FONAR CORP - 10-K Annual Report

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

FORM 10-K
_____________________

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended June 30, 1996

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)

(516) 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 3, 1996, 43,686,751 shares of Common Stock, 5,411 shares of
Class B Common Stock, 9,562,824 shares of Class C Common Stock and 7,855,627
shares of Class A Non-voting Preferred Stock of the registrant were
outstanding. The aggregate market value of the approximately 41,056,768
shares of Common Stock held by non-affiliates as of such date (based on the
bid price per share on September 3, 1996 as reported on the NASDAQ System)
was approximately $100,075,872. The other outstanding classes do not have a
readily determinable market value.

DOCUMENTS INCORPORATED BY REFERENCE
None

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
(516) 694-2929.

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 is the originator of the iron-core non-superconductive and
permanent magnet technology and is engaged in the business of designing,
developing, manufacturing, marketing and servicing magnetic resonance
imaging ("MRI" or "MR") scanners which utilize that technology for the
detection and diagnosis of human disease. 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.

RECENT DEVELOPMENTS AND OVERVIEW.

The Company's principal products are its new "QUAD" series of MRI
scanners. 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 above low field (above 600 gauss). The "QUAD 7000"
is similar in design to the QUAD 12000 but utilizes a smaller 3,500 gauss
electromagnet.

FONAR received FDA approval to market the QUAD 7000 in April, 1995
and for the QUAD 12000 in November 1995.

In 1990 the Company introduced the Ultimate (tm) 7000 scanner, which
was its principal product prior to the introduction of the QUAD scanners.
The Quad and Ultimate scanners are revolutionary new MR scanning products
representing the culmination of years of total company wide effort to design
and construct the "Ultimate MR" scanner product line. These products
replaced the Company's traditional principal products, the Beta (tm) 3000
scanner (which utilizes a permanent magnet) and the Beta 3000M scanner
(which utilizes an iron core electromagnet). All of the Company's scanners
create cross-sectional images of the human body.

The QUAD 7000, utilizing a 3500 gauss iron core electromagnet, is
envisioned by the Company as an economical solution to the rising cost of
medicine. Priced at $695,000, the Company expects the QUAD 7000 to be a
success in the market, not only with first time buyers but with users who
must now replace their obsolete MRI equipment.

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 quality and clarity competitive
with high field superconductive magnets. The QUAD 12000 scanner magnet is
the highest field "open MRI" in the industry.

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.

In tandem with new product and software developments, the Company has
been strengthening and continues to strengthen its legal position for the
purpose of protecting its proprietary technology as well as other interests.

The Company does not intend to permit its competitors and would-be
competitors to capitalize, to the detriment of the Company, on its
inventions and exhaustive research and development efforts, as the Company
believes has happened in the past.

On September 2, 1992, the Company filed a patent infringement suit
against Hitachi Ltd., General Electric Company and others in the United
States District Court for the Eastern District. In April, 1995, the Company
reached a settlement with Hitachi Ltd. and related defendants. In May,
1995, the jury rendered a verdict in FONAR's favor against General Electric
Company. In October, 1995, the Court awarded FONAR judgment of $62 million,
plus interest and issued an injunction (stayed pending appeal) enjoining
General Electric from future violations of Fonar's Multi-Angle Oblique (MAO)
(tm) patent. The appeal is scheduled for oral argument on October 8, 1996.

Following its favorable jury verdict against General Electric
Company, FONAR filed patent infringement suits against Siemens Medical
Systems, Inc., Siemens, AG, Philips Electronics, NV, Philips Medical
Systems, Inc. and Philips Electronics North America Corporation. The
patents sought to be enforced against both defendants include the
Multi-Angle Oblique improvement patent (U.S. Patent No. 4,871,966 entitled
"Apparatus and Method for Multiple Angle Oblique Magnetic Resonance
Imaging"). Subsequently, in March 1996, the Company commenced a patent
infringement suit against Toshiba America Medical Systems, Inc. and Toshiba
American MRI, Inc. In April 1996, the litigation with the Philips companies
was resolved.

The Company is optimistic about sales of its new scanner products.
At September 1, 1996, the Company's backlog of unfilled orders had increased
to $6.8 million as compared to $4.0 million at September 1, 1995. To
further promote product recognition and sales, FONAR will attend the RSNA
(Radiological Society of North America) trade show in November 1996 to
exhibit its new products. The RSNA is the leading trade show in the MRI
industry. Approximately 25,000 radiologists, who are among the principal
groups to whom the Company directs its marketing efforts, are expected to
attend to view MRI industry's most current product developments. In
addition, the Company is in the process of establishing a network of
independent sales representatives to supplement its internal domestic sales
force.

The Company is actively seeking to promote foreign sales, thus
enhancing America's competitive position as well as its own. Since
commencing its current foreign sales program, the Company has sold scanners
in Korea, Mexico and Poland. Based on numerous indications of interest,
meetings, sales trips abroad and negotiations, the Company is cautiously
optimistic that foreign sales will produce significant revenues.

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

PRODUCTS OFFERED

The Company's principal products are its new "QUAD" series of MRI
scanners. The QUAD 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 above low field (above 600 gauss). The QUAD 7000 is
similar in design to the QUAD 12000 but utilizes a smaller 3,500 gauss
electromagnet. The Ultimate 7000 utilizes a 3500 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.

The "QUAD" scanners are unique MR scanners in that four sides are
open, thus allowing access to the scanning area from four vantage points.
Equipped with up to four beds, the user is able to prep one or more "on
deck" patients while another patient is being scanned, thereby increasing
throughput and reducing scan prices. The star shaped open design of the
QUAD will also make possible a host of new applications, particularly MRI
mammography and MRI directed surgery (Interventional MRI).

The principal difference between the Quads 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).

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.

MRI directed surgery (laproscopic surgical procedures) is made
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 increased patient space in the QUAD permits the utilization of
the Company's software for the taking of "moving scans." Those "moving
scans" or "CINE," enable the physician to observe the scanned body part
(e.g., knee, neck and elbow) in motion. The QUAD enables a full range of
motion studies that cannot be completely performed in the claustrophobic
cylindrical tubes of today's superconductive magnets.

FONAR's works-in-progress include CINE-FLEX (tm), which is a set of
specialized coils and matching fixtures that enable full-range CINEs of the
knee, shoulder, C-spine, L-spine and TMJ - an impossibility with supercon
MRIs.

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 quality and clarity competitive
with high field superconductive magnets. The QUAD 12000 scanner magnet is
the highest field "open MRI" in the industry.

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 7000, 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 7000 is used
to describe the S/N equivalency of the QUAD 7000 to 7000-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.

The QUAD's state-of-the-art electronics package features five
computer processors performing parallel processing. Its speed is
demonstrated by its ability to scan and reconstruct images simultaneously
and its ability to reconstruct a 256x256 image in 0.7 seconds, the fastest
of any MRI scanner on the market.

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, 1280x1280-pixel, 20-up, high-resolution image
monitor with features such as electronic magnifying glass and real-time,
continuous zoom and pan.

Because of the openness of the QUAD 7000 and FONAR's coil development
and CINE, QUAD 7000 users can plan on adding the works-in-progress CINE-FLEX
(tm) option to their scanners. CINE-FLEX (tm) is a set of specialized coils
and matching fixtures that enable full-range CINEs of the knee, shoulder,
C-spine, L-spine and TMJ - an impossibility with supercon MRIs.

The Beta 3000 initiated the Company's product line and resulted in
over 150 worldwide FONAR installations to date. The effort to achieve the
QUAD and the Ultimate product line represented a company-wide aspiration to
seize the opportunity to incorporate into the Company's product line all of
the desirable features FONAR had learned since it opened the industry in
1980. The facility of these features have been achieved in FONAR's "QUAD"
and "Ultimate" MR machines.

MARKETS AND MARKETING

The principal markets for the Company's scanners are hospitals and
private scanning centers. The Company is conducting its marketing through
its own sales network and selected distributors. Direct domestic marketing
is accomplished through field solicitation of potential users by Company
personnel. The Company is in the process of establishing a network of
independent sales representatives and distributors working on a commission
basis in the domestic market. Sales in foreign markets are made through
independent sales representatives and distributors.

In addition, the Company exhibited its new products at the trade show
held by the Radiological Society of North America ("RSNA") in Chicago in
November 1995 and plans to attend the RSNA trade shows in November 1996 and
future years as well. 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
(.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 a base price of $895,000 for
the QUAD 12000 and of $695,000 for the QUAD 7000 scanner. 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 is actively seeking to promote foreign sales. Since
commencing its current foreign sales program, the Company 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.

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

The Company regards its customer base of over 100 scanners installed
or in the process of being installed as a major asset. It has been and will
continue to be a significant 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 $7.7 million in fiscal 1994,
$6.6 million in fiscal 1995 and $6.1 million in fiscal 1996. The decreases
in fiscal 1995 and 1996 were principally the result of the retirement of old
scanners.

Substantial upgrades income, which is new to the medical instrument
industry, 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. 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.

RESEARCH AND DEVELOPMENT

During the fiscal year ended June 30, 1996, the Company incurred
expenditures of $3,607,703 ($251,659 of which was capitalized) on research
and development, as compared to $3,508,101 ($151,981 of which was
capitalized) and $3,604,785 ($687,551 of which was capitalized) incurred
during the fiscal years ended June 30, 1995 and June 30, 1994, respectively.

Research and development activities have focused, in large part, on
the development and enhancement of the Company's QUAD MR scanners and on the
continued enhancement of the Ultimate and Beta 3000 and Beta 3000M products.

The QUAD and Ultimate scanners involved significant software and hardware
development as the new products represented entirely new hardware design and
architecture requiring a complete new operating software system. Most
recently, the Company's research activity has centered on 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, 1996
increased to approximately $6.8 million, as compared to $4.0 million at
September 1, 1995. Of these amounts, approximately $1.3 million and $2.4
million had been paid to the Company as customer advances as at September 1,
1996 and September 1, 1995, respectively. 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 foreign and domestic 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, which expire at various times from 1999 to 2013, 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.

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.

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 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.

ENFORCEMENT LITIGATION

On September 2, 1992, the Company commenced legal action to enforce
its patent rights, filing suit against Hitachi Ltd., General Electric
Company and others in the United States District Court for the Eastern
District of New York. Prior to trial in April 1995, FONAR settled with
Hitachi. On May 26, 1995 the jury rendered a verdict against General
Electric Company awarding FONAR $110,575,000 for infringement of its
multi-angle oblique patent (Apparatus and Method for Multiple Angle Oblique
MRI, 10/3/89, U.S. Patent No. 4,871,966) and Dr. Damadian's pioneer cancer
detection patent (Apparatus and Method for Detecting Cancer in Tissue,
2/5/74, U.S. Patent No. 3,789,832). On October 6, 1995, the Court announced
its decisions on the parties' respective post-trial motions, awarding FONAR
$61,950,000 and an injunction (stayed pending appeal) on the multi-angle
oblique patent (U.S. Patent No. 4,871,966). Although finding that the
cancer detection patent was valid (U.S. Patent No. 3,789,832), the Court
overturned the jury's determination that General Electric Company's MRI
scanners infringed the patent. Both the Company and General Electric
Company have appealed. Oral argument is scheduled to be held on the appeals
on October 8, 1996. The Company is represented by Robins, Kaplan, Miller
and Ciresi, the Minneapolis based national law firm that represented
Honeywell in its lawsuit against Minolta for infringement of Honeywell's
autofocus patents.

Following the rendering of the jury's verdict in favor of FONAR
against General Electric Company, the Company, represented by Robins,
Kaplan, Miller and Ciresi, filed suits against Siemens Medical Systems,
Inc., Philips Electronics North America Corporation and related parties for
infringement of FONAR's multi-angle oblique patent, Dr. Damadian's pioneer
cancer detection patent and, in the case of Siemens Medical Systems, Inc.,
two additional MRI patents. Thereafter, Fonar commenced a patent
infringement suit against Toshiba American MRI, Inc. and Toshiba American
Medical Systems, Inc. The litigation with Philips Electronics of North
America Corporation and its affiliates was settled in April 1996.

The Company believes that it has achieved a significant milestone in
protecting and enforcing its proprietary rights in its lawsuit against
General Electric Company, and having pioneered the establishment and
development of the medical MRI scanning industry, the Company intends to
take the steps necessary to enforce its rights and protect its proprietary
technology against other infringers as well. (See "Litigation.")

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
superconductive magnet technology while the balance are based on
non-superconductive magnet technology. FONAR's non-superconductive MRI
scanners are competing principally with superconductive scanners.

FONAR believes that its MRI scanners have significant advantages as
compared to the superconductive scanners. These advantages include:

1. There is no fringe magnetic field. Super conductive scanners
require a more expensive shielded room than is required for the
non-superconductive scanners. The shielded room required for the
non-superconductive scanners is intended to prevent interference from
external radio frequencies.

2. They do not require costly coolants (liquid nitrogen and liquid
helium) or highly complex technology to handle them.

3. They are more open, quiet and in the case of the QUAD scanners
allow for faster throughput of patients.

4. They require smaller space to install.

5. Their annual operating costs are lower.

6. The set-up and disconnect time for a Mobile Scanner is shorter
than for a mobile superconductive scanner.

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

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; Elscint Ltd; Philips N.V.; Toshiba
Corporation, Hitachi Corporation, Shimadzu 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.

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.

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. These systems have
comprised one of the most rapidly growing modalities during recent years due
to an increasing number of procedures for established applications, as well
as the expansion of ultrasound into new applications. 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. 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 approval to market the Ultimate Magnetic Resonance
Imaging Scanner as a Class II device. The Company received FDA approval to
market the QUAD 7000 in April 1995 and for the QUAD 12000 in November 1995.

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.

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.

EMPLOYEES

As of July 1, 1996, the Company employed 171 persons on a full-time
basis. Of such employees, 12 were engaged in marketing and sales, 28 in
research and development, 46 in manufacturing, 43 in customer support
services, and 42 in administration.

ITEM 2. PROPERTIES

The Company leases approximately 93,240 square feet of office and
plant space at its principal office in Melville, New York and at one other
location in Farmingdale, New York at a current aggregate rental rate of
approximately $681,000, excluding utilities, taxes and other related
expenses. The terms of the various leases extend through 1997. Management
believes that these premises are adequate for its current needs. The
Company presently is negotiating to extend the terms of existing leases and
considering additional space in the same area.

ITEM 3. LEGAL PROCEEDINGS

On September 2, 1992, the Company filed an action against General
Electric Company, ("General Electric"), Hitachi Ltd. ("Hitachi") and other
defendants for patent infringement in the United States District Court for
the Eastern District of New York seeking injunctive relief and damages.
(FONAR Corporation and Dr. Raymond V. Damadian v. Hitachi Ltd. et. al. Civil
Action No. 92-4196). The defendants contested the Company's claims, and
Hitachi counterclaimed, alleging infringement by the Company of two of its
patents. In April, 1995, after the opening statements by counsel at the
commencement of trial, FONAR and Hitachi reached a settlement. On May 26,
1995, the jury rendered a verdict against General Electric Company awarding
FONAR $110,575,000 for infringement of two of its patents: United States
Patent Number 3,789,832 entitled "Apparatus and Method for Detecting Cancer
in Tissue" and United States Patent Number 4,871,966 entitled "Apparatus and
Method for Multiple Angle Oblique Magnetic Resonance Imaging." Subsequent
to the verdict General Electric made motions to the Court to enter judgment
as a matter of law in its favor and against FONAR with respect to both
patents notwithstanding the jury's verdict. FONAR made a motion to the
Court for an injunction restraining General Electric Company from using the
multi-angle oblique imaging technology covered by U.S. Patent No. 4,871,966.

On September 30, 1995 the Court announced its decision. In its
decision, the Court awarded FONAR $61,950,000 in damages against General
Electric for direct infringement of U.S. Patent No. 4,871,966 (Multiple
Angle Oblique Magnetic Resonance Imaging) and granted an injunction against
General Electric prohibiting future violations of the patent. (An
additional $6,471,726 in pre-judgment interest was awarded to FONAR on
November 17, 1995.) The injunction was stayed pending appeal, however, upon
the posting of a bond by General Electric. With respect to U.S. Patent No.
3,789,832 (Cancer Detection Patent), the judge agreed with the jury's
finding that the patent was valid, but disagreed with the jury finding of
infringement and determined that General Electric's MRI scanners did not
infringe the patent.

The Court also rejected the jury's finding that General Electric had
induced others to infringe U.S. Patent No. 4,871,966. General Electric has
appealed the portion of the judgment upholding the jury's award of damages
to FONAR for direct infringement of U.S. Patent No. 4,871,966 and the
issuance of the injunction. FONAR has appealed the portion of the judgment
overturning the jury's findings of infringement on U.S. Patent No. 3,789,832
and contributory infringement in respect of U.S. Patent No. 4,871,966. Oral
argument was held on October 8, 1996.

On June 16, 1995, the Company filed an action against Siemens Medical
Systems, Inc., Philips Electronics North America Corporation, Philips
Electronics, N.V. and other defendants for patent infringement in the United
States District Court for the Eastern District of New York. FONAR sought
injunctive relief and damages (FONAR Corporation and Dr. Raymond V. Damadian
V. Siemens Medical Systems, Inc. et al. Civil Action No. CV 95-2469 (LJW).
In its suit, FONAR alleged that four of its patents were infringed,
including U.S. Patent Nos. 3,789,832 (Apparatus and Method for Detecting
Cancer in Tissue) and 4,871,966 (Apparatus and Method for Multiple Angle
Oblique Magnetic Resonance Imaging). (Subsequently, the action was
transferred to the United States District Court for the District of
Delaware.)

Previously, in May 1995, Siemens Medical Systems, Inc. had filed a
complaint against FONAR in the United States District Court for the District
of Delaware seeking a declaratory judgment that the four patents were
invalid and unenforceable, as well as an adjudication that Siemens was not
infringing the four patents. On June 14, 1995, Siemens Medical Systems,
Inc. amended the Complaint to add Siemens AG as a plaintiff, to add Raymond
V. Damadian, M.D. MR Scanning Centers Management Company as a defendant and
to include a claim against FONAR for infringement of one of Siemens' MRI
patents. The complaint was further amended on December 14, 1995 to allege
infringement of two additional patents. (Siemens Medical Systems, Inc. and
Siemens AG, v. FONAR Corporation and Raymond V. Damadian, M.D. MR Scanning
Centers Management Company, Civil Action No. 95-261.

Thereafter, on June 30, 1995, Philips Electronics North America
Corporation and Philips Electronics, N.V. filed a complaint against FONAR in
the United States District Court for the District of Delaware seeking a
declaratory judgment that FONAR's U.S. Patents Nos. 3,789,832 and 4,871,966
were invalid, unenforceable and not infringed (Philips Electronics North
America Corporation and Philips Electronics, N.V. v. FONAR Corporation, Case
No. 95-431).

Separately, U.S. Philips Corporation, an affiliate of Philips
Electronics North America Corporation and Philips Electronics, N.V.,
commenced an action in the United States Court for the District of Delaware
alleging infringement by FONAR of two of its patents. (U.S. Philips
Corporation v. Fonar Corporation and Raymond V. Damadian, M.D. MR Scanning
Centers Management Company, Civil Action No. 95-448.)

In April 1996, FONAR entered into an agreement with Philips
Electronics N.V., Philips Electronics North America Corporation, Philips
Medical Systems North America and U.S. Philips Corporation setting the
lawsuits and claims between them.

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. FONAR
Corporation and Dr. Raymond V. Damadian v. Toshiba Corporation, Toshiba
America Medical Systems, Inc., Toshiba America MRI, Inc. et al. (U.S.
District Court, Eastern District of New York, Civil Action No. 96-0963.)

On March 4, 1987, Philip B. Kivitz, M.D. and Rad-Sonic Diagnostic
Medical Clinics, Inc., filed a complaint against AMD, FONAR, Raymond V.
Damadian and others in the San Francisco County Superior Court (Case Action
No. 870407) seeking $10,000,000 in compensatory damages and $10,000,000 in
punitive damages. In January 1993, the case went to trial and the jury
returned a verdict of $880,000 against AMD and $120,000 against FONAR. On
June 17, 1993, the Court granted FONAR's and AMD's motion for judgment
notwithstanding the verdict, thereby vacating the entire award against both
FONAR and AMD. The plaintiffs appealed the Court's granting of judgment
notwithstanding the verdict. On February 27, 1995, the appellate court
affirmed the lower court's judgment notwithstanding the verdict as to FONAR,
but reversed the judgment as to AMD. As a result, the trial court's
determination that the plaintiffs could not recover against FONAR was
upheld, but the jury verdict against AMD was reinstated. AMD filed a
petition for review with the California Supreme Court. AMD's petition was
denied on May 17, 1995.

On April 3, 1990, Summit, Rovins and Feldesman commenced an action in
the Supreme Court of the State of New York, County of New York against the
Company and its President, Raymond V. Damadian. The complaint alleges
unpaid fees for legal services and disbursements in the amount of
$664,371.65. The Company is contesting the plaintiff's claims as excessive
and improper charges for legal services, and has asserted various defenses
and a counterclaim of $100,000 for a refund of fees. The plaintiff made a
motion for summary judgment which was granted as to the existence of
liability but denied as to the amount. Dr. Damadian's cross-motion to
dismiss the action against him personally was granted. Both parties
appealed the court's decisions. On March 9, 1995, the appellate court
reversed the granting of summary judgment against FONAR. The appellate
court also upheld the dismissal of the action against Dr. Damadian
personally. The case is ready for trial.

In January, 1991, Myheal Technologies and a former employee commenced
an action against the Company in the United States District Court for the
Eastern District of New York (Index No. 91 CIV 0204). The amount claimed
was $5,000,000 in compensatory damages and $5,000,000 in punitive damages.
The claim arose out of an alleged breach of an agreement between the Company
and a former research and development employee of the Company. A jury
verdict rendered in December, 1993 against the Company for $1,150,000 was
set aside, and a second trial was ordered and held. On March 24, 1995 the
jury rendered a verdict in favor of Myheal Technologies in the amount of
$250,000 plus interest. On April 21, 1995, the Company made a motion
requesting judgment as a matter of law dismissing the plaintiffs' claim or
in the alternative a new trial or reduction of damages. The Company's
motion was denied and judgment was entered against the Company in August,
1995. The District Court's decision was upheld by the Court of Appeals on
appeal. The judgment has been paid.

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 over-the-counter 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 1993 3.28 1.13 3.38 1.16
October - December 1993 3.53 1.81 3.59 1.84
January - March 1994 2.63 1.59 2.66 1.66
April - June 1994 1.72 1.22 2.00 1.25
July - September 1994 1.91 1.22 2.00 1.25
October - December 1994 2.50 1.28 2.53 1.31
January - March 1995 2.50 1.53 2.53 1.63
April - June 1995 4.50 2.38 4.56 2.41
July - September 1995 3.84 2.56 4.00 2.63
October - December 1995 3.91 2.50 3.97 2.56
January - March 1996 2.78 2.09 2.81 2.13
April - June 1996 3.00 2.19 3.03 2.25
July - September 3 1996 2.63 2.13 2.72 2.19

On September 3, 1996, the Company had approximately 4,653
stockholders of record of the Company's Common Stock, 14 stockholders of
record of the Company's Class B Common Stock, four stockholders of record of
the Company's Class C Common Stock and 4,694 stockholders of record of the
Company's 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 has paid no dividends to date. The Company anticipates,
however, paying certain dividends on monies it receives from the enforcement
of its patents. Except for these dividends, it is expected that the Company
will continue to retain earnings to finance the development and expansion of
its business.

Item 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been extracted
from the Company's consolidated financial statements for the five years ended
June 30, 1996. 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.

As of, or For the Period Ended June 30,

STATEMENT OF OPERATIONS 1996 1995 1994 1993 1992
----------- ----------- ----------- ------------ -----------

Revenues $13,130,000 $14,090,000 $15,387,000 $ 16,802,000 $19,697,000

Cost of $ 8,956,000 $ 9,003,000 $ 7,814,000 $ 9,608,000 $10,620,000
revenues

Research and $ 3,356,000 $ 3,356,000 $ 2,803,000 $ 2,181,000 $ 2,135,000
Development Expenses

Net Income (loss) $(3,376,000) $(1,763,000) $ (335,000) $ 238,000 $ 635,000

Net income (loss) (0.07) (0.04) (0.01) 0.01 0.02
per common share

Weighted average 50,822,000 45,055,000 36,774,000 30,870,000 27,888,000
number of shares
outstanding *

BALANCE SHEET DATA

Working capital $(2,355,000 $(5,077,000) $(7,749,000) $(12,239,000) $(7,231,000)
(deficit)

Total $63,096,000 $54,944,000 $48,418,000 $ 42,811,000 $40,410,000
assets

Long-term debt and $ 3,872,000 $ 3,780,000 $ 5,884,000 $ 9,483,000 $11,789,000
obligations under
capital leases

Stockholders' $48,138,000 $39,388,000 $28,333,000 $ 18,022,000 $12,797,000
equity

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

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.

RESULTS OF OPERATIONS.
FISCAL 1996 COMPARED TO FISCAL 1995

In fiscal 1996, the Company experienced a net loss of $3.4 million on
revenues of $13.1 million as compared to a net loss of $1.8 million on
revenues of $14.1 million for fiscal 1995.

The Company's QUAD 7000 and QUAD 12000 MRI scanners, together with
other research and development projects, are intended to significantly
improve the Company's competitive position. Having received FDA approval
for its QUAD 7000 scanner in the fourth quarter of fiscal 1995 and for its
QUAD 12000 scanner in the first quarter of fiscal 1996, the Company believes
it is in a position to aggressively seek new sales. The QUAD scanners are
highly competitive and totally new non-claustrophobic scanners not
previously available in the MRI market. At .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 Company expects vigorous sales from its new products.

As the Company has expanded its operations and productive capacity to
meet and anticipate new orders, costs and expenses increased in fiscal 1996.
Although cost of revenues remained at approximately $9.0 million in 1996,
research and development, selling, general and administrative expenses
increased to approximately $11.5 million for fiscal 1996 from approximately
$10.0 million for fiscal 1995.

The Company has continued its program for upgrading previously
installed scanners. The versatility and productivity of MRI technology
creates the impetus for new uses. As a result, new features are developed
and sold to the Company's customer base thereby extending the useful life of
their equipment, avoiding obsolescence and minimizing capital expenditures.
Upgrades consist of hardware, software and pulse sequences designed to
maximize throughput while maintaining image quality and patient comfort.

As part of its marketing program, the Company attended the industry's
annual trade show, RSNA (Radiological Society of North America) in November
1995, and plans to do so again in November 1996. At the RSNA show in 1995,
the Company exhibited its new QUAD 12000 and QUAD 7000 scanners. 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 this product since image quality increases as a direct proportion to
magnetic field strength. 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.

The Company also believes that efforts to reduce infringement of its
intellectual property rights by competitors have begun to produce material
benefits, as reflected in the $62 million judgment rendered in its favor
against General Electric Company. During the 1995 fiscal year the Company
commenced similar patent infringement suits against other major competitors
(See "Litigation").

As at September 1, 1996, the Company's backlog of unfilled orders was
approximately $6.8 million, as compared to approximately $4.0 million at
September 1, 1995.

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 other profitable enterprises within
the MRI industry. As a result of this expansion, the percentage of the
Company's revenue derived from sources other than scanner sales (customer
service and upgrades) was approximately 49% for fiscal 1996 as compared to
33% for fiscal 1990. The Company believes, however, that this trend may
have peaked in fiscal 1991 and 1992 when the percentage was approximately
61%. (The percentages for fiscal 1995, 1994 and 1993 were 48%, 51% and 60%,
respectively.) Management expects that the percentage of revenue derived
from scanner sales will continue to expand as a result of the introduction
into the market of its new QUAD scanner products. Customer service and
upgrades, however, are and will continue to be priorities for the Company.

The Company derived approximately $1.7 million in upgrades income in
1992, $1.3 million in 1993, $61,000 in 1994, $338,000 in 1995 and $112,000
in 1996. Significant research and development of new programs have been
undertaken, which emphasize the development of new features for the
Company's scanner upgrade program.

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 1996 the Company continued its investment in the development of its
new MRI scanners together with software and upgrades, with an investment of
$3,607,703 in research and development ($251,659 of which was capitalized)
as compared to $3,508,101 ($151,981 of which was capitalized) in fiscal
1995. The research and development expenditure was approximately 27.5% of
revenues in 1996 and $23.8% of revenues in 1995.

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 cautiously optimistic that foreign sales will prove a significant
source of revenue.

FISCAL 1995 COMPARED TO FISCAL 1994

In fiscal 1995 the Company experienced a loss of $1.8 million on
gross revenues of $14.1 million, while in fiscal 1994 a loss of $334,574 was
reported on gross revenues of $15.4 million.

Contributing to the Company's net loss were the recognition in the
fourth quarter of unfavorable judgments in excess of $1.5 million in the
aggregate. The most significant of these actions were the $880,000 judgment
against Fonar's subsidiary AMD in the Kivitz et ano v. AMD et al. action
(approximately $1.1 million with accrued interest) and the $250,000 judgment
rendered against the Company in Myheal Technologies et ano. v. Fonar
(approximately $369,000 with accrued interest). (See "Litigation"). Also
significantly contributing to the Company's net loss for the year were the
continuing losses of its Israeli subsidiary, Medical SNI (formerly Vonar
Ltd.). These losses were in the amount of $867,100 for fiscal 1995 and
$558,892 for fiscal 1994 (after giving effect to the minority interest).

Lower revenues experienced in fiscal 1995, as in fiscal 1994, were
the principal reason for the operating losses experienced in both fiscal
years ($6.4 million in fiscal 1995 and $2.5 million in fiscal 1994). Lower
revenues reflected strong competition and a continued weak domestic demand
for MRI scanners in a marketplace eager to see new products that would
address both the heightened cost pressures on MRI and the patient demand for
non-claustrophobic scanners.

As at September 1, 1996, the Company's backlog of unfilled orders was
approximately $4.0 million, as compared to $1.5 million at September 1,
1994.

Lower service and repair fees in fiscal 1995, as in fiscal 1994
(approximately $6.6 million in fiscal 1995 as compared to approximately $7.7
million in fiscal 1994) indirectly resulted from reduced sales, as well as
from competition, as older scanners were retired.

Overall, expenses increased from approximately $10.0 million in
fiscal 1994 to $11.5 million in fiscal 1995. General and administrative
expenses decreased from approximately $5.8 million in fiscal 1994 to
approximately $5.3 million in fiscal 1995, but research and development
expenses increased from approximately $2.8 million in fiscal 1994 to $3.4
million in fiscal 1995 (exclusive of the portion of such expenses
capitalized), and selling and marketing expenses increased from
approximately $1.3 million in fiscal 1994 to $1.5 million in fiscal 1995.
The greatest part of the overall increase in expenses resulted from an
increase in the compensatory element of stock issuances from $193,527 in
fiscal 1994 to $1,363,194 in fiscal 1995. This increase resulted mostly
from non-recurring bonuses granted to a large number of employees. The
Company notes that maintaining or increasing expenses are necessary for the
Company to realize its objective to develop and market new scanner products.

In fiscal 1995 the Company invested $3,508,101 in research and
development ($151,981 of which was capitalized) as compared to $3,604,785 in
research and development ($687,551 of which was capitalized in fiscal 1994.
The research and development expenditure was approximately 25% of revenues
in 1995 and 23% of revenues in 1994.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1996, the Company's liquidity and capital resources
positions changed from the June 30, 1995 position as follows:

June 30, June 30,
1996 1995 Change
____________ ____________ __________
Working capital
(deficiency) ($2,355,000) ($5,077,000) $2,722,000

The improvement in the Company's working capital position resulted
primarily from an increase in current assets (to $11.5 million at June 30,
1996 from $9.6 million at June 30, 1995) and a decrease in current
liabilities (from $14.6 million in fiscal 1995 to $13.8 million in fiscal
1996). The increase in current assets principally reflected an expansion of
inventory, resulting from the Company's increased manufacturing activity and
an increase in cash. The decrease in current liabilities resulted from the
payment of various taxes and other obligations.

Total liabilities were reduced since June 30, 1995 by approximately
$600,000 to approximately $14.8 million at June 30, 1996.

Since June 1989, a principal objective of the Company has been to
reduce and ultimately eliminate its debt. Since the inception of the plan,
interest bearing debt was reduced from $23.1 million in fiscal 1989 to $18.5
million in fiscal 1990. From June 30, 1990 through June 30, 1991, interest
bearing debt was reduced by an additional $3.3 million to $15.2 million and
from June 30, 1991 through June 30, 1992 interest bearing debt was reduced
by an additional $3.1 million to $12.1 million. From June 30, 1992 through
June 30, 1993, interest bearing debt was reduced by $2.3 million to $9.8
million, and from June 30, 1993 to June 30, 1994 by $3.8 million to $6.0
million. Through June 30, 1995, interest bearing debt was reduced by an
additional $2.1 million to approximately $3.9 million. At June 30, 1996
interest bearing debt was approximately $4.0 million.

As of June 30, 1996, the Company had no unused credit facilities with
banks or financial institutions.

While continuing to focus on new sources of income and cost
containment, the Company's business plan currently includes an aggressive
program for manufacturing and selling its new line of QUAD scanners which
are achieving success in the marketplace and which the Company has had under
development for four years.

The Company expects to reduce its working capital deficiency during
the current fiscal year by internally generated cash from operating profits
and the refinancing and/or restructuring of maturity terms of certain loans.

The Company will also pursue equity financing alternatives.

The Company believes that the above mentioned programs will provide
the cash flows needed to achieve the sales, service and production levels
necessary to support its operations.

The Company offers its products for sale or lease to customers. Cash
flows from leasing transactions are derived under the terms of the
underlying agreements. Over the long term, the Company expects enhanced
cash flows and increased revenues from such transactions while in the short
term, such transactions impair cash flow. In order to mitigate the short
term effect on cash flow, the Company previously had borrowed money secured
by the leases and the underlying equipment. Such debt comprises
substantially all of the remaining long-term debt in the accompanying
financial statements.

Since 1990 the Company has restructured various long-term loans and
notes. The significant changes included extended maturity dates, and the
addition of unpaid interest to the note and loan balances.

Capital expenditures for each of fiscal 1996 and 1995 approximated
$1.8 million, and substantially consisted of capitalized computer software
costs in connection with the development of scanner products, patent costs
and copyright costs 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, the QUAD scanners and is reemphasizing MRI
Scanner sales.

Cost containment programs continue in force notwithstanding an
increase in costs and expenses resulting from increased manufacturing
activity and marketing of its MRI scanners. 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
7Company's installed base of scanners were $6.6 million for the year ended
June 30, 1995 and $6.1 million for the year ended June 30, 1996. The
Company will continue to aggressively develop and market upgrades and
enhancements for previously installed scanners.

The Company's working capital deficiency as of June 30, 1996
approximates $2.4 million, down from $5.1 million as of June 30, 1995 and
$7.7 million as of June 30, 1994. The Company expects to reduce this
deficiency further. This is to be accomplished by internally generated cash
from operating profits and the refinancing and/or restructuring of maturity
terms of certain loans now classified as short term obligations. The
Company also will pursue equity financing alternatives.

The Company believes that the above mentioned financing arrangements
and programs 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 more permanent financing
alternatives which may become available as the success of the previously
described programs accelerates.

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FONAR CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

Page No.

INDEPENDENT AUDITORS' REPORT F-2

CONSOLIDATED BALANCE SHEETS F-3; F-4
At June 30, 1996 AND 1995

CONSOLIDATED STATEMENTS OF OPERATIONS F-5
For the Three Years Ended June 30, 1996,
1995 and 1994

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-6 to F-14
For the Three Years Ended June 30,
1996, 1995 and 1994

CONSOLIDATED STATEMENTS OF CASH FLOWS F-15; F-16
For the Three Years Ended June 30, 1996,
1995 and 1994

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-17 to F-80

SUPPLEMENTARY SCHEDULES:

INDEPENDENT AUDITORS' REPORT ON SCHEDULES S-1

SCHEDULE II - Amounts Receivable from Related
Parties and Underwriters, Promoters and Employees
Other than Related Parties S-2
For the Years Ended June 30, 1996, 1995 and 1994

SCHEDULE VIII - Valuation and Qualifying Accounts S-3
For the Three Years Ended June 30, 1996, 1995 and
1994

SELECTED FINANCIAL DATA
For the Five Years Ended June 30, 1996 (*)

(*) 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.

F-1
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, 1996 and 1995, 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, 1996. 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 financial position of FONAR
Corporation and Subsidiaries at June 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-
year period ended June 30, 1996, in conformity with generally accepted
accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company suffered a loss from operations, has a
working capital deficiency, is in arrears with certain debts, accounts
payable and various taxes. These factors and others, discussed in Note 1,
raised substantial doubt about the Company's ability to continue as a going
concern. Realization of a major portion of the assets in the accompanying
balance sheet is dependent upon continuing operations of the Company.
Management's plans in regard to these matters are described in Note 1 and
include, among other things, the exploitation of a new product line of MRI
scanners. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

As more fully described in Note 15, the Company is a defendant in various
lawsuits alleging breach of contract. It is not possible to predict at
this time whether the ultimate awards or settlements will exceed the amount
currently provided by the Company.

During each of the years in the three-year period ended June 30, 1996, a
significant portion of the Company's revenues was from related parties and
a significant portion of the Company's assets was due from related parties
(see Note 3).

/s/ Tabb, Conigliaro & McGann, P.C.
TABB, CONIGLIARO & McGANN, P.C.

New York, New York
October 7, 1996

F-2
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
______
June 30,
---------------------------
1996 1995
----------- -----------
CURRENT ASSETS
Cash $ 3,712,393 $ 3,266,728
Accounts receivable, net of allowance for
doubtful accounts of $712,082 and $603,719
at June 30, 1996 and 1995, respectively 1,796,716 1,796,929
Notes receivable from related parties (Note 3) 400,000 400,000
Costs and estimated earnings in
excess of billings on uncompleted
contracts (Notes 2 and 4) 336,455 323,918
Inventories (Notes 2 and 5) 3,623,572 2,295,327
Net investment in sales-type leases
with related parties (Notes 2, 3, 6, and 11) 779,096 1,368,988
Prepaid expenses and other current assets 815,857 113,955
----------- -----------
TOTAL CURRENT ASSETS 11,464,089 9,565,845
ASSETS HELD FOR RESALE (Note 2) 450,000 598,062
PROPERTY AND EQUIPMENT - Net (Notes 2, 7 and 13) 2,500,594 2,786,402
INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES
AND RELATED PARTIES, Net of discounts and
allowance for doubtful accounts of $1,250,000
at June 30, 1996 and 1995
(Notes 2, 3, 4 and 6) 28,352,568 23,940,345
LONG-TERM ACCOUNTS RECEIVABLE, Net of
allowance for doubtful accounts of
$1,990,018 and $1,837,348 at June
30, 1996 and 1995, respectively 624,174 1,039,079
NOTES RECEIVABLE, Net of allowance for
doubtful accounts of $708,411 at
June 30, 1996 and 1995 157,553 179,337
CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
Net of accumulated amortization of
$6,872,193 and $5,858,578 at June 30,
1996 and 1995, respectively (Notes 2
and 8) 1,255,924 1,763,549
OTHER INTANGIBLE ASSETS, Net (Notes 8 and 15) 3,204,155 3,320,053
NET INVESTMENT IN SALES-TYPE LEASES
WITH RELATED PARTIES, Net of
allowance for possible losses of
$115,000 in 1996 and 1995 (Notes 2,
3, 6 and 11) 5,518,873 4,961,979
COSTS AND ESTIMATED EARNINGS IN EXCESS
OF BILLINGS ON UNCOMPLETED CONTRACTS
WITH RELATED PARTIES (Notes 2, 3 and 4) 9,460,469 6,681,296
OTHER ASSETS 107,863 107,630
TOTAL ASSETS ----------- -----------
$63,096,262 $54,943,577
=========== ===========

See accompanying notes to consolidated financial statements.

F-3
FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
--------------------------
1996 1995
----------- -----------
CURRENT LIABILITIES
Notes payable (Note 11) $ 100,000 $ 100,000
Current maturities of long-term debt and capital
lease obligations (Notes 11 and 15) 2,909,071 3,251,863
Accounts payable 1,747,730 1,595,452
Other current liabilities (Note 14) 7,883,452 9,248,727
Customer advances (Notes 2 and 4) 933,604 293,487
Billings in excess of costs and estimated
earnings on uncompleted contracts (Notes 2 and 4) 170,008 11,102
Income taxes payable (Note 12) 75,000 142,691
----------- -----------
TOTAL CURRENT LIABILITIES 13,818,865 14,643,322
----------- -----------
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, Less current maturities
(Notes 2, 11 and 15) 963,019 528,543
OTHER LIABILITIES 59,023 99,021
----------- -----------
1,022,042 627,564
----------- -----------
MINORITY INTEREST 117,498 285,131
----------- -----------
COMMITMENTS AND CONTINGENCIES
(Notes 3, 9,11 and 15)
STOCKHOLDERS' EQUITY (Notes 2 and 10)
Common stock - $.0001 par value; issued -
42,871,751 and 38,229,448 shares at
June 30, 1996 and 1995, respectively 4,287 3,822
Class B common stock (10 votes per share) - $.0001 par
value; issued and outstanding - 5,411 and 3,193,456
shares at June 30, 1996 and 1995, respectively - 319
Class C common stock (25 votes per share) - $.0001
par value; 9,562,824 and -0- issued and outstanding
at June 30, 1996 and 1995, respectively 956 -
Class A non-voting preferred stock - $.0001 par
value; issued and outstanding - 7,855,627 and
7,624,117 shares at June 30, 1996
and 1995, respectively 785 762
Preferred stock - $.001 par value;
issued and outstanding - none - -
Paid-in capital in excess of par value 75,985,245 63,779,202
Accumulated deficit (25,697,690) (22,104,053)
Notes receivable from stockholders (1,760,281) (1,897,047)
Treasury stock - 108,864 shares of
common stock at June 30, 1996 and 1995 (395,445) (395,445)
----------- -----------
48,137,857 39,387,560
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $63,096,262 $54,943,577
=========== ===========
See accompanying notes to consolidated financial statements.
F-4

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended June 30,
--------------------------------------
1996 1995 1994
----------- ----------- ----------
REVENUES (Notes 1, 2, 3, 4, 6 and 9)
Product sales - net $ 2,060,888 $ 2,383,309 $3,236,330
Service and repair fees - net 3,725,613 4,444,913 6,028,417
Scanning and management fees - net 201,770 88,740 32,172
Related parties -product sales -net 4,583,578 4,866,548 4,274,547
Related parties -service and repair
fees - net 2,407,944 2,174,076 1,690,500
Related parties - scanning and
management fees - net 150,210 133,374 124,649
----------- ----------- ----------
TOTAL REVENUES - Net 13,130,003 14,090,960 15,386,615
----------- ----------- ----------

COST OF REVENUES
Product sales 1,983,873 2,283,665 2,065,548
Service and repair fees 2,305,664 2,254,251 2,578,952
Scanning and management fees 146,044 1,785 1,196
Related parties - product sales 2,975,079 3,345,482 2,410,756
Related parties-service and repair
fees 1,490,292 1,102,589 723,194
Related parties -scanning and
management fees 55,175 15,338 34,192
----------- ----------- -----------

TOTAL COST OF REVENUES 8,956,127 9,003,110 7,813,838
----------- ----------- -----------

GROSS PROFIT 4,173,876 5,087,850 7,572,777
----------- ----------- -----------

EXPENSES
Research and development expenses 3,607,703 3,356,120 2,803,221
Selling and marketing expenses 2,069,045 1,497,825 1,282,328
General and administrative expenses 5,785,973 5,187,588 5,478,288
Provision for bad debt 1,226,014 116,514 287,310
Compensatory element of stock
issuances (Note 10) 355,327 1,363,194 193,527
----------- ----------- -----------
13,044,062 11,521,241 10,044,674
----------- ----------- -----------
LOSS FROM OPERATIONS (8,870,186) (6,433,391) (2,471,897)

INTEREST EXPENSE (626,297) (1,122,159) (1,235,523)

INTEREST INCOME - RELATED PARTIES 1,964,828 1,969,204 1,865,963

GAIN ON SALE OF INVESTMENTS AND SUB-
SIDIARY TO RELATED PARTIES (Note 3) - - 1,273,629

OTHER INCOME (Note 16) 4,007,576 3,621,607 140,483
----------- ----------- ----------

LOSS BEFORE PROVISION FOR TAXES AND
MINORITY INTEREST (3,524,079) (1,964,739) (427,345)

PROVISION FOR INCOME TAXES (Notes 2 19,965 145,558 47,905
and 12) ----------- ----------- -----------

LOSS BEFORE MINORITY INTEREST (3,544,044) (2,110,297) (475,250)

MINORITY INTEREST IN NET LOSS
OF SUBSIDIARY AND PARTNERSHIP (Note 2) 167,633 347,326 140,676
----------- ----------- -----------

NET LOSS $(3,376,411) $(1,762,971) $(334,574)
=========== =========== ===========

NET LOSS PER SHARE (Note 2) $(.07) $(.04) $(.01)
===== ===== =====

WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (Note 2) 51,516,470 45,055,334 36,773,623
=========== =========== ===========

See accompanying notes to consolidated financial statements.

F-5

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1996
Class A
Common Stock
Per Share ----------------------
Amount Shares Amount
--------- ---------- --------
Balance - June 30, 1995 $ - 38,229,448 $ 3,822
Shares issued as follows:
Stock bonus to employees (measured at
the average quoted market price on
the award dates) 2.67 157,341 16
Under incentive stock option plan 2.66 82,125 8
Shares issued under non-statutory plans 2.69 3,100,000 310
Issuance of stock in settlememt
of liabilities 2.73 802,400 80
Issuance of stock 2.08 500,000 50
Conversion from class B to class C - - -
Conversion from class B to class A 437 1
Net charge in notes receivable
from stockholder - - -
Stock dividend adjustment -
Class A non-voting preferred - - -
Dividend - preferred stock - - -
NET LOSS - - -
---------- --------
Balance - JUNE 30, 1996 42,871,751 $ 4,287
========== ========

Class B
Common Stock
----------------------
Shares Amount
----------- --------
Balance - June 30, 1995 3,193,456 $ 319
Shares issued as follows:
Stock bonus to employees (measured at
the average quoted market price on
the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory plans - -
Issuance of stock in settlememt
of liabilities - -
Issuance of stock - -
Conversion from class B to class C (3,187,608) (318)
Conversion from class B to class A (437) (1)
Net charge in notes receivable
from stockholder - -
Stock dividend adjustment -
Class A non-voting preferred - -
Dividend - preferred stock - -
NET LOSS - -
----------- --------
Balance - JUNE 30, 1996 5,411 $ -
=========== ========

See accompanying notes to consolidated financial statements
F-6

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1996
(continued) Class C
Common Stock
----------------------
Shares Amount
--------- ----------
Balance - June 30, 1995 - $ -
Shares issued as follows:
Stock bonus to employees (measured at
the average quoted market price on
the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory plans - -
Issuance of stock in settlememt
of liabilities - -
Issuance of stock - -
Conversion from class B to class C 9,562,824 956
Conversion from class B to class A - -
Net charge in notes receivable
from stockholder - -
Stock dividend adjustment -
Class A non-voting preferred - -
Dividend - preferred stock - -
NET LOSS - -
---------- ----------
Balance - JUNE 30, 1996 9,562,824 $ 956
========== ==========

Class A
Non-Voting Paid-in
Preferred Stock Capital in
------------------- Excess of
Shares Amount Par Value
--------- ------ -----------
Balance - June 30, 1995 7,624,117 762 $63,779,202
Shares issued as follows:
Stock bonus to employees (measured at
the average quoted market price on
the award dates) - - 420,187
Under incentive stock option plan - - 218,780
Shares issued under non-statutory plans - - 8,337,190
Issuance of stock in settlememt
of liabilities - - 2,190,892
Issuance of stock - - 1,039,655
Conversion from class B to class C - - (638)
Conversion from class B to class A - - -
Net charge in notes receivable
from stockholder - - -
Stock dividend adjustment -
Class A non-voting preferred 231,510 23 (23)
Dividend - preferred stock - - -
NET LOSS - - -
---------- -------- -----------
Balance - JUNE 30, 1996 7,855,627 $ 785 $75,985,245
========== ======== ===========
See accompanying notes to consolidated financial statements
F-7

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1996
(Continued) Treasury Stock
-----------------------
Shares Amount
--------- -----------
Balance - June 30, 1995 108,864 $ (395,445)
Shares issued as follows:
Stock bonus to employees (measured at
the average quoted market price on
the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory plans - -
Issuance of stock in settlememt
of liabilities - -
Issuance of stock - -
Conversion from class B to class C - -
Conversion from class B to class A - -
Net charge in notes receivable
from stockholder - -
Stock dividend adjustment -
Class A non-voting preferred - -
Dividend - preferred stock - -
NET LOSS - -
--------- -----------
Balance - JUNE 30, 1996 108,864 $ (395,445)
========= ===========

Notes
Receivable
from Accumulated
Stockholders Deficit
------------ -------------
Balance - June 30, 1995 $(1,897,047) $(22,104,053)
Shares issued as follows:
Stock bonus to employees (measured at
the average quoted market price on
the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory plans - -
Issuance of stock in settlememt
of liabilities - -
Issuance of stock - -
Conversion from class B to class C - -
Conversion from class B to class A - -
Net charge in notes receivable
from stockholder 136,766 -
Stock dividend adjustment -
Class A non-voting preferred - -
Dividend - preferred stock - (217,226)
NET LOSS - (3,376,411)
------------ -------------
Balance - JUNE 30, 1996 $(1,760,281) $(25,697,690)
============ =============

See accompanying notes to consolidated financial statements

F-8

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1995

Class A
Common Stock
Per Share -----------------------
Amount Shares Amount
--------- ---------- ----------
Balance - June 30, 1994 $ - 31,235,773 $ 3,123
Shares issued as follows:
Stock bonus to employees and directors
(measured at the average quoted
market price on the award dates) 2.89 480,650 48
Under incentive stock option plan 2.43 413,375 41
Shares issued under non-statutory plans 1.42 1,752,695 175
Issuance of stock in settlement of
liabilities 2.00 1,398,550 138
Issuance of stock 2.13 2,947,305 296
Net change in notes receivable from
stockholders - - -
Conversion from Class B to Class A - 1,100 1
Stock dividend - Class A non-voting
preferred - -
NET LOSS - -
----------- ----------
Balance - JUNE 30, 1995 38,229,448 $ 3,822
=========== ==========

Class B
Common Stock
------------------------
Shares Amount
------------ ----------
Balance - June 30, 1994 3,194,556 $ 320
Shares issued as follows:
Stock bonus to employees and directors
(measured at the average quoted
market price on the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory plans - -
Issuance of stock in settlement of
liabilities - -
Issuance of stock - -
Net change in notes receivable from
stockholders - -
Conversion from Class B to Class A (1,100) (1)
Stock dividend - Class A non-voting
preferred - -
NET LOSS - -
------------ ----------
Balance - JUNE 30, 1995 3,193,456 $ 319
============ ==========

See accompanying notes to consolidated financial statements

F-9

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1995
(Continued) Class C
Common Stock
-------------------------
Shares Amount
---------- -----------
Balance - June 30, 1994 - $ -
Shares issued as follows:
Stock bonus to employees and directors
(measured at the average quoted
market price on the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory plans - -
Issuance of stock in settlement of
liabilities - -
Issuance of stock - -
Net change in notes receivable from
stockholders - -
Conversion from Class B to Class A - -
Stock dividend - Class A non-voting
preferred - -
NET LOSS - -
---------- -----------
Balance - JUNE 30, 1995 - $ -
========== ===========

Class A
Non-Voting Paid-in
Preferred Stock Capital in
----------------------- Excess of
Shares Amount Par Value
--------- ---------- -----------
Balance - June 30, 1994 - $ - $49,817,538
Shares issued as follows:
Stock bonus to employees (measured
at the average quoted market
price on the award dates) - - 1,387,052
Under incentive stock option plan - - 1,004,224
Shares issued under non-statutory
plans - - 2,490,667
Issuance of stock in settlement of
liabilities - - 2,794,953
Issuance of stock - - 6,285,530
Net change in notes receivable from
stockholders - - -
Conversion from Class B to Class A - - -
Stock dividend - Class A non-voting
preferred 7,624,117 762 (762)
NET LOSS - - -
--------- ---------- -----------
Balance - JUNE 30, 1995 7,624,117 $ 762 $63,779,202
========= ========== ===========

See accompanying notes to consolidated financial statements

F-10

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1995
(Continued)
Treasury Stock
------------------------
Shares Amount
---------- -----------
Balance - June 30, 1994 108,864 $ (395,445)
Shares issued as follows:
Stock bonus to employees (measured
at the average quoted market
price on the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory
plans - -
Issuance of stock in settlement of
liabilities - -
Issuance of stock - -
Net change in notes receivable from
stockholders - -
Conversion from Class B to Class A - -
Stock dividend - Class A non-voting preferred - -
NET LOSS - -
---------- -----------
Balance - JUNE 30, 1995 108,864 $ (395,445)
========== ===========

Notes
Receivable
from Accumulated
Stockholders Deficit
------------ -------------
Balance - June 30, 1994 $ (751,561) $(20,341,082)
Shares issued as follows:
Stock bonus to employees (measured
at the average quoted market
price on the award dates) - -
Under incentive stock option plan (994,469) -
Shares issued under non-statutory plans
Issuance of stock in settlement of - -
liabilities - -
Issuance of stock - -
Net change in notes receivable from
stockholders (151,017) -
Conversion from Class B to Class A - -
Stock dividend - Class A non-voting
preferred - -
NET LOSS - (1,762,971)
------------ -------------
Balance - JUNE 30, 1995 $(1,897,047) $(22,104,053)
============ =============

See accompanying notes to consolidated financial statements

F-11

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1994

Class A
Common Stock
Per Share -----------------------
Amount Shares Amount
--------- ---------- ----------
Balance - June 30, 1993 $ - 25,165,219 $ 2,516
Shares issued as follows:
Stock bonus to employees (measured at
the average quoted market price on
the award dates) 1.79 116,796 12
Under incentive stock option plan 1.01 40,125 4
Shares issued under non-statutory plans 1.78 4,771,291 477
Issuance of stock in settlement of
liabilities 1.80 1,011,000 101
Issuance of stock 1.52 123,709 13
Net change in notes receivable from
stockholders - - -
Conversion from Class B to Class A - 7,633 -

NET LOSS - -
---------- ----------
Balance - JUNE 30, 1994 31,235,773 $ 3,123
========== ==========

Class B
Common Stock
----------------------
Shares Amount
----------- ----------
Balance - June 30, 1993 3,202,189 $ 320
Shares issued as follows:
Stock bonus to employees (measured at
the average quoted market price on
the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory plans - -
Issuance of stock in settlement of
liabilities - -
Issuance of stock - -
Net change in notes receivable from
stockholders - -
Conversion from Class B to Class A (7,633) -
NET LOSS - -
----------- ----------

Balance - JUNE 30, 1994 3,194,556 $ 320
=========== ==========

See accompanying notes to consolidated financial statements

F-12

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1994
(continued)
Class C
Common Stock
-----------------------
Shares Amount
---------- ---------
Balance - June 30, 1993 - $ -
Shares issued as follows:
Stock bonus to employees (measured at
the average quoted market price on
the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory plans - -
Issuance of stock in settlement of
liabilities - -
Issuance of stock - -
Net change in notes receivable from
stockholders - -
Conversion from Class B to Class A - -
NET LOSS - -
---------- ---------

Balance - JUNE 30, 1994 - $ -
========== =========

Class A
Non-Voting Paid-in
Preferred Stock Capital in
----------------------- Excess of
Shares Amount Par Value
---------- ---------- -----------
Balance - June 30, 1993 - $ - $39,083,508
Shares issued as follows:
Stock bonus to employees (measured
at the average quoted market
price on the award dates) - - 209,140
Under incentive stock option plan - - 40,718
Shares issued under non-statutory
plans - - 8,474,532
Issuance of stock in settlement of
liabilities - - 1,821,919
Issuance of stock - - 187,721
Net change in notes receivable from
stockholders - - -
Conversion from Class B to Class A - - -
NET LOSS - - -
---------- ---------- -----------
Balance - JUNE 30, 1994 - $ - $49,817,538
========== ========== ===========

See accompanying notes to consolidated financial statements

F-13

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1994

Treasury Stock
--------------------------
Shares Amount
----------- -----------
Balance - June 30, 1993 108,864 $ (395,445)
Shares issued as follows:
Stock bonus to employees (measured
at the average quoted market
price on the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory
plans - -
Issuance of stock in settlement of
liabilities - -
Issuance of stock - -
Net change in notes receivable from
stockholders - -
Conversion from Class B to Class A - -
NET LOSS - -
----------- -----------
Balance - JUNE 30, 1994 108,864 $ (395,445)
=========== ===========

Notes
Receivable
from Accumulated
Stockholders Deficit
------------- -------------
Balance - June 30, 1993 $ (662,011) $(20,006,508)
Shares issued as follows:
Stock bonus to employees (measured
at the average quoted market
price on the award dates) - -
Under incentive stock option plan - -
Shares issued under non-statutory
plans - -
Issuance of stock in settlement of
liabilities - -
Issuance of stock - -
Net change in notes receivable from
stockholders (89,550) -
Conversion from Class B to Class A - -
NET LOSS - (334,574)
------------- ------------
Balance - JUNE 30, 1995 $ (751,561) $(20,341,082)
============= =============

See accompanying notes to consolidated financial statements.

F-14

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended June 30,
----------------------------------------

1996 1995 1994
----------- ----------- -----------

CASH FLOWS FROM OPERATING
ACTIVITIES

Net loss $(3,376,411) $(1,762,971) $(334,574)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Minority interest in net loss
of subsidiary and partnership (167,633) (347,327) (140,676)
Depreciation and amortization 2,259,183 2,426,982 2,558,189
Writedown of assets
held for resale 148,062 - -
Provision for losses on
accounts and notes
receivable and accounts
receivable from affiliates 1,226,014 116,514 395,721
Compensatory element of stock
issuances 355,327 1,363,194 193,527
Stock issued in settlement of
current liabilities 1,257,909 2,424,587 1,822,021
Loss (gain) on settlement of
various legal disputes and
other claims - 15,724 (104,061)
Gain on sale of investments
and subsidiary to related
parties - - (1,273,629)
Loss on disposal of fixed
assets - 184,883 -
(Increase) decrease in
operating assets, net:
Accounts and notes
receivable (35,424) 1,167,618 (520,699)
Costs and estimated
earnings in excess of
billings on uncompleted
contracts (2,791,710) (3,749,367) 124,603
Inventories (916,898) 731,342 145,898
Sales-type lease
receivables - - (922,338)
Collection of principal on
sales-type leases 383,998 92,204 480,968
Assets held for resale - 10,000 (10,000)
Prepaid expenses and other
current assets (226,902) 1,163,034 160,751
Other assets (233) 199 11,299
Receivables and advances
to affiliates and
related parties (4,993,973) (4,642,270) (5,022,066)

Increase (decrease) in
operating liabilities, net:
Accounts payable and
income taxes 84,588 (1,305,728) 970,128
Other current liabilities (1,582,501) (164,736) (2,263,388