Continued)                                             

Options (Continued)                                                             
-------                                                                         

The  exercise  price for options  outstanding  as of June 30, 2000 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, 2000.                                                     

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, 2000.                  

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, 2000.   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 11 - CAPITAL STOCK (Continued)                                             

Options (Continued)                                                             
-------                                                                         

Stock option share  activity and weighted  average  exercise  prices under the  
HMCA plans and grants for the three years ended June 30,  2000,  1999 and 1998  
were as follows:                                                                

                                                                Weighted
                                                                 Average
                                                   Number of    Exercise
                                                      Shares       Price
                                                   ---------   ---------

Outstanding - June 30, 1998 and                     
            1997                                   1,600,000       $ .10
          Granted - June 30, 1999                  1,170,000        1.00
                                                   ---------       -----
Outstanding - June 30, 2000 and                     
           1999                                    2,770,000       $ .48
                                                   =========       =====
Exercisable at June 30, 2000,                       
            1999 and 1998                                  -         $ -
                                                   =========       =====

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, 2000, 1999 or 1998 as follows:                                   

                                  2000            1999            1998
                                ------------    ------------    ------------
Net Loss:                                           
              As reported       $ 10,955,987    $ 14,215,763      $5,653,086
              Proforma          $ 11,059,237    $ 14,256,763      $5,908,938

Loss Per Share:                                     
              As reported              $0.17           $0.22           $0.09
              Proforma                 $0.17           $0.22           $0.10

The fair value of the options  granted  under all plans is estimated at $0.23,  
$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, 2000, 1999 and 1998:                                                   

All Plans:                                      
       Dividend yield                                   0%
       Expected volatility                             33%
      Expected life (years)                            1

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%.                                                 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 11 - CAPITAL STOCK (Continued)                                             

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

On May 9, 1997 and April 1, 1995,  the Board of Directors  adopted Stock Bonus  
Plans.  Under the terms of the Plans,  5,000,000  shares of common  stock were  
reserved for  issuance  and stock  bonuses may be awarded no later than May 8,  
2007 for the 1997 Plan and March 31,  2005 for the 1995  Plan.  During  fiscal  
2000, 1999 and 1998, 2,148,429, 826,359 and 849,205 shares, respectively, were  
issued  under the stock  bonus  plans,  of which  234,677,  161,180  and 4,300  
shares,  respectively,  were charged to  operations as  compensation  expense,  
490,000, 463,161 and 621,875 shares,  respectively,  were issued in settlement  
of liabilities,  19,332, -0- and 10,600 shares,  respectively,  were issued in  
exchange for notes, 1,403,420, 202,018 and 223,030 shares, respectively,  were  
issued in  connection  with  consulting  agreements,  and  1,000,  -0- and -0-  
shares, respectively, were issued upon conversion of Class B to Class A common  
stock.                                                                          

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

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

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

                                                June 30,
                                               ---------------------------
                                                2000          1999
                                                -----------    -----------

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.                                         $   387,580    $   494,030   

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  (7.22% at June 30,                                    
2000)  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.                                 2,767,060      3,763,565   

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.                                   758,788      1,005,180   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

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

                                          June 30,
                                           ---------------------------
                                           2000           1999
                                           -----------     -----------

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.                          $   205,262     $   290,984     

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.        1,877,776       2,807,742     

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.                                564,341         717,327     

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

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

                                                      June 30,
                                                     -------------------------
                                                      2000          1999
                                                     -----------    ----------

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.           $ 5,337,913    $ 5,025,392 

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.                                   2,000,000      1,915,000 

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

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

                                                    June 30,
                                                     -------------------------
                                                    2000        1999
                                                    -----------  -----------

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.                              $    68,749  $    91,665  

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.                                  283,247      460,000  

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.                      247,824      392,848  

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      266,942  

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      253,31   

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

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

                                                  June 30,
                                                 ---------------------------
                                                2000            1999
                                                 -----------     -----------

Capital lease  obligations  requiring monthly                                   
payments,   aggregating  $24,750,   including                                   
interest at 13.15%.                                $    -          $   430,890  

Other (including  capital leases for property                                   
and equipment)                                       1,112,996       1,906,957  
                                                 -----------     -----------
                                                  20,969,186      24,821,834
                                                   6,224,727       4,474,293
Less:  Current maturities                          -----------     -----------  
                                                 $14,744,459     $20,347,541
                                                 ===========     ===========

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

Years Ended 
June 30,  
----------- 

                      2001             $ 6,224,727
                      2002               6,066,441
                      2003               8,401,334
                      2004                 247,760
                      2005                  28,924
                                       -----------
                                       $20,969,186
                                       ===========

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 13 - INCOME TAXES                                                          

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

                            2000             1999             1998
                            ----------       ----------       ----------
Current:                                            
            Federal          $   -           $    -           $1,700,000
            State              43,677           203,876          302,449
                             --------        ----------       ----------
                               43,677           203,876        2,002,449
                             --------        ----------       ----------

Deferred:                                           
             Federal              -             (659,794)      (2,500,000)
        State                -             (134,000)           -
                             --------        ----------       ----------
                                  -             (793,794)      (2,500,000)
                             --------        ----------       ----------
               Totals         $ 43,677        $ (589,918)      $ (497,551)
                             ========        ==========       ==========

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

                                        2000           1999           1998
                                        --------       --------       --------
Taxes at federal                                    
               statutory rate            (34.0)%        (34.0)%        (34.0)%
State and local                                     
income taxes, net                               
             of federal benefit           .4            0.3            3.3
           Permanent differences         1.1            0.8            1.7
Unutilized net                                      
operating losses and                              
            tax credits                 32.9           28.9           20.9
                                       -----          -----          -----
Effective income tax                                
               rate                        0.4%          (4.0)%         (8.1)%
                                        =====          =====           =====

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 13 - INCOME TAXES (Continued)                                              

As of June 30,  2000,  the Company has net  operating  loss  carryforwards  of  
approximately  $26,240,000  that will be  available to offset  future  taxable  
income. Of these carryforwards, $15,500,000 and $10,740,000 expire on June 30,  
2018 and 2019,  respectively.  Additionally,  for federal income tax purposes,  
the Company has tax credit  carryforwards  aggregating  $2,016,760,  which are  
accounted  for under the flow  through  method.  The tax credit  carryforwards  
expire as follows:                                                              

June 30:                      
     2005                     $202,017
     2006                      101,334
     2007                      258,200
     2008                      172,207
     2016                       70,145
     2017                      402,590
     2018                      432,195
     2019                      378,072
                            ----------
                            $2,016,760
                            ==========

In  addition,  for New York State  income tax  purposes,  the  Company has tax  
credit carryforwards aggregating $1,120,000, which are accounted for under the  
flow-through method. The tax credit carryforwards expire during the years 2006  
to 2015.                                                                        

Significant components, tax effected, of the Company's deferred tax assets and  
liabilities at June 30, 2000 and 1999 are as follows:                           

                                                 2000           1999
                                                 ----------     ----------
Deferred tax assets:                                
             Allowance for doubtful accounts     $1,022,807     $  868,094
             Non-deductible accruals                621,067        737,444
             Net operating carryforwards          9,896,000      5,600,000
             Tax credits                          3,136,906      3,066,761
Inventory capitalization for                    
               tax purposes                          84,000        148,000
                                                 ----------     ----------
                                                 14,760,780     10,420,299
            Valuation allowance                  (13,924,203)    (9,221,699)
                                                 ----------     ----------
           Net deferred tax assets                  836,577      1,198,600
                                                 ----------     ----------

Deferred tax liabilities:                           
             Fixed assets and depreciation          661,019      1,107,776
             Capitalized software costs             175,558         90,824
                                                 ----------     ----------
           Gross deferred tax liabilities           836,577      1,198,600
                                                 ----------     ----------
       Net deferred tax liabilities          $    -         $    -
                                                 ==========     ==========

The net change in the valuation allowance for deferred tax assets increased by  
approximately $4,702,504.                                                       

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 14 - OTHER CURRENT LIABILITIES                                             

Included in other current liabilities are the following:                        

                                          2000              1999
                                          -----------        -----------
Unearned revenue on service                         
            contracts                     $   775,032        $   702,406
          Accrued bonus                       729,546          1,187,742
          Accrued payroll taxes               282,158            443,830
          Accrued interest                    259,224            237,270
          Accrued salaries and commissions    870,663            955,500
          Accrued professional fees           653,102            561,938
          Litigation judgements             2,440,037          2,478,794
          Excise and sales taxes            1,847,805          1,789,039
          Other                             1,109,362          1,564,472
                                          -----------        -----------
                                          $ 8,966,929        $ 9,920,991
                                          ===========        ===========

NOTE 15- 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, 2000:   

                      Facilities
Year Ended                         and              
         June 30,                        Equipment           Capital
          ----------                      -----------        -----------
             2001                         $ 2,842,411        $ 1,125,425
             2002                           2,795,293            468,376
             2003                           2,456,311            320,786
             2004                           2,263,351             63,097
             2005                           1,419,919             32,637
     Thereafter                        5,057,702             -
                                          -----------        -----------
          Total minimum obligations       $16,834,987          2,010,321
                       ===========
Less: Amount representing                           
                  interest                                       251,821
                                                             -----------
Present value of net minimum                        
            lease obligations                                $ 1,758,500
                                                             ===========

Rent expense for operating  leases  approximated  $3,235,075,  $3,266,289  and  
$2,382,000  for  the  three  years  ended  June  30,  2000,   1999  and  1998,  
respectively.                                                                   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)                             

Litigation                                                                      
----------                                                                      

On March 4, 1996,  the Company filed an action  against  Toshiba  Corporation,  
Toshiba America Medical Systems,  Inc.,  Toshiba American MRI, Inc. and others  
alleging  infringement  of four of its MRI  patents.  In May  1998,  FONAR and  
Toshiba amicably resolved the litigation and FONAR received a monetary payment  
from Toshiba. Other terms of the settlement are confidential.                   

In January  1998,  the Company  filed an action  against  Health  South,  Inc.  
("Health  South"),  in the United States  District  Court of New York alleging  
infringement of the Company's  Multi-Angle Oblique Imaging Patent (U.S. Patent  
No. 4,871,966).  Health South filed a declaratory  judgement  counterclaim for  
non-infringement and invalidity and a third party claim against a manufacturer  
of certain of its  scanners.  The case was settled  with the  manufacturer  in  
December 1999 and with Health South in June, 2000. The terms of the settlement  
are confidential.                                                               

On August 4, 1998,  Beal Bank filed a notice of motion for  summary  judgement  
against Melville Magnetic Resonance Imaging,  P.C.  ("Melville  Magnetic") and  
the Company. The motion for summary judgement seeks to recover $733,855,  plus  
accrued interest of $221,809,  for payment of a bank loan executed by Melville  
Magnetic and guaranteed by the Company. In April 1999, a summary judgement was  
granted against Melville Magnetic and the Company, as a guarantor on the loan.  
The  court's   decision  is  currently  under  appeal.   Included  in  accrued  
liabilities at June 30, 1999 and 2000 is $650,000 related to the judgement.     

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,  2000,  1999 and 1998  approximated  $36,000,  $50,000  and  $47,000,  
respectively.                                                                   

The Company is  self-insured  with  respect to product  liability.  During the  
fiscal years ended June 30, 2000, 1999 and 1998, no material claims arose.      

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)                             

Management Contracts                                                            
--------------------                                                            

In  connection  with the  acquisition  of  Affordable  Diagnostics,  Inc. HMCA  
entered into a management  agreement  with the former  President of Affordable  
effective July 1, 1997.  The agreement  provides for a base fee of $52,000 per  
year for a 5-year period, commencing July 1, 1997, and 60,000 shares of HMCA's  
common stock valued at $60,000, as signing bonuses. In addition, an additional  
240,000 shares of HMCA's common stock are issuable to the consultant  provided  
certain financial hurdles are met over the 5-year term of the agreement. As of  
June 30, 2000, no additional shares have been earned under the agreement.       

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)                             

Employment Agreements                                                           
---------------------                                                           

On  March  20,  1998,  a  consolidated  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 vefirst  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,  
----------- 

                         2001                 $  652,000
                         2002                    652,000
                         2003                    682,500
                         2004                  1,096,666
                         2005                  1,190,000
                      Thereafter               3,833,334
                                              ----------
                                              $8,106,500
                                              ==========

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, 2000, 1999 and 1998.                                       

The shareholders of the Company approved the 2000 employee stock purchase plan  
("ESPP") at the Company's  annual  shareholders'  meeting in April,  2000. The  
ESSP 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, 2000.                                                                       

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 16 - OTHER INCOME (EXPENSE) AND SUPPLEMENTARY PROFIT AND LOSS DATA         

Other income consists of:                                                       

                                    For the Years Ended June 30,
                                     -------------------------------------
                                      2000         1999         1998
                                     -----------   ----------   ----------

           Royalties                 $   920,000   $   42,000   $  714,000
            Other income (expense)         93,425       32,950      (61,382)
Gain on sale of                                     
         subsidiary                1,021,950         -           -
Gain on settlement of                               
various legal                                     
disputes and other                                
            claims                     3,540,000    1,618,169    7,957,417
      Litigation provision           -          (650,000)      -
                                     -----------   ----------   ----------
                                     $ 5,575,375   $1,043,119   $8,610,035
                                     ===========   ==========   ==========

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.                     

Advertising expense approximated  $2,140,000,  $2,191,000 and $651,000 for the  
years ended June 30, 2000, 1999 and 1998, respectively. Maintenance and repair  
expenses totalled approximately $758,000,  $491,000 and $224,000 for the years  
ended  June  30,  2000,  1999  and  1998,   respectively.   Royalty   expenses  
approximated  $36,000,  $49,000 and $47,000 for the years ended June 30, 2000,  
1999  and  1998,   respectively.   Amortization   of  intangible   assets  was  
approximately $1,433,000, $1,518,000 and $674,000 for the years ended June 30,  
2000, 1999 and 1998, respectively.                                              

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION                                    

During  the years  ended  June 30,  2000,  1999 and  1998,  the  Company  paid  
$1,596,931,  $1,768,481  and $343,418 for interest,  respectively.  During the  
years ended June 30, 2000,  1999 and 1998, the Company paid $20,144,  $201,388  
and $1,202,449 for income taxes, respectively.                                  

During the years ended June 30, 1999 and 1998, the Company acquired the assets  
and assumed the  liabilities of various  entities.  The  transactions  had the  
following non-cash impact on the balance sheets:                                

                                                  1999                  1998
                                            ----------            ----------

              Accounts receivable           $1,900,000              $600,000
              Equipment                         60,000               300,000
              Other assets                           -                     -
              Intangibles                    9,356,067            12,221,442
              Accrued liabilities            1,000,000           (1,100,000)
              Notes payable to sellers     (9,388,572)           (7,073,000)
              Capital lease obligation               -                     -
              Other liabilities                      -                     -
              Deferred taxes payable                 -                     -
              Equity                         (275,830)             (923,442)
                                            ----------            ----------
Net Cash Used for                               
                Acquisitions                $2,651,665            $4,025,000
                                            ==========            ==========

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

During the year ended June 30, 2000:                                            

a) The Company  issued 490,000 shares of common stock in settlement of current  
liabilities aggregating $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.                                                                     

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)                        

Non-Cash Transactions (Continued)                                               
---------------------                                                           

During the year ended June 30, 1999:                                            

a) The Company  issued 463,161 shares of common stock in settlement of current  
liabilities aggregating $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.       

During the year ended June 30, 1998:                                            

a) The Company  issued  236,345  shares of its common stock in  settlement  of  
current liabilities aggregating $632,386.                                       

b) The Company issued 576,000 shares of its common stock valued at $923,442 as  
additional  contingent  consideration  related to  acquisition  of  Affordable  
Diagnostics, Inc.                                                               

c) The Company  issued  385,530  shares of its common  stock to  employees  in  
satisfaction of accrued liabilities incurred during the fiscal year ended June  
30, 1997 aggregating $1,147,906.                                                

d) Accrued  interest  aggregating  $146,330 was reclassified to long-term debt  
pursuant to a debt restructuring agreement.                                     

e)  Equipment  costing  $800,000  was  reclassified  from Costs and  Estimated  
Earnings in Excess of  Billings  on  Uncompleted  Contracts  to  Property  and  
Equipment.                                                                      

f) The Company  purchased  $1,391,304 of machinery and equipment under capital  
leases.                                                                         

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 18 - 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 19 - ADVANCES AND NOTES TO RELATED PARTIES                                 

Effective  December 1, 1993,  Albany Magnetic Imaging Center,  P.C., a Georgia  
professional corporation, of which Raymond V. Damadian is the sole stockholder  
("Albany  Center"),  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, 2000 was $158,745.                                                          

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  $16,626.20  each,  commencing  May  1999.  The  
balance due under this note as of June 30, 2000 was $924,451.                   

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. The balance due under this note as of June 30, 2000 was  
$91,719.                                                                        

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 19 - ADVANCES AND NOTES TO RELATED PARTIES (Continued)                     

During 1994, Deerfield Magnetic Resonance Imaging P.A. ("Deerfield Center"), a  
Florida  professional  association,  of which  Raymond V. Damadian is the sole  
shareholder, Director and President, purchased an MRI scanner from the Company  
for a purchase  price of $962,185.  The  Deerfield  Center paid the  remaining  
balance due under the note during fiscal 1998.                                  

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.  Timothy  
Damadian,  the  Treasurer  of  FONAR  and  President  of  HMCA,  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.  Timothy  
Damadian,  the  Treasurer of FONAR and  President of HMCA,  is a  stockholder,  
Director and President of Pompano.                                              

As at June 30, 2000 and 1999, the aggregate  indebtedness  of Specialties  and  
Canarsie  to the  Company  was  $12,629  and  $25,720,  respectively,  and the  
aggregate  indebtedness of Guardian and Pompano to the Company was $17,667 and  
$29,682, respectively.                                                          

NOTE 20 - SEGMENT AND RELATED INFORMATION                                       

Effective  July 1, 1998,  the Company  adopted the provisions of SFAS No. 131,  
"Disclosures  About Segments of an Enterprise and Related  Information".  SFAS  
No.  131  establishes   standards  for  the  way  public   enterprises  report  
information  about  operating  segments  in annual  financial  statements  and  
requires those  enterprises to report  selected  information  about  operating  
segments in interim financial reports issued to stockholders.  The information  
for 1998 has been  restated  from the prior  year's  presentation  in order to  
conform to the 1999 presentation.                                               

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.                                                                     

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 20 - SEGMENT AND RELATED INFORMATION (Continued)                           

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

                                 Physician
                                  Management
                          Medical Equipment     Services        Totals
                             -----------------   ------------   ------------
Fiscal 2000:                                                            

Net sales from external                                                 
    customers                     $  5,051,064   $ 34,022,733   $ 39,073,797
  Intersegment net sales          $  1,227,075   $      -       $  1,227,075
   Operating (loss) income         $(18,904,534)  $  2,477,962   $(16,426,572)
  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   $ 41,553,346   $ 84,599,037
  Capital expenditures            $  2,081,551   $    940,795   $  3,022,346

Fiscal 1999:                                                            

Net sales from external                                                 
    customers                     $  5,681,955   $ 31,263,089   $ 36,945,044
  Intersegment net sales          $    845,834          -       $    845,834
   Operating (loss) income         $(18,730,341)  $  3,122,286   $(15,608,055)
  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   $ 41,337,611   $ 97,648,168
  Capital expenditures            $  4,180,447   $  1,299,392   $  5,479,839

Fiscal 1998:                                                            

Net sales from external                                                 
    customers                     $  6,458,363   $ 21,095,994   $ 27,554,357
  Intersegment net sales          $  1,349,186          -       $  1,349,186
   Operating (loss) income         $(20,292,707)  $  2,698,314   $(17,594,393)
  Depreciation and amortization   $  1,415,783   $  1,501,820   $  2,917,603
Compensatory element of stock                                           
    issuances                     $     12,362   $  1,096,000   $  1,108,362
  Total identifiable assets       $ 79,235,791   $ 29,211,989   $108,447,780
  Capital expenditures            $  1,889,450   $  2,287,398   $  4,176,848

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

The Company's  areas of operations are  principally in the United States.  The  
Company had export sales of medical equipment amounting to 2.8%, 3.4% and 4.6%  
of consolidated net revenues for the years ended June 30, 2000, 1999 and 1998,  
respectively.                                                                   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 20 - SEGMENT AND RELATED INFORMATION (Continued)                           

Export Sales (Continued)                                                        
------------                                                                    

The sales were made principally to the following locations:                     

                                  2000           1999           1998
                                  ----           ----           ----
            Korea                    -              -           1.8%
            Spain                 2.8%           3.2%              -
           Saudi Arabia             -            .2            2.8
                                  ----           ----           ----
                                  2.8%           3.4%           4.6%
                                  ====           ====           ====

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 92%, 85% and 77%  
of the  consolidated  net revenues for the years ended June 30, 2000, 1999 and  
1998, respectively.  Accounts receivable due from related parties approximated  
83% and 88% of the  consolidated  accounts  receivable as of June 30, 2000 and  
1999, respectively.(NOTE 5)                                                     

NOTE 21 - PROFORMA INFORMATION (UNAUDITED)                                      

The Company's  consolidated  financial  statements for the year ended June 30,  
1998 do not include the results of operations  of A&A  Services,  Inc. for the  
period July 1, 1997 through March 20, 1998 and Dynamic for the year ended June  
30, 1998, and the  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 and 1998,  
assuming the foregoing  acquisition had occurred on June 30, 1999 and 1998 (in  
thousands, except per share data):                                              

                                          1999              1998
                                          -----------        -----------
                                          (Unaudited)        (Unaudited)

      Revenue, net                        $    37,624        $    36,747
       Loss from operations                $   (15,447)       $   (16,367)
       Loss before income taxes            $   (14,344)       $    (4,777)
Basic and diluted net                                       
         loss per share                          $(.22)             $(.08)

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FONAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 JUNE 30, 2000

NOTE 22 - SUBSEQUENT EVENTS                                                     

The  Company  received  approximately  $9  million  during  August  of 2000 in  
connection with the licensing of its technology.                                

During  September  2000,  the Company  entered into a sales-type  lease with a  
related party for an MRI scanner totalling  $935,000.  The lease is payable in  
60 monthly  payments of $12,356 each,  plus at the end of the 60-month  lease,  
the lessee can elect to continue the lease for an additional  five years, at a  
monthly payment of $12,356, including interest at 10% per annum, or pay a lump  
sum of $581,544.                                                                

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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.   64   President, Chairman                  
                       of the Board and a Director

Timothy R. Damadian         36   Treasurer of FONAR; President of HMCA

David B. Terry              53   Vice President and Secretary         

Claudette J.V. Chan         63   Director                             

Robert J. Janoff            73   Director                             

Charles N. O'Data           64   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 director of  
HMCA.                                                                           

   Timothy R. Damadian has been  Treasurer of FONAR since  December 1998 and
President of HMCA since its formation in March 1997. Mr.  Damadian served as a  
field service  technician for FONAR,  after graduating from Suburban Technical  
School in 1982,  where he studied digital  computer  technology.  Mr. Damadian  
became  Director of  Manufacturing  in October  1989 and was  promoted to Vice  
President of  Operations  of FONAR in July 1992,  in which  position he served  
until December,  1998.  Timothy Damadian is the son of Raymond V. Damadian and  
nephew of David Terry and Claudette Chan.                                       

   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. Mr. O'Data acts an independent financial consultant to various  
entities,  including  Pittsburgh National Bank. Mr. O'Data served on the board  
of the Medical Center,  Beaver,  a 500 bed acute care facility,  for 22 years,  
three as the Board Chair. 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.  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 Raymond V. Damadian, 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 2000 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 2000.                                                                    

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I.  SUMMARY COMPENSATION TABLE                                                  

                                                        [Enlarge/Download 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.     2000    $86,799.97   -       -        -            -         -          -   
Damadian,      1999    $86,799.96   -       -        -            -         -          -   
President      1998    $84,218.10   -       -        -            -         -          -   
& CEO                                                                                      

II.  OPTION/SAR GRANTS IN LAST FISCAL YEAR                                      

                                                        [Enlarge/Download Table]

                                                              Potential                   
                                                              Realizable                  
                                                           Value at Assumed               
                                                             Annual Rates      Alternative
                                                            of 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                                                                                     

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)                         
               Shares       Value       Number of        Value of Unexercised             
Name          Acquired     Realized     Unexercised      In-the-Money                     
                 on          ($)        Options/SARs     Options/SARs at                  
              Exercise                  at FY-End (#)    FY-End ($)                       
                (#)                                                                       
                                        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, 2000,  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,            
2000,  options  to  purchase  4,572,400  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, 2000, 2,013,344 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, 1999, 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, 1999,  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, 1999,  options to            
purchase 100,000 shares of Common Stock were available for future grant.                  

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.                 

     The following table sets forth the number and percentage of shares of the            
Company's  securities  held by each  director,  by each  person  known  by the            
Company to own in excess of five percent of the  Company's  voting  securities            
and by all officers and directors as a group as of September 6, 2000.                     

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             4.39%                          
    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 (6 persons) (2)                                                                
    Common Stock                      2,522,469            4.45%                          
    Class C Stock                     9,561,174           99.98%                          
    Class A Preferred                   492,744            6.29%                          
---------------------------                                                               
*   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.                                                                             

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 to HMCA under both the  Management  Agreements  and the  Scanner            
Leases are on a per scan basis.                                                           

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

     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.                                                                      

     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.                                                                               

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,  2000,  the net  revenues  from the            
Affordable Professional Corporations were approximately $2.8 million.                     

ACQUISITION OF A & A SERVICES.                                                            

     Effective  March 20,  1998,  HMCA  acquired A & A Services,  Inc. ("A & A            
Services"),  an MSO 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, 2000, the net revenues from the A & A Professional  Corporations were            
$4.0 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,  2000,   the  net  revenues  from  the  Dynamic            
Professional Corporations were $7.3 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,  2000,  the net            
revenues from Superior were $2.6 million.                                                 

     Pursuant to an agreement  dated March 31,  1993,  RVDC agreed to purchase            
the  Company's  general  partnership   interest   (approximately  92%  of  the            
partnership)  in a partnership  owning and operating an MRI scanning center in            
Bensonhurst (Brooklyn), New York. Robert Janoff, a director of the Company, is            
a limited  partner  in the  partnership.  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, 2000 to July 30,  2001.  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.                                                      

     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, 2000  through  April 7,  2001.  The price in effect for the prior year from            
April 8, 1999 through April 7, 2000 was also $50,000.  Timothy  Damadian,  the            
Treasurer of FONAR and President of HMCA, 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, 2000 through  August 31, 2001.  The price in effect            
during  the prior  year from  September  1, 1999 to August  31,  2000 was also            
$70,000.  Timothy  Damadian,  the Treasurer of FONAR and President of HMCA, 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, 1999 through  September  30, 2000.  The price in effect during            
the prior  year from  October  1, 1998  through  September  30,  1999 was also            
$70,000.  Timothy Damadian, the Treasurer of FONAR and President of HMCA, is a            
stockholder, director and officer of Guardian.                                            

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

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, 2000 and 1999.                            

     Consolidated  Statements of Operations for the Three Years Ended June 30,            
2000, 1999 and 1998.                                                                      

     Consolidated Statements of Stockholders' Equity for the Three Years Ended            
June 30, 2000, 1999 and 1998.                                                             

     Consolidated  Statements of Cash Flows for the Three Years Ended June 30,            
2000, 1999 and 1998.                                                                      

     Notes to Consolidated Financial Statements.                                          

     Information  required by  schedules  called for under  Regulation  S-X is            
either not applicable or is included in the consolidated  financial statements            
or notes thereto.                                                                         

b) REPORTS ON FORM 8-K                                                                    

          None.                                                                           

c)  EXHIBITS                                                                              

     3.1 Certificate of Incorporation, as amended, of the Company incorporated            
herein by reference to Exhibit 3.1 to the Registrant's  registration statement            
on Form S-1,Commission File No. 33-13365.                                                 

     3.2 Article Fourth of the Certificate of  Incorporation,  as amended,  of            
the Company  incorporated  by  reference  to Exhibit  4.1 to the  Registrant's            
registration statement on Form S-8, Commission File No. 33-62099.                         

     3.3 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:  January 26, 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            January 26, 2001                    
Raymond V. Damadian        Board of Directors,                                            
                           President and a                                                
                           Director (Principal                                            
                           Executive Officer)                                             

/s/ Claudette J.V. Chan  Director            January 26, 2001                             
Claudette J.V. Chan                                                                       

/s/ Robert J. Janoff     Director            January 26, 2001                             
Robert J. Janoff                                                                          

/s/ Charles N. O'Data    Director            January 26, 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 Investor Services                                       
                    12039 W. Alameda Parkway                                              
                    Suite Z-2                                                             
                    Lakewood, Colorado  80228                                             

                    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

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