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)
Customer advances 640,117 (371,150) 14,368
Billings in excess of
costs and estimated
earnings on uncompleted
contracts 158,906 11,102 (51,294)
Other liabilities (39,998) (102,257) 910
----------- ----------- -----------
NET CASH USED IN OPERATING
ACTIVITIES (7,617,579) (2,738,423) (3,764,342)
----------- ----------- -----------

See accompanying notes to consolidated financial statements.

F-15

FONAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchases of property and
equipment, net of capital
lease obligations of
$965,442, $-0- and $340,895
for the years ended
June 30, 1996, 1995 and
1994, respectively $ (186,188) $ (80,870) $ (998,308)
Cost of capitalized
software development (505,990) (281,052) (373,256)
Cost of patents and copyright (103,579) (1,365,273) (1,799,126)
----------- ----------- -----------

NET CASH USED IN
INVESTING ACTIVITIES (795,757) (1,727,195) (3,170,690)
----------- ----------- -----------

CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from borrowings, net
of capital lease obligation - 282,346 -
Repayment of borrowings and
capital lease obligations (873,758) (1,762,145) (2,074,771)
Proceeds from exercise of
stock options 5,859 9,797 117,602
Repayments of notes
receivable in connection
with shares issued under
stock option and bonus
plans 9,726,900 8,625,641 8,469,820
Proceeds from issuance of
partnership units to
minority interests - - 773,134
----------- ----------- -----------

NET CASH PROVIDED BY
FINANCING ACTIVITIES 8,859,001 7,155,639 7,285,785
----------- ----------- -----------

INCREASE IN CASH 445,665 2,690,021 350,753

CASH - BEGINNING OF YEAR 3,266,728 576,707 225,954
----------- ----------- -----------

CASH - END OF YEAR $ 3,712,393 $ 3,266,728 $ 576,707
=========== =========== ===========

See accompanying notes to consolidated financial statements.

F-16

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 1 - BUSINESS, RISKS AND CONTINUED OPERATIONS

Since its incorporation in 1978, FONAR Corporation and
Subsidiaries ("the Company") has 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.

The patented technology underlying the Company's principal and
planned products is either owned by the Company or has been
exclusively licensed to the Company by its Chairman of the Board,
President and principal stockholder. The license provides for
termination at the option of the grantor, upon occurrence of
certain events. Such events include, among other things, the
removal of the grantor from his position as Chairman of the Board
or President of the Company; and/or a dilution of the grantor's
voting control such that another stockholder or group of
stockholders acquire voting rights equal to or greater than that
of the grantor.

The Company operates in a high technology marketplace, in
competition with other manufacturers and service providers having
far greater financial resources than its own. The past success
of the Company related substantially to the early development and
exploitation of the MRI machine. FONAR's sales advantage over
its larger and financially stronger competitors, is aided
substantially by the various proprietary patents and copyrights
covering such products and technologies. Since inception FONAR
has vigorously litigated any suspected infringements of its
patents and copyright. During the year ended June 30, 1994,
FONAR settled one such action and received in the aggregate $1.1
million. On September 2, 1992, the Company filed a patent
infringement suit against two of its largest competitors, General
Electric and Hitachi. During April 1995, the Company reached a
settlement with Hitachi. In October 1995, the court awarded
FONAR a judgement of $62 million, plus interest, and issued an
injunction (stayed pending appeal) prohibiting General Electric
from future violations. Further, FONAR has commenced additional
lawsuits against other competitors claiming infringement on
various patents related to the MRI machine and upgrades. During
1996, the Company reached a settlement with Philips Electronics,
N.V. (see note 15 for a more detailed discussion of these
lawsuits).

F-17

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 1 - BUSINESS, RISKS AND CONTINUED OPERATIONS (Continued)

As discussed below, during October 1993 and March 1994, the
Company developed the "Quad 12000" and the "Quad 7000",
respectively. FONAR received FDA approval to market the Quad
7000 in April 1995 and in November 1995, received FDA approval to
market the Quad 12000. These new products have numerous patents
filed by FONAR covering various features and designs. The
Company strongly believes that these new products will
substantially increase its revenue.

The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles, which
contemplate continuation of the Company as a going concern.
However, the Company has sustained operating losses of $8,870,186
and $6,433,391 for the years ended June 30, 1996 and 1995,
respectively, and has a working capital deficiency of $2,354,776
at June 30, 1996. The working capital deficiency at June 30,
1996 includes the reclassification of long-term debt and capital
lease obligations of approximately $827,000 to current
maturities. Notwithstanding that the Company has continued to
make regular payments on these obligations, that reclassification
considers the fact that the Company was in arrears on those
obligations. Further, much of the Company's accounts payable is
overdue and the Company was in arrears on various taxes.

The success of the Company's future operations is dependent,
therefore, on the Company's ability to overcome the financial
difficulties that exist, restructure and/or maintain its existing
credit privileges and, if necessary, obtain additional financing
when needed.

In view of these matters, realization of a major portion of the
assets in the accompanying balance sheet is dependent upon
continued operations of the Company, which in turn is dependent
upon the Company's ability to meet its financing requirements,
and the success of its future operations. Management believes
that actions presently being taken, as discussed below, to revise
the Company's operating and financial requirements provide the
opportunity for the Company to continue as a going concern.

F-18

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 1 - BUSINESS, RISKS AND CONTINUED OPERATIONS (Continued)

The Company's business plan addresses its financial difficulties.
The plan is based to a substantial extent, on the successful
implementation of several new programs designed to position the
Company for long-term growth and expansion. The plan has, as its
objective, exploitation of a new line of MRI products and the
enhancement and stabilization of revenue streams through the
generation of additional income from its installed base of over
100 scanners.

In addition, the Company utilizes strict cost-containment
programs, while continuing to maintain an aggressive investment
in research and development.

Recently, the Company has developed new scanner products and
various software enhancements, including the "Quad 12000" and
the "Quad 7000" MRI scanners. These products will enhance the
quality of the image at greater efficiency, while reducing the
cost of scan prices.

In April of 1995, FONAR received FDA approval to market its Quad
7000 MRI scanner in the United States, and in November 1995, the
Company received FDA approval to market the Quad 12000. FONAR
introduced these new MRI products at the annual meeting of the
Radiological Society of North America ("RSNA") in Chicago,
Illinois in November 1995. The RSNA show is noted to be the
largest medical meeting in the world.

The Company's sales and marketing activities for the Quad 7000
and Quad 12000 commenced during the fiscal year ended June 30,
1996. FONAR has outstanding, confirmed orders aggregating $6.8
million for these new products.

Because of the Quad's non-claustrophobic patient environment, its
high quality of diagnostic images, its low price, and its
suitability for meeting the continuing demands for low cost
medical care, the Company expects vigorous sales activities in
fiscal 1997.

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

F-19

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 1 - BUSINESS, RISKS AND CONTINUED OPERATIONS (Continued)

The Company will continue to aggressively develop and market
upgrades and enhancements to its previously installed base of
more than 100 scanners. The Company expects to realize the
benefits of its research and development activities as the new
products are released and marketed to existing and potential new
customers.

Also, 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.

The Company expects to reduce its working capital deficiency
during fiscal 1997. This is to be accomplished by internally
generated cash from operating profit and the refinancing and/or
restructuring of maturity terms of certain loans now classified
as short-term obligations. The Company is currently negotiating
to refinance and/or restructure these obligations. In addition,
the Company plans to pursue equity financing alternatives.

The Company believes that the above mentioned financing
arrangements and increased revenue from its new products and its
sizable installed base 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 during fiscal 1997 as the anticipated success of the
previously described programs become evident.

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/
partnership and its proportionate share in the accounts of all
joint ventures. All significant intercompany accounts and
transactions have been eliminated in consolidation.

F-20

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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

Certain reclassifications were made to prior year balances to
conform to current year presentation.

Property and Equipment/Assets Held for Resale
---------------------------------------------

Property and equipment are stated at cost.

Depreciation of property and equipment is calculated on a
straight-line basis using the estimated useful lives of the
assets.

Years
-----
Offsite research scanner 7
Research, development and
demonstration equipment 2-7
Machinery and equipment 5-8
Furniture and fixtures 5-10
Property under lease 5-7
Property held for lease 7

Maintenance and repairs are charged to expense as incurred;
renewals or betterments are capitalized.

The Company leases a portion of its property and equipment under
leases, pursuant to which the Company retains all the benefits
and risks inherent in ownership of the related property. Such
leases are accounted for as capital leases. The related assets
and liabilities are recorded at amounts equal to the lesser of
the present value of the minimum lease payments, or the fair

F-21

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

market value of the leased equipment, at the inception of the
lease. Such assets are amortized using the straight-line method
over their economic useful lives, generally 5 to 7 years.
Interest expense relating to the lease liability is recorded to
effect constant rates of interest over the terms of the leases.

Assets held for resale are restated at the lower of the carrying
amount or fair value less costs to sell.

Assets held for resale as of June 30, 1996 and 1995 represent one
MRI scanner.

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. The
amortization period ranges from 3 to 5 years using the
straight-line method.

2) Other Intangible Assets

Amortization is calculated on the straight-line basis
over periods ranging from 5 to 17 years.

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.

F-22

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 service and management contracts are recognized on the
straight-line method over the related contract period.

Revenue from sales of other items are recognized upon shipment.

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.

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

The Company has adopted the Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes" (SFAS 109)
effective July 1, 1993. SFAS 109 requires recognition of
deferred tax liabilities and assets for the expected future tax
consequences of events that have been recognized in the financial
statements or tax returns. Under this method, 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. Adoption
of the statement did not have a material effect on the
accompanying financial statements.

F-23

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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

Net 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 1995, a stock
dividend of Class A non-voting preferred stock was declared (Note
10). Earnings per share and weighted average shares have been
restated to reflect the stock dividend.

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.

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

Financial instruments, which potentially subject the Company to
concentrations of credit risk, are primarily cash, trade accounts
receivable, notes receivable, investment in sales-type leases and
investments, advances and notes to affiliates and related
parties. Ongoing credit evaluations of customers' financial
condition are performed. The Company generally retains

F-24

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

title to the MRI scanners that it sells until the scanners have
been paid in full. The Company's customers are concentrated in
the industry of providing MRI scanning services.

Various related parties (Note 3), accounted for approximately
54%, 51%, and 39% of revenues for the years ended June 30, 1996,
1995 and 1994, respectively, and 70% and 68% of total assets at
June 30, 1996 and 1995, respectively.

At June 30, 1996, the Company had cash deposits totalling
$3,634,718 in excess of federally insured limits.

Impairment of Assets
--------------------

The Financial Accounting Standards Board (FASB) has issued
Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-
lived Assets to be Disposed of". This statement requires long-
lived assets to be held and be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Measurement of an
impairment loss for long-lived assets and identifiable
intangibles to be held and used should be based on the fair value
of the asset. It also requires that those long-lived assets and
identifiable intangibles to be disposed of should be reported at
the lower of carrying amount or fair value less cost to sell.
This standard is required to be adopted in 1996. Management
estimates that the adoption of this standard will not have a
material effect on the Company's financial statements.

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

The financial statements include various estimated fair value
information at June 30, 1996, 1995 and 1994, 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.

F-25

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

Receivables and payables: The carrying amounts approximates 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
------------------------

In June 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation". The
statement allows companies to measure compensation cost in
connection with employee stock compensation plans by using a fair
value based method or to continue to use an intrinsic value based
method, which generally does not result in compensating cost to
the Company. It is the Company's plan to continue using the
intrinsic value based method.

F-26

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Risk and Uncertainties
----------------------

The preparation of 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 at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.

NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED
PARTIES

Limited Partnerships
--------------------

The Company's majority-owned subsidiary, Advanced Medical
Diagnostics Corporation (AMD) was a general partner in four
limited partnerships. During the year ended June 30, 1994,
AMD's partnership interests in these partnerships were sold
to certain related parties as discussed below. For acting
as the Managing General Partner, AMD was entitled to receive
a fee for providing management and administrative services
to the partnerships. AMD's investment in the limited
partnerships was accounted for under the equity method.

Allocation of partnership profits and losses to the general
partners was based on 1% of partnership net income with
potential increases to as high as 50%, depending on
partnership operating results reaching certain levels as
defined in the partnership agreements.

FONAR was entitled to receive annual consulting fees from
one of the limited partnerships of $75,000, plus annual
escalations (which totalled $67,710, $58,374 and $49,649 for
fiscal years 1996, 1995 and 1994, respectively), and
pursuant to a service and maintenance contract for the
partnership's scanner unit, an annual service fee of
$105,000. FONAR also has service and maintenance contracts
on each unit owned by the two other partnerships and is
entitled to receive service fees thereunder (which
approximated $249,000, $259,000 and $263,000 for fiscal
years 1996, 1995 and 1994,

F-27

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED
PARTIES (Continued)

respectively). Income from upgrades, repairs and
maintenance, supplies and other services approximated
$3,800, $22,000 and $-0-for fiscal years 1996, 1995, and
1994 respectively. Operating results for fiscal 1996, 1995
and 1994 include $249,000, $390,000 and $493,000,
respectively, of such fees.

Additionally, AMD has advanced funds from time to time to
the partnerships for their respective working capital
requirements.

During the year ended June 30, 1994, AMD sold its interests
in a partnership operating an MRI scanning center in
Southfield Michigan to Raymond V. Damadian, M.D. MRI
Scanning Centers Management Co., Inc. ("RVDC"), a Delaware
Corporation of which Dr. Raymond V. Damadian, Chairman and
President of the Company, is sole shareholder, Director and
Officer for $600,000. The purchase price is payable with
interest at 10% per annum, over a period of 48 months
commencing October 1, 1993 as follows: $2,000 per month for
the first year, $8,333 per month for the second year,
$16,666 per month for the third year and $20,909 for the
fourth and fifth years.

During the year ended June 30, 1994, AMD sold its interests
in a partnership operating an MRI scanning center in
Melbourne, Florida to Melbourne Magnetic Resonance Imaging,
P.A. (the "Melbourne Center"), for a purchase price of
$150,000. The purchase price is payable, with interest at
10% per annum, over a period of 15 months commencing
September 1, 1995 as follows: $13,500 per month for the
first fourteen months and $1,185 for the fifteenth month.
The Melbourne Center is a Florida professional corporation
of which Raymond V. Damadian is the sole stockholder,
Director and President.

F-28

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1996

NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED
PARTIES (Continued)

During the year ending June 30, 1994, AMD sold to Dade
County MRI, P.A. (the "Dade County Center") its interests in
a partnership which had formerly operated an MRI scanning
center in Miami, Florida, but is now inactive. The purchase
price of $100,000 is payable, with interest at 10% per
annum, at the rate of $2,124 per month over a period of 60
months commencing 90 days after the scanner is placed in
service. The Dade County Center is a Florida professional
association of which Raymond V. Damadian is the sole
stockholder, Director and President.

During the year ended June 30, 1994, AMD sold its interests
in a partnership operating an MRI scanning center in San
Francisco to RVDC. The purchase price of $265,000 is
payable, with interest at 10% per annum, at the rate of
$9,405 per month over a period of 36 months commencing
January 1, 1995.

As of June 30, 1996 and 1995 the Company was due $1,423,272
and $1,900,819 respectively, from the Limited Partnerships
for service contracts, upgrades, fees and expenses.

Joint Ventures
--------------

Pursuant to an agreement dated April 6, 1993, a professional
association, of which Dr. Raymond V. Damadian, Chairman and
President of the Company, is sole shareholder, Director and
Officer, agreed to purchase the Company's partnership/joint
venture interest in two MRI scanning centers for a purchase
price of $3,200,000. The agreement provides for the payment
of the purchase price as follows: $200,000 no later than
June 30, 1993 and the balance in 36 equal monthly
installments of principal and interest (8% per annum) in the
amount of $46,759 and one final installment of principal in
the amount of $1,915,324.

F-29

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED
PARTIES (Continued)

During the year ended June 30, 1994, AMD sold its interest
in a joint venture operating an MRI scanning center in
Philadelphia, Pennsylvania to Liberty MRI, P.C. (the
"Liberty Center"). The purchase price of $400,000 is
payable, with interest at 10% per annum, at a rate of $9,349
per month over a period of 60 months commencing
July 1, 1995. The Liberty Center is a Pennsylvania
professional corporation of which Raymond V. Damadian is the
sole stockholder, Director and President.

Revenues and income from operations recorded by FONAR
related to these joint ventures for the years ended June 30,
1996, 1995 and 1994 were as follows:

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

Revenues $ - $ - $179,302
======= ======== ========

Income from operations $ - $ - $ 17,304
======= ======== ========

Advances to and Notes Due from Related Parties
----------------------------------------------

On April 7, 1989, Donna Damadian, the spouse of Dr. Raymond
V. Damadian, Chairman and President of the Company,
purchased from the Company a scanner for a purchase price of
$1,508,000, representing an arms-length transaction
consistent with what unrelated third parties have paid for
similar equipment. Of such purchase price, $1.2 million was
paid in cash and the balance was evidenced by a promissory
note of even date. At June 30, 1991, the note, including
accrued interest thereon, was paid in full. Donna Damadian
leased such scanner to the Macon MRI, P.C. ("Macon Center"),
a corporation wholly owned by and of which Dr. Damadian is
the President.

Since May 1990, RVDC has been party to a standard service
agreement with the Company for the servicing of the scanner
at the Macon Center. The annual price is $120,000, which is
the standard price charged to the Company's other customers
for like equipment.

F-30

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED
PARTIES (Continued)

During the year ended June 30, 1990, RVDC assumed from the
original lessees the obligations under two separate lease
agreements for MRI scanners with the Company. Each lease
was originally classified by the Company and continues to
qualify as a sales-type lease. Effective June 30, 1991, the
lease agreements were restructured to provide for new five-
year terms, commencing June 30, 1991, and the aggregate
monthly payments were fixed at $73,760 eliminating the
previous per scan fee. RVDC can purchase the machines at
their then outstanding lease value at any time, without
penalty. In addition, since service and maintenance for the
scanner is not included under the new leases, RVDC has been
a party to two standard service agreements since June 30,
1991. The annual price is currently $120,000 per contract
and the term of the current one-year service contracts runs
from June 30, 1995 to June 29, 1996.

During the year ended June 30, 1990, RVDC agreed to assume
the financial and other obligations of the original lessee
under a lease for mobile scanner dated June 29, 1988, on the
same terms and conditions as the original lessee. The lease
was originally classified by the Company as a sales-type
lease. Effective June 30, 1991, the lease arrangements were
restructured to provide for a five year term, commencing
June 30, 1991 and the monthly payment was fixed at $35,167,
eliminating the previous per scan fee (with a minimum
monthly payment of $40,000). Effective December 1, 1993,
RVDC assigned its purchase option under the lease to Albany
Magnetic Imaging Center, P.C., a Georgia professional
corporation of which Raymond V. Damadian is the sole
stockholder, Director and President ("Albany Center") and
the Albany Center concurrently exercised the option and
purchased the scanner from the Company for a purchase price
of $1,128,844. Of the purchase price, $574,077 is to be
paid by the assumption and payment of the Company's
indebtedness to the lender secured by the scanner. Such
indebtedness to the lender is to be 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 will 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).

F-31

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED
PARTIES (Continued)

By agreement dated June 27, 1990, Tallahassee Magnetic
Resonance Imaging, Inc., a Florida corporation, of which
Raymond V. Damadian is the sole shareholder, Director and
Officer ("TMRI"), leased from the Company one mobile scanner
for a period of five years. The Company classified this
lease as a sales-type lease and, accordingly, recorded
revenue of $1,700,000 during the year ended June 30, 1990.
This transaction represents an arms length transaction
consistent with what unrelated third parties have paid under
similar lease agreements.

Effective June 30, 1991, the lease agreement was
restructured to provide for a new five-year term, commencing
June 30, 1991, and the monthly payment was fixed at $43,217,
eliminating the previous per scan fee. TMRI can purchase
the machine at its then outstanding lease value at any time,
without penalty. In addition, since service and maintenance
for the scanner are not included under the new lease, TMRI
has been a party to a standard service agreement for the
scanner since June 30, 1991. The annual price is currently
$120,000 and the term of the current one-year service
contract runs from June 30, 1996 to June 29, 1997.

As of June 30, 1991, $1,996,100 of additional indebtedness
of RVDC due to FONAR was incorporated into a note, payable
over a five-year period with interest at the rate of 10% per
annum. During the year ended June 30, 1992, the note was
amended to incorporate additional indebtedness incurred
during the year. The amended note is for $4,284,692 and is
payable over a five-year period with interest at the rate of
10% per annum. The RVDC note is collateralized by the
assets of RVDC, and guaranteed by the various RVDC scanning
centers.

During the year ended June 30, 1991, the Company sold
upgrades to TMRI aggregating $69,000. As part of the
restructuring, the net investment in sales-type lease was
increased by $500,000, which represents $69,000 in upgrades,
and a refinancing of past due lease payments of $431,000.

F-32

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED
PARTIES (Continued)

In addition to the above restructuring, $169,200 of
indebtedness of TMRI to FONAR was incorporated into a note
payable over a five-year period with interest at the rate of
10% per annum. During the year ended June 30, 1992, the
note was amended to incorporate additional indebtedness
incurred during the year. The amended note is for $803,272
and is payable over a five-year period, with interest at the
rate of 10% per annum.

During the year ended June 30, 1992, RVDC agreed to assume
the financial and other obligations of the original lessee
under a lease for a mobile scanner dated June 30, 1989 and
restructured the terms to provide for a monthly payment of
$24,421 commencing April 1, 1992 and extended the term of
the lease seven years from that date. The lease was
originally classified by the Company as a sales-type lease.
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. Of the
purchase price, $328,044 is to be paid by the assumption and
payment of the Company's indebtedness to the lender secured
by the scanner. Such indebtedness to the lender is to be
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 will be paid pursuant to a promissory note, with
interest at 10% per annum, over a 45 month term commencing
July 1, 1994 as follows: eleven installments of $15,000
each, thirty-three installments of $35,000 each and one
installment of $19,097.

F-33

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED
PARTIES (Continued)

During the year ended June 30, 1992, RVDC agreed to lease
one of the Company's mobile scanners for a term of five
years at a monthly lease payment of $36,119 commencing
January 1, 1992. The lease was originally classified by the
Company as a sales-type lease. Effective June 30, 1994, RVDC
assigned its purchase option under the lease to Melville
MRI, P.C., a New York professional corporation of which
Raymond V. Damadian is the sole shareholder, Director and
President ("Melville Center") and the Melville Center
concurrently exercised the option and purchased the 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 is to be
paid concurrently with the payments to the lender pursuant
to a note, with interest at 10% per annum, providing for 60
monthly payments of $2,367 each.

During the year ended June 30, 1992, RVDC agreed to lease
one of the Company's scanners for a monthly lease payment of
$18,081 for a period of seven years commencing April 1,
1992. The Company classified this lease as a sales-type
lease. RVDC in turn provided the use of the scanner to
Damadian MRI at Astoria, P.C. (the "Astoria Center"), a New
York professional corporation of which Raymond V. Damadian
is the sole shareholder, Director and President. Effective
November 13, 1993, the lease between the Company and RVDC
was restructured with the terms to provide for monthly
payments of $16,978 each commencing February 1, 1994.

During the year ended June 30, 1992, FONAR entered into
contracts to sell four MRI scanners to RVDC for a purchase
price of $1,000,000 per machine, recognizing, on a
percentage of completion basis, revenue of $3,249,825 (see
Note 4). RVDC will utilize the scanners at sites located in
Bayside, Elmhurst, Islandia and Forest Hills, New York.
Each of the four sales agreements provide for a 10% down
payment within 30 days of signing, 10% within 30 days of
delivery of the magnet and shielded room and 80% pursuant to
a promissory note to be given upon acceptance of the
scanner, said note providing for 84 monthly payments of
$12,469 each, including interest at 8% per annum. Each
note is secured by the scanner to which

F-34

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1996

NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED
PARTIES (Continued)

it relates. During November 1993, one of the sales
agreements with RVDC was terminated and the Company then
leased the scanner to Damadian MRI at Islandia, P.C.
("Islandia") for a period of seven years. The Company
classified this lease as a sales-type lease for $1,000,000.
This transaction represents an arm's length transaction
consistent with what unrelated third parties have paid under
similar lease agreements. The lease provides for monthly
payments aggregating $15,586. During March 1995, $224,657
of the note related to the Elmhurst scanner was reduced by
the assumption of the Company's indebtedness.

During the year ended June 30, 1993, RVDC leased from the
Company one scanner for a period of seven years. The
Company classified this lease as a sales-type lease and,
accordingly, recorded revenue of $1,000,000. This
transaction represents an arm's length transaction
consistent with what unrelated third parties have paid under
similar lease agreements. The lease provides for monthly
payments aggregating $15,586.

In addition, since service and maintenance for the scanner
are not included under the new leases, RVDC has been a party
to an additional standard service agreement. The annual
price is currently $105,000 and the term is for one year.

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 ("the Bensonhurst Center"). The
purchase price of $923,000 is payable in 84 equal monthly
installments of $14,386 each commencing May 1, 1993, which
amount includes principal and interest at the rate of 8% per
annum amortized over the term.

Pursuant to a sales agreement dated June 30, 1993, RVDC
agreed to purchase an MRI scanner from the Company which
RVDC is planning to utilize at a site located in Coral
Gables, Florida (the "Coral Gables Center"). The sales
agreement provides for a purchase price of $1,000,000
payable in installments as follows: (1) 10% down payment
within 30 days of execution; (2) 10% within 30 days of
delivery of the magnet and shielded room, and

F-35

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED
PARTIES (Continued)

(3) 80% in 84 monthly installments of $12,468 each
(inclusive of interest at 8% per annum) pursuant to a
promissory note to be executed by RVDC upon acceptance of
the scanner. The Scanner is expected to be completed during
fiscal 1997.

During the year ended June 30, 1994, the Company entered
into a contract to sell an MRI scanner to RVDC which RVDC is
planning to utilize at a site located in Manhattan, New
York, recognizing revenue of $800,000. The sales agreement
provides for a purchase price of $800,000 payable in
installments as follows: (1) $100,000 down payment within 30
days of execution, (2) $700,000 in 84 monthly installments
of $11,347 (inclusive of interest at 8% per annum commencing
January 1, 1995) pursuant to a promissory note executed by
RVDC upon acceptance of the scanner.

During the year ended June 30, 1994, the Company entered
into a contract to sell an MRI scanner to RVDC which RVDC is
planning to utilize at a site located in Israel, recognizing
revenue of $1,000,000. The sales agreement provides for a
purchase price of $1,000,000 payable in 84 monthly
installments of $16,210 each (inclusive of interest at 8%
per annum commencing January 1, 1995) pursuant to a
promissory note executed by RVDC upon acceptance of the
scanner.

During the year ending June 30, 1994 the Company entered
into an agreement to sell an MRI scanner to RVDC which RVDC
is planning to utilize at a site in Cape Coral, Florida
recognizing, on a percentage of completion basis, revenue of
$950,000. The agreement provides for a purchase price of
$1,000,000 payable in installments as follows: (1) $100,000
down payment within 30 days of execution, and (2) $900,000
in 84 monthly installments of $14,028 each (inclusive of
interest at 8% per annum) pursuant to a promissory note to
be executed by RVDC upon acceptance of the scanner.

During the year ended June 30, 1994 the Company entered into
an agreement to sell an MRI scanner to RVDC which RVDC is
planning to utilize at a site located in Orlando, Florida
recognizing on a percentage of completion basis, revenue of
$950,000. The agreement provides for a purchase price of
$1,000,000 payable in installments as follows: (1) $100,000
down payment

F-36

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED
PARTIES (Continued)

within 30 days of execution, and (2) $900,000 in 84 monthly
installments of $14,028 each (inclusive of interest at 8%
per annum) pursuant to a promissory note to be executed by
RVDC upon acceptance of the scanner.

Pursuant to an agreement dated March 31, 1994, the Company
sold an MRI scanner to Ellwood City MRI Center Limited
Partnership, a Pennsylvania limited partnership of which
RVDC is the general partner. The sales agreement provided
for a purchase price of $400,000, of which the first
$200,000 was paid subsequent to the fiscal year end and the
second $200,000 will be paid by the transfer of RVDC's
distributions until the sum of $200,000 is reached. The
partnership is utilizing the scanner to set up an MRI
scanning center in Ellwood City, Pennsylvania.

Effective July 1994, RVDC assigned its purchase option under
the lease to Deerfield Magnetic Resonance Imaging P.A., a
Florida professional association of which Raymond V.
Damadian is the sole shareholder, Director and President
("Deerfield Center") and the Deerfield Center exercised the
option and purchased the scanner from the Company for a
purchase price of $962,185. Of the purchase price, $311,934
is to be paid by the assumption and payment of the Company's
indebtedness to the lender secured by the scanner. Such
indebtedness is to be retired pursuant to a new equipment
finance lease between the lender and the Deerfield Center,
guaranteed by the Company, providing for 17 monthly payments
of $30,520 and a final payment of the remaining principal
balance plus unpaid interest. The remaining $454,005 of the
purchase price due to the Company will be paid pursuant to a
promissory note with interest at 10% per annum, over a 17-
month term commencing January 1, 1996 as follows: sixteen
installments of $30,000 each and one installment of $7,275.

During the year ended June 30, 1995, the Company entered
into a contract to sell an MRI scanner to RVDC, which RVDC
is planning to utilize at a site in Fort Lauderdale, Florida
recognizing on a percentage of completion basis, revenue of
$549,032. The agreement provides for a purchase price of
$800,000 payable in installments as follows: (1) $80,000
down payment within 90 days of execution, and (2) $720,000
in 84 monthly installments of $11,222 each (inclusive of
interest at 8% per annum) pursuant to a promissory note to
be executed by RVDC upon acceptance of the scanner.

F-37

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED
PARTIES (Continued)

During the year ended June 30, 1995, the Company entered
into a contract to sell an MRI scanner to RVDC, which RVDC
is planning to utilize at a site in Leeds, England
recognizing on a percentage of completion basis, revenue of
$707,862. The agreement provides for a purchase price of
$800,000 payable in installments as follows: (1) $80,000
down payment within 90 days of execution, and (2) $720,000
in 84 monthly installments of $11,222 each (inclusive of
interest at 8% per annum) pursuant to a promissory note to
be executed by RVDC upon acceptance of the scanner.

During the year ended June 30, 1995, the Company entered
into a contract to sell an MRI scanner to RVDC, which RVDC
is planning to utilize at a site in Birmingham, England
recognizing on a percentage of completion basis, revenue of
$760,000. The agreement provides for a purchase price of
$800,000 payable in installments as follows: (1) $80,000
down payment within 90 days of execution, and (2) $720,000
in 84 monthly installments of $11,222 each (inclusive of
interest at 8% per annum) pursuant to a promissory note to
be executed by RVDC upon acceptance of the scanner.

During the year ended June 30, 1995, the Company entered
into a contract to sell an MRI scanner to RVDC, which RVDC
is planning to utilize at a site in Boca Raton, Florida
recognizing on a percentage of completion basis, revenue of
$524,042. The agreement provides for a purchase price of
$800,000 payable in installments as follows: (1) $80,000
down payment within 90 days of execution and (2) $720,000 in
84 monthly installments of $11,222 each (inclusive of
interest at 8% per annum) pursuant to a promissory note to
be executed by RVDC upon acceptance of the scanner.

During the year ended June 30, 1995, the Company entered
into a contract to sell an MRI scanner to RVDC, which RVDC
is planning to utilize at a site in St. Petersburg, Florida
recognizing on a percentage of completion basis, revenue of
$699,667. The agreement provides for a purchase price of
$800,000 payable in installments as follows: (1) $80,000
down payment within 90 days of execution and (2) $720,000 in
84 monthly installments of $11,222 each (inclusive of
interest at 8% per annum) pursuant to a promissory note to
be executed by RVDC upon acceptance of the scanner.

F-38

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED
PARTIES (Continued)

During the year ended June 30, 1995, the Company entered
into a contract to sell an MRI scanner to RVDC, which RVDC
is planning to utilize at a site in Sarasota, Florida
recognizing on a percentage of completion basis, revenue of
$405,240. The agreement provides for a purchase price of
$800,000 payable in installments as follows: (1) $80,000
down payment within 90 days of execution and (2) $720,000 in
84 monthly installments of $11,222 each (inclusive of
interest at 8% per annum) pursuant to a promissory note to
be executed by RVDC upon acceptance of the scanner.

During the year ended June 30, 1995, the Company entered
into a contract to sell an MRI scanner to RVDC, which RVDC
is planning to utilize at a site in Largo, Florida
recognizing on a percentage of completion basis, revenue of
$707,860. The agreement provides for a purchase price of
$800,000 payable in installments as follows: (1) $80,000
down payment within 90 days of execution and (2) $720,000 in
84 monthly installments of $11,222 each (inclusive of
interest at 8% per annum) pursuant to a promissory note to
be executed by RVDC upon acceptance of the scanner.

Pursuant to a sales agreement dated July 6, 1995, the
Company entered into a contract to sell an MRI scanner to
RVDC, which RVDC is planning to utilize at a site located in
Panama City, Florida, recognizing on a percentage of
completion basis, revenue of $531,000. The sales agreement
provides for a purchase price of $590,000 payable in
installments as follows: (1) $59,000 down payment within 30
days of execution and (2) $531,000 in 84 monthly
installments of $8,276.28 each (inclusive of interest at 8%
per annum) pursuant to a promissory note to be executed by
RVDC upon acceptance of the scanner.

Pursuant to a sales agreement dated August 4, 1995, the
Company entered into a contract to sell an MRI scanner to
RVDC, which RVDC is planning to utilize at a site located in
Gainsville, Florida, recognizing on a percentage of
completion basis, revenue of $405,000. The sales agreement
provides for a purchase price of $450,000 payable in
installments as follows: (1) $45,000 down payment within 30
days of execution and (2) $405,000 in 84 monthly
installments of $6,312.42 each (inclusive of interest at 8%
per annum) pursuant to a promissory note to be executed by
RVDC upon acceptance of the scanner.

F-39

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED
PARTIES (Continued)

Pursuant to a sales agreement dated August 4, 1995, the
Company entered into a contract to sell an MRI scanner to
RVDC, which RVDC is planning to utilize at a site located in
Newark, New Jersey, recognizing on a percentage of
completion basis, revenue of $531,000. The sales agreement
provides for a purchase price of $590,000 payable in
installments as follows: (1) $59,000 down payment within 30
days of execution and (2) $531,000 in 84 monthly
installments of $8,276.28 each (inclusive of interest at 8%
per annum) pursuant to a promissory note to be executed by
RVDC upon acceptance of the scanner.

Pursuant to a sales agreement dated September 20, 1995, the
Company entered into a contract to sell an MRI scanner to
RVDC, which RVDC is planning to utilize at a site located in
Patterson, New Jersey, recognizing on a percentage of
completion basis, revenue of $405,000. The sales agreement
provides for a purchase of $450,000 payable in installments
as follows: (1) $45,000 down payment within 30 days of
execution and (2) $405,000 in 84 monthly installments of
$6,312.42 each (inclusive of interest at 8% per annum)
pursuant to a promissory note to be executed by RVDC upon
acceptance of the scanner.

Pursuant to a sales agreement dated October 4, 1995, the
Company entered into a contract to sell an MRI scanner to
RVDC, which RVDC is planning to utilize at a site located in
Atlanta, Georgia, recognizing on a percentage of completion
basis, revenue of $405,000. The sales agreement provides
for a purchase price of $450,000 payable in installments as
follows: (1) $45,000 down payment within 30 days of
execution and (2) $405,000 in 84 monthly installments of
$6,312.42 each (inclusive of interest at 8% per annum)
pursuant to a promissory note to be executed by RVDC upon
acceptance of the scanner.

Pursuant to a sales agreement dated October 4, 1995, the
Company entered into a contract to sell an MRI scanner to
RVDC, which RVDC is planning to utilize at a site located in
Trenton, New Jersey, recognizing on a percentage of
completion basis, revenue of $405,000. The sales agreement
provides for a purchase price of $450,000 payable in
installments as follows: (1) $45,000 down payment within 30
days of execution and (2) $405,000 in 84 monthly
installments of $6,312.42 each (inclusive of interest at 8%
per annum) pursuant to a promissory note to be executed by
RVDC upon acceptance of the scanner.

F-40
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1996

NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED
PARTIES (Continued)

Pursuant to a sales agreement dated October 24, 1995, the
Company entered into a contract to sell an MRI scanner to
RVDC, which RVDC is planning to utilize at a site located in
Naples, Florida, recognizing on a percentage of completion
basis, revenue of $405,000. The sales agreement provides
for a purchase price of $450,000 payable in installments as
follows: (1) $45,000 down payment within 30 days of
execution and (2) $405,000 in 84 monthly installments of
$6,312.42 each (inclusive of interest at 8% per annum)
pursuant to a promissory note to be executed by RVDC upon
acceptance of the scanner.

Pursuant to a sales agreement dated January 19, 1996, the
Company entered into a contract to sell an MRI scanner to
RVDC, which RVDC is planning to utilize at a site located in
Savannah, Georgia, recognizing on a percentage of completion
basis, revenue of $405,000. The sales agreement provides
for a purchase of $450,000 payable in installments as
follows: (1) $45,000 down payment within 30 days of
execution and (2) $405,000 in 84 monthly installments of
$6,312.42 each (inclusive of interest at 8% per annum)
pursuant to a promissory note to be executed by RVDC upon
acceptance of the scanner.

Pursuant to a sales agreement dated February 7, 1996, the
Company entered into a contract to sell an MRI scanner to
RVDC, which RVDC is planning to utilize at a site located in
Buffalo, New York, recognizing on a percentage of completion
basis, revenue of $405,000. The sales agreement provides
for a purchase of $450,000 payable in installments as
follows: (1) $45,000 down payment within 30 days of
execution and (2) $405,000 in 84 monthly installments of
$6,312.42 each (inclusive of interest at 8% per annum)
pursuant to a promissory note to be executed by RVDC upon
acceptance of the scanner.

Pursuant to a sales agreement dated April 1, 1996, the
Company entered into a contract to sell an MRI scanner with
certain upgrades to RVDC, which RVDC has contributed to
Orlando MRI Associates, Limited Partnership (the "Orlando
Partnership"), a limited partnership in which RVDC is the
general partner. 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

F-41

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED
PARTIES (Continued)

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. Commencing October 8,
1996, the Orlando Partnership will enter into a service
agreement for the scanner with the Company at an annual fee
of $70,000, which fee will remain in effect for five years.
As at June 30, 1996, the Orlando Partnership was indebted to
the Company in the amount of $21,063. Timothy Damadian, a
Vice-President of the Company, is a limited partner in
Orlando.

As of June 30, 1996 the Company had entered into various
service contracts with RVDC and other related entities as
described above. The service contracts aggregating
$2,213,425, are for one year terms and expire at various
dates.

During the years ended June 30, 1996, 1995 and 1994, the
Company sold (at standard prices) various upgrades to RVDC
aggregating $11,000, $338,000 and $126,000, respectively.

During the years ended June 30, 1996, 1995 and 1994, the
Company received a fee and reimbursed expenses for the use
of its computer system and personnel.

Pursuant to an agreement dated March 3, 1994, Network MRI,
Inc. ("Network") engaged the Company to disassemble,
transport and reinstall an MRI scanner purchased by Network
from a third party. Luciano Bonanni, the Executive Vice
President of the Company, is the President, Director and
shareholder of Network. The agreement provides for a price
of $120,000 payable as follows: (1) $5,000 upon the giving
of notice by Network to commence the deinstallation; (2)
$15,000 upon the completion of the installation of the
magnet and shielded room, and (3) $100,000 in 36 monthly
installments of $3,133 each (inclusive of interest at 8% per
annum) pursuant to a note executed upon completion of the
reinstallation.

F-42

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED
PARTIES (Continued)

Pursuant to an agreement dated June 20, 1994, MRI
Enterprises, Inc. ("Enterprises"), a New York corporation of
which Luciano Bonanni is the stockholder, Director and
President, engaged the Company to disassemble, transport and
reinstall an MRI scanner purchased by Enterprises from a
third party. The agreement provided for a price of $120,000
payable as follows: (1) $5,000 upon the giving of notice by
Enterprises to commence the deinstallation; (2) $15,000 upon
the completion of the installation of the magnet and
shielded room, and (3) $100,000 with interest at 8% per
annum pursuant to a note executed upon completion of the
reinstallation.

In addition, as of June 30, 1995, Enterprises assumed the
liability of a third party to FONAR which had defaulted in
its obligation to pay for service for an MRI scanner being
provided by Enterprises to the third party. The liability,
in the amount of $50,604 was assumed by Enterprises in
exchange for FONAR assigning the accounts receivable to
Enterprises. The liability is payable by Enterprises to
FONAR amortized over a period of thirty-six months with
interest at 8% per annum commencing on January 1, 1996.

Enterprises was indebted to the Company as at June 30, 1996
in the amount of $204,539 pursuant to a promissory note due
January 15, 1995 in the original principal amount of
$324,235 with interest at the rate of 10% per annum. The
original principal amount of this note represents the
liability of a third party to the Company for service and
other items which was assumed by Enterprises in connection
with Enterprises' acquisition of an MRI scanner and
assumption of said party's finance lease covering the
scanner.

The aggregate indebtedness of Enterprises and Network to the
Company as at June 30, 1996 was $419,068.

Pursuant to an agreement dated August 3, 1993, MRI
Specialties, Inc. ("Specialties") engaged the Company to
deinstall, transport and reinstall an MRI scanner purchased
from a third party. Timothy Damadian, a Vice-President of
the Company, is the stockholder, Director and President of
Specialties. The agreement provides for a price of
$120,000 payable in 36 monthly

F-43

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 3 - INVESTMENTS, ADVANCES AND NOTES TO AFFILIATES AND RELATED
PARTIES (Continued)

installments of $3,760 each (inclusive of interest at 8% per
annum) pursuant to a note executed and delivered by
Specialties upon the completion of the reinstallation. The
scanner is owned by Canarsie MRI Associates ("Canarsie"), a
joint venture partnership of which Specialties is an owner,
and Canarsie is party to a service agreement for the scanner
with the Company at an annual fee of $70,000 for the period
September 1, 1994 through August 31, 1995 and $73,500 for
the period September 1, 1995 through August 31, 1996. The
annual fee for the following two annual periods will not
exceed $77,000 and $80,500, respectively.

Pursuant to an agreement dated January 2, 1996, Guardian
MRI, Inc. ("Guardian") engaged the Company to deinstall,
transport and reinstall an MRI scanner purchased for Pompano
MRI Associates ("Pompano") from a third party. Timothy
Damadian, a Vice-President of the Company, is a stockholder,
director and officer of Guardian. Pompano is a joint
venture partnership of which Guardian is an owner. The
agreement provides for a price of $120,000 payable in 36
monthly installments of $3,760.36 each (inclusive of
interest at 8% per annum) pursuant to a note executed and
delivered by Guardian upon the completion of the
reinstallation. The agreement also provides that the
Company will provide a six-month warranty for the scanner
and a service agreement thereafter at an annual price of
$70,000. In addition, the agreement provides that the
Company will provide updated software, Signal Plus Surface
Coils, Whisper Gradients and a Four Post Canopy and Steel
upgrade for the scanner.

The aggregate indebtedness of Specialties and Canarsie to
the Company as at June 30, 1996 was $95,807 and the
aggregate indebtedness of Guardian and Pompano to the
Company was $124,929.

As of June 30, 1996, notes receivable as described above
include amounts in arrears aggregating $5,201,004.

Income and expenses charged by the Company to RVDC, and
related entities are approximately as follows:

1996 1995 1994
---------- ---------- ----------
Revenues recognized
from product sales $4,583,000 $4,866,000 $4,400,000
Interest income $1,965,000 $1,851,000 $1,829,000
Service fees $2,144,000 $2,174,000 $1,323,000
Fees and reimbursable
expenses $2,110,000 $3,284,000 $2,197,000

F-44
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND
CUSTOMER ADVANCES

1) Information relating to uncompleted contracts as of
June 30, 1996 and 1995 is as follows:

As of June 30,
-----------------------
1996 1995
---------- ----------
Costs incurred on uncompleted
contracts $5,147,175 $4,373,423
Estimated earnings 7,202,741 5,053,189
---------- ----------
12,349,916 9,426,612
Less: Billings to date 2,723,000 2,432,500
---------- ----------
$9,626,916 $6,994,112
========== ==========

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

As of June 30,
-----------------------
1996 1995
---------- ----------
Costs and estimated earnings
in excess of billings on
uncompleted contracts -
short-term $ 336,455 $ 323,918
Costs and estimated earnings
in excess of billings on
uncompleted contracts -
long-term with related
parties 9,460,469 6,681,296
Billings in excess of costs
and estimated earnings on
uncompleted contracts (170,008) (11,102)
---------- ----------
$9,626,916 $6,994,112
========== ==========

F-45

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1996

NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND
CUSTOMER ADVANCES (Continued)

2) Customer advances consist of the following:

As of June 30,
-----------------------
1996 1995
---------- ----------
Total advances from customers $3,656,604 $2,725,987
Less: Advances from customers
on contracts under
construction (includes
$1,393,000 and
$1,160,000 for 1996
and 1995, respectively,
with related parties) 2,723,000 2,432,500
---------- ----------

$ 933,604 $ 293,487
========== ==========

NOTE 5 - INVENTORIES

Inventories included in the accompanying consolidated
balance sheets consist of:

June 30,
-----------------------
1996 1995
---------- ----------

Purchased parts, components
and supplies $3,316,190 $2,204,888
Work-in-process 307,382 90,439
---------- ----------

$3,623,572 $2,295,327
========== ==========

F-46

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 6 - LEASING OPERATIONS

Net Investment in Sales-Type Leases with Related Parties
------------------------------------------------------------

The Company has entered into several lease agreements for
its MRI scanners which are considered sales-type leases (see
Note 3). Revenues for fiscal 1996, 1995 and 1994 include
approximately $-0-, $-0- and $1,000,000, respectively, from
these sales-type leases. The Company's net investment in
sales-type leases as at June 30, 1996 and 1995 is as
follows:

June 30,
------------------------
1996 1995
---------- ----------
Total minimum lease payments
receivable $6,794,026 $7,063,068
Less: Allowance for possible
losses 115,000 115,000
---------- ----------
Net minimum lease payments
receivable 6,679,026 6,948,068

Less: Unearned income (381,057) (617,101)
---------- ----------
Net investment in sales-type
leases $6,297,969 $6,330,967
========== ==========

Current portion $ 779,096 $1,368,988
Non-current portion 5,518,873 4,961,979
---------- ----------

$6,297,969 $6,330,967
========== ==========

At June 30, 1996 and 1995, net investment in sales-type
leases include amounts in arrears aggregating $3,522,730 and
$2,537,739, respectively.

a) During the year ended June 30, 1996, 117,000 shares of
stock were issued to a finance company in consideration
for the purchase of all receivables due under a lease
of an MRI scanning machine with a related party. The
value assigned to such lease approximated $351,000 as
of June 30, 1996.

F-47

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 6 - LEASING OPERATIONS (Continued)

b) During the year ended June 30, 1995, one purchase
option was exercised by a related party for property
and equipment under a sales-type lease with a remaining
lease value of $962,185. In consideration for the
property and equipment, the related party assumed
$311,934 of the Company's debt.

Minimum lease payments to be received as at June 30,
1996 for each of the next five years and thereafter are
as follows:

Years Ended
June 30,
-----------
1997 $2,780,340
1998 694,786
1999 694,786
2000 1,008,630
2001 1,615,484
2002
and thereafter -
----------
$6,794,026
Total ==========

NOTE 7 - PROPERTY AND EQUIPMENT

Property and equipment, at cost, less accumulated
depreciation and amortization, at June 30, 1996 and 1995, is
comprised of:
June 30,
------------------------
1996 1995
---------- ----------
Offsite research scanner
(see Note 13) $1,154,217 $1,154,217
Research, development and
demonstration equipment
(Note 11) 5,460,928 6,177,043
Machinery and equipment 3,485,573 3,386,353
Furniture and fixtures 2,206,848 2,142,867
Property under lease 1,512,282 555,645
---------- ----------
13,819,848 13,416,125
Less: Accumulated depreciation
and amortization 11,319,254 10,629,723
---------- ----------

$2,500,594 $2,786,402
========== ==========
F-48

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 7 - PROPERTY AND EQUIPMENT (Continued)

Depreciation and amortization of property and equipment for
the years ended June 30, 1996, 1995 and 1994 was $1,026,091,
$987,752 and $1,019,815, respectively.

The property under lease has a net book value of $1,195,603
and $357,200 at June 30, 1996 and 1995, respectively.

NOTE 8 - INTANGIBLE ASSETS

1) Capitalized Software Development Costs

The following is a summary of software development costs
capitalized and the amortization charged to operations for
the three years ended June 30, 1996:

For the Years Ended June 30,
-------------------------------
1996 1995 1994
---------- ---------- ----------

Amount capitalized $ 505,990 $ 281,052 $ 373,256
========== ========== ==========

Amortization $1,013,615 $1,255,012 $1,318,337
========== ========== ==========

Capitalized computer software costs for the years ended June
30, 1996, 1995 and 1994 primarily relate to the costs of
developing upgrades for the Company's existing scanner
product lines and a new line of scanner products.

F-49

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 8 - INTANGIBLE ASSETS (Continued)

2) Other Intangible Assets

Other intangible assets, net of accumulated amortization, at
June 30, 1996 and 1995 are comprised of:

June 30,
-----------------------
1996 1995
---------- ----------

Cost of acquiring technology
and license $3,422,231 $3,422,231
Patents and copyrights 6,033,543 5,929,963
---------- ----------
9,455,774 9,352,194
Less: Accumulated amortization (6,251,619) 6,032,141
---------- ----------

$3,204,155 $3,320,053
========== ==========

In January 1987, the Company acquired the technology for
adapting trailers for use in its mobile scanner units. The
purchase price of $422,231 was capitalized and was amortized
over five years. On May 7, 1987, the Company acquired
certain technology and, accordingly, capitalized $3,000,000
of such purchase price, which was amortized over five years.
These assets are fully amortized at June 30, 1994.

Patents, acquired at various dates are being amortized over
17 years.

Patent and deferred legal costs related to various patent
and copyright infringement actions of approximately $120,473
and $1,365,275 were capitalized during the years ended June
30, 1996 and 1995, respectively. During August 1994 one
such action was settled with the Company receiving a
monetary award of $1,150,000 (see Note 15). As of June 30,
1994, the net accumulated costs associated with this case,
which approximated the monetary award were reclassified to
prepaid expenses and other current assets.

F-50
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 8 - INTANGIBLE ASSETS (Continued)

Approximately $103,000 and $1,365,000 of the legal costs
capitalized during fiscal 1996 and 1995, respectively,
related to the separate suits, whereby, the Company is suing
General Electric and Hitachi for infringement of various
patents related to the Company's MRI machines. During
fiscal years 1996 and 1995, two cases against Philips and
Hitachi were settled and approximately $17,000 and $332,000
of legal costs relating to these cases were written-off,
respectively (see Note 15 for a more detailed discussion of
these lawsuits).

Amortization of other intangible assets for the years ended
June 30, 1996, 1995 and 1994 was $219,478, $176,276 and
$203,266, respectively.

NOTE 9 - SIGNIFICANT CUSTOMERS AND DISTRIBUTION AGREEMENTS

The Company's machine sale revenues for the three years
ended June 30, 1996 were derived as follows:

Percent of
Customers Foreign
Years Ended ------------------------ Revenues to
June 30, Domestic Foreign Total Total Revenues
----------- -------- ------- ----- --------------
1996 9 5 14 17%
1995 5 5 10 17%
1994 5 3 8 9%

During the years ended June 30, 1996, 1995 and 1994,
revenues from related parties were 54%, 51% and 39%,
respectively, of total revenues. In addition, interest
income recognized from related parties totalled $1,964,828,
$1,969,204 and $1,865,963, respectively, for the years ended
June 30, 1996, 1995 and 1994. No one unrelated customer
accounted for more than 10% of total revenues during fiscal
years 1996, 1995 and 1994.

F-51

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 9 - SIGNIFICANT CUSTOMERS AND DISTRIBUTION AGREEMENTS
(Continued)

Distributorship Agreements
--------------------------

In order to facilitate the marketing of its products, the
Company has entered into agreements granting exclusive and
non-exclusive rights to distribute the Company's existing
and certain future products in Europe, Asia and Latin
America.

NOTE 10 - CAPITAL STOCK

The total number of shares of stock which the Company is
authorized to issue is 92,000,000 shares. The classes and
the aggregate number of shares of stock of each class are as
follows:

1) 60,000,000 shares of common stock with a par value of
$.0001 per share. On April 3, 1995, shareholders
approved an increase in the authorized common shares
from 50,000,000 to 60,000,000.

2) 4,000,000 shares of Class B common stock, having a par
value of $.0001 per share.

3) 10,000,000 shares of Class C common stock, having a par
value of $.0001 per share (see below).

4) 8,000,000 shares of Class A non-voting preferred stock,
having a par value of $.0001 per share (see below).

5) 10,000,000 shares of preferred stock, having a par
value of $.001 per share.

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, a special cash dividend shall be payable in an
amount equal to three percent (3%) 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).

F-52

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 10 - 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, 1996, 437
shares of Class B common stock were converted to common
stock leaving 5,411 of such shares outstanding as of June
30, 1996.

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.

F-53

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 10 - CAPITAL STOCK (Continued)

The Class A non-voting preferred stock is entitled to a
special dividend equal to three percent (3%) 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 lawsuit, discussed in Note 15, less
the 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
$217,226 during fiscal 1996.

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.

As of June 30, 1996, the financial statements reflect
authorized Class A non-voting preferred shares of 8,000,000
and deemed issued and outstanding shares of 7,855,627.

F-54

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 10 - CAPITAL STOCK (Continued)

Stock Options
-------------

The Company has granted options to purchase shares of the
Company's common stock to officers and key employees as
follows:

1) Incentive Stock Option Plans

The Board of Directors adopted Incentive Stock Option Plans
on March 26, 1993 and on January 17, 1986, under which
1,500,000 and 1,250,000 shares of common stock were reserved
for issuance, respectively. Under the terms of the Plans,
options may be granted at prices not less than the fair
market value of the common stock at the date of grant. The
options must be exercised within ten years from the date of
grant and may be granted no later than March 25, 2003 for
the 1993 Plan and January 16, 1996 for the 1986 Plan.
During fiscal 1996 and 1995, 4,000 and 388,000 options were
exercised at prices averaging $2.56 per share. These shares
were paid by issuing notes payable to the Company
aggregating $994,469. The notes are payable over 5 years
and carry interest at a rate of 7% per annum. Included in
the options exercised in fiscal 1996 and 1995 are options
for -0- and 145,000 shares, respectively, exercised by three
officers of the Company at prices ranging from $1.4375 to
$3.00 per share. These officers paid for such shares by
issuing notes payable to the Company aggregating $-0- and
$263,125, respectively. The notes bear interest at 7% per
annum and are included in the accompanying financial
statements as a reduction of stockholders' equity.

F-55

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 10 - CAPITAL STOCK (Continued)

2) Nonstatutory Stock Option Plans

On April 1, 1995, December 1, 1993, March 26, 1993 and
January 17, 1986, the Board of Directors approved
Nonstatutory Stock Option Plans under which 5,000,000,
5,000,000, 2,500,000 and 1,250,000 shares of common stock
were reserved for issuance, respectively. Under the terms
of the Plan, options expire no later than ten years from the
date of grant and may be granted under each Plan no later
than March 31, 2005 for the 1995 Plan, November 30, 2003 for
the 1994 Plan, March 25, 2003 for the 1993 Plan and January
16, 1996 for the 1986 Plan.

When options are exercised, the par value per share is
credited to common stock and the excess of the proceeds over
the par value is credited to paid-in capital in excess of
par value. Under the Nonstatutory Stock Option Plan,
compensation expense is recorded on the date of grant and is
measured by the amount per share that the fair market value
of the underlying shares on the date of grant exceeds
the grant price. No compensation expense was recognized for
the years ended June 30, 1996 and 1995 because the grant
price approximated the fair market value at the grant date.
Included in the options exercised in fiscal 1996 and 1995
are options for 1,400,000 and 1,050,000 shares,
respectively, exercised by one company owned by an officer
of the Company at prices ranging from $2.25 to $3.65 per
share. This company paid for such shares by issuing notes
payable to the Company aggregating $3,806,110 in 1996 and
$1,529,600 in 1995. The balances due under such notes at
June 30, 1996 and 1995, respectively, were $251,112 and
$417,491. These notes bear interest at 10% per annum and
are included in the accompanying financial statements as a
reduction of stockholders' equity.

F-56

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 10 - CAPITAL STOCK (Continued)

3) Shares Under Option

The following is a summary of activity and information
relating to shares (rounded to whole shares) subject to
option under the Incentives Stock Option Plans and the
Nonstatutory Stock Option Plans for the two years ended June
30, 1996:

June 30,
-------------------------
1996 1995
---------- ----------
Beginning of Year:
1984 Plan ($5.00/share) 25,354 25,354
1986 Plan ($.375-
$4.25/share) 97,875 141,250
1993 Plan - -
Nonstatutory Plans
($5.00/share) under
1986 Plan 100,131 100,131
---------- ----------
223,360 266,735
---------- ----------

Options Granted:
1984 Plan - -
1986 Plan ($1.34/share) 50,000 -
1993 Plan ($1.4375-
$3.00/share) 4,000 388,000
Nonstatutory Plans
($1.00-$3.50/share) 3,100,000 1,752,695
---------- ----------
3,154,000 2,140,695
---------- ----------

Options Exercised:
1984 Plan - -
1986 Plan ($.375-
$1.34/share) (78,125) (25,375)
1993 Plan ($1.4375-
$3.00/share) (4,000) (388,000)
Nonstatutory Plans
($1.00-$3.50/share) (3,100,000) (1,752,695)
---------- ----------
(3,182,125) (2,166,070)
---------- ----------

F-57
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 10 - CAPITAL STOCK (Continued)

3) Shares Under Option (Continued)

June 30,
-------------------------
1996 1995
---------- ----------

Options Cancelled/Expired:
1984 Plan - -
1986 Plan ($.375-
$2.375/share) - (18,000)
1993 Plan - -
Nonstatutory Plans - -
---------- ----------
- (18,000)
---------- ----------

Balance - End of Year:
1984 Plan ($5.00/share) 25,354 25,354
1986 Plan $.375-
$4.25/share) 69,750 97,875
1993 Plan - -
Nonstatutory Plans
($5.00/share) 100,131 100,131
---------- ----------

195,235 223,360
========== ==========

Total Value at Option Price $ 843,003 $ 853,550
========== ==========

Options Exercisable:
End of Year:
1984 Plan ($5.00/share) 25,354 25,354
1986 Plan ($.375-
$4.25/share) 55,750 58,000
1993 Plan - -
Nonstatutory Plans
($5.00/share) 100,131 100,131
---------- ----------

181,235 183,485
========== ==========

Total Value at Option Price $ 836,940 $ 822,284
========== ==========

F-58

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 10 - CAPITAL STOCK (Continued)

3) Shares Under Option (Continued)

June 30,
-------------------------
1996 1995
---------- ----------
Shares Available for Future
Grant:
1984 Plan - -
1986 Plan - 157,302
1993 Plan 1,108,000 1,112,000
Nonstatutory Plans 1,900,000 5,000,000
---------- ----------

3,008,000 6,269,302
========== ==========

4) Stock Bonus Plans

On April 1, 1995, December 1, 1993, March 26, 1993 and
January 17, 1986, the Board of Directors adopted Stock Bonus
Plans. Under the terms of the Plans, 5,000,000, 5,000,000,
2,500,000 and 1,250,000 shares, respectively, of common
stock were reserved for issuance and stock bonuses may be
awarded no later than March 31, 2005 for the 1995 Plan,
November 30, 2003 for the 1994 Plan, March 25, 2003 for the
1993 Plan and January 16, 1996 for the 1986 Plan. An
amendment to the 1986 Plan was approved by the Board of
Directors on August 26, 1986, whereby an additional
1,250,000 shares were reserved for issuance. During fiscal
1996, 1995 and 1994, 1,463,741, 4,826,505 and 1,251,505
shares, respectively, were issued under the stock bonus
plans, of which 161,341, 480,650 and 116,796 shares,
respectively, were charged to operations as compensation
expense, 802,400, 1,398,550 and 1,011,000 shares,
respectively, were issued in settlement of liabilities and
500,000, 1,947,305 and 123,709 shares, respectively, were
issued in exchange for notes. The balance due under these
notes was paid in full.

F-59

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 11 - FINANCING ACTIVITIES

The following represents the Company's major financing
activities during fiscal 1996 and 1995, and data related to
outstanding indebtedness and encumbrances at June 30, 1996
and 1995:

Notes Payable:
-------------
June 30,
-------------------------
1996 1995
---------- ----------

Short-term bank credit and
loans, with interest at
10.8%, secured by certain
assets of the Company. $ 100,000 $ 100,000
========== ==========

Long-term Debt:
--------------

June 30,
-------------------------
1996 1995
---------- ----------

Term note converted on November 20,
1992 from demand notes payable with
interest at a prime rate, plus 2%,
collateralized by certain research
equipment in the accompanying
financial statements. Repayment
terms were modified on March 1,
1993 requiring monthly payments of
$20,000 for 36 months and a balloon
payment of $350,000 at the end of
the term. On March 21, 1996,
repayment terms were modified again
requiring monthly payments of
$20,000 until the loan is
satisfied. The loan is required

F-60

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 11 - FINANCING ACTIVITIES (Continued)

Long-term Debt: (Continued)
--------------

June 30,
-------------------------
1996 1995
---------- ----------

to be paid in full if the Company
collects monies awarded under the
G.E. judgement. $ 249,779 $ 490,000

Note payable dated February 1991 -
$3,114,379, with various payment
amounts ranging from $33,500 to
$105,000 through October 1, 1993,
including interest at 8.725%.
Repayment terms were modified on
November 18, 1992 requiring monthly
payment amounts ranging from
$57,750 to $124,750 through
December 1993 including interest at
16.29%. This represented
consolidation of four previously
existing notes. Effective December
1993, $902,121 of this obligation
was assumed by related parties in
connection with the exercise of
purchase options under two of the
sales-type lease agreements.
Repayment terms for the balance of
the obligations were modified
through two notes in the amounts
of $208,468 and $258,064 requiring
monthly payments of $9,810 and
$16,699, respectively, through
November 1995 including interest at
11.97%. Such notes are secured by
a scanning machine which is the
subject of a sales-type lease

F-61

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 11 - FINANCING ACTIVITIES (Continued)

Long-term Debt: (Continued)
--------------
June 30,
------------------------
1996 1995
---------- ----------

agreement (Note 6) and a scanning
machine included in assets held for
resale (Note 2). $ - $ 10,000

Note payable dated December 1988 -
$1,648,000, due $30,884 per month,
including interest at 11.1%,
through November 1993, secured by
equipment, which has been
classified as assets held for lease
(Note 7). Repayment terms were
modified during October 1991
requiring payments of $34,481,
which include interest at 16.3%,
payable through October 1996.
During March 1995, $224,657 of the
obligation was assumed by a related
party in consideration for the
reduction of a note receivable
(Note 3). 701,201 774,293

Note payable dated January 1989 -
$1,200,000 and $1,265,000 requiring
monthly payments of $29,000 and
$30,800, respectively, including
interest at 18.0% and 19.4%,
respectively. Repayment terms were
modified in August 1993 requiring
monthly payments of $20,000 for 47
months and a balloon payment of
$104,752 at the end of the term.
This represents the consolidation
of two previously existing notes.

F-62

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 11 - FINANCING ACTIVITIES (Continued)

Long-term Debt: (Continued)
--------------
June 30,
------------------------
1996 1995
---------- ----------

Such note is secured by scanning
machines which are the subject of
sales-type lease agreements (Note
6). $ 332,367 $ 501,564

Note payable dated June 1990 -
$765,063, payable interest only at
12%, through July 1991 when the
entire balance is due. Repayment
terms were modified during November
1992 requiring 62 monthly payments
of $16,601 with the balance due on
December 12, 1997. Payments
include interest at a rate of 12%
and is secured by scanning
equipment. 465,664 578,470

Note payable dated March 1989 -
$750,000, due $18,045 per month,
commencing July 1989, including
interest at 15.5%, through June
1994. Such note is secured by
service agreements of the end users
of the equipment. Repayment terms
were restructured during November
1993 requiring monthly payment
amounts ranging from $14,566 to
$41,059 through March 1995,
including interest at 14%. - 55,974

Capital lease dated March 5, 1993 -
$340,895, due $11,162 per month,
commencing April 1993, including
interest at 11% for 36 months. Such

F-63

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 11 - FINANCING ACTIVITIES (Continued)

Long-term Debt: (Continued)
--------------
June 30,
------------------------
1996 1995
---------- ----------

lease is collateralized by
equipment, which has been
classified as property under lease
in the accompanying financial
statements. Repayment terms were
modified in May 1995 requiring 36
monthly payments of $5,117. $ 105,425 $ 148,386

Capital lease dated October 13,
1995 - $513,692, due $11,173 per
month, commencing October 1995,
including interest of 11% for 60
months. Such lease is
collateralized by equipment, which
has been classified as property
under lease in the accompanying
financial statements. 460,461 -

Capital lease dated June 4, 1996 -
$412,550, due $8,972 per month,
commencing July 1996, including
interest of 11% for 60 months.
Such lease is collateralized by
equipment, which has been
classified as property under lease
in the accompanying financial
statements. 402,225 -

Other (including capital leases for
property and equipment) 1,154,968 1,221,719
---------- ----------
3,872,090 3,780,406
Less: Current maturities 2,909,071 3,251,863
---------- ----------

$ 963,019 $ 528,543
========== ==========

F-64

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 11 - FINANCING ACTIVITIES (Continued)

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

Years Ended
June 30,
-----------
1997 $2,909,071
1998 412,696
1999 201,665
2000 225,665
2001 122,993
----------
$3,872,090
==========

NOTE 12 - INCOME TAXES

The provisions for income taxes for the years ended June 30,
1996, 1995 and 1994 consist of the following:

For the Year Ended June 30,
--------------------------------

1996 1995 1994
Federal: --------- --------- --------
Current $ - $ 22,867 $(10,000)
Deferred - - -
-------- -------- --------
- 22,867 (10,000)
-------- -------- --------

State:
Current 19,965 122,691 57,905
Deferred - - -
-------- -------- --------
19,965 122,691 57,905
-------- -------- --------

Total Provision for
Income Taxes $ 19,965 $145,558 $ 47,905
======== ======== ========

F-65

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 12 - INCOME TAXES (Continued)

The components of deferred tax assets and liabilities at
June 30, 1996 and 1995 are as follows:

1996 1995
---------- ----------
Deferred Tax Assets:
Nondeductible accruals $ 87,445 $ 105,085
Additional costs
capitalized for
inventory-tax 69,622 108,521
Allowance for doubtful
accounts 876,466 787,470
Net operating loss
carryforwards 6,868,902 7,011,093
Tax credit carryforwards 2,280,720 1,642,000
---------- ----------
Total Gross Deferred
Tax Assets 10,183,155 9,654,169

Less: Valuation allowance (8,830,257) (8,321,364)
---------- ----------

Net Deferred Tax Assets 1,352,898 1,332,805
---------- ----------
Deferred Tax Liabilities:
Accelerated tax
depreciation (460,398) (436,258)
Amortization of capitalized
software and patents (892,500) (896,547)
---------- ----------

Total Gross Deferred
Tax Liabilities (1,352,898) (1,332,805)
---------- ----------

Net $ - $ -
========== ==========

F-66

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 12 - INCOME TAXES (Continued)

The net change in the valuation allowance for deferred tax
assets was a increase of $508,893.

At June 30, 1996, the Company has net operating loss
carryforwards of approximately $ 20,202,652 that will be
available to offset future taxable income, if any.
Additionally, at June 30, 1996, the Company has investment
and research and development ("R&D") tax credit
carryforwards of approximately $ 1,545,000 available to
offset future taxes payable, if any.

These carryforwards expire in the following approximate
amounts:

Tax Carryforward
------------------------------
Year of Net Operating Investment and
Expiration Loss R&D Tax Credit
---------- ------------- --------------

1997 $ - $ 33,000
1998 - 12,000
1999 783,000 16,000
2000 7,978,000 48,000
2003 23,000 -
2004 11,418,000 -
2006 - 1,436,000
----------- -----------

$20,202,000 $ 1,545,000
=========== ===========

F-67

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 12 - INCOME TAXES (Continued)

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

1996 1995 1994
----------- ---------- ----------
Computed tax at the
statutory rate $(1,147,980) $ (549,920) $ (97,467)
State and local
income taxes, net of
federal income tax
benefit 19,965 122,691 57,905
Unutilized net operating 1,147,980 549,920 97,467
loss
Other - - (10,000)
Alternative minimum tax - 22,867 -
----------- ---------- ----------
Income Tax
Expense $ 19,965 $ 145,558 $ 47,905
=========== ========== ==========

NOTE 13 - OFFSITE RESEARCH SCANNER

In connection with an agreement dated July 1983, the Company
agreed to lend a prominent U.S. medical school an MRI
scanner for research purposes, for a period of two years
commencing in June 1984, at no charge. Upon expiration of
the agreement, the unit was to have been purchased by the
user or returned to the Company. During the fiscal year
ended June 30, 1991, the Company and the school mutually
decided to cancel the agreement, without purchase of the
scanner by the school, and the scanner was returned to the
Company. Costs of $1,154,217 have been incurred by the
Company for equipment and site preparation and are included
in property and equipment under the caption "Offsite
Research Scanner" in the accompanying consolidated balance
sheets (net of accumulated depreciation). As of June 30,
1996, this asset has been fully depreciated.

F-68

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 14 - OTHER CURRENT LIABILITIES

Included in other current liabilities are the following:

1996 1995
---------- -----------

Unearned revenue on
service contracts $1,538,802 $2,263,918
Accrued payroll taxes 679,400 1,079,040
Accrued interest 270,484 310,144
Accrued royalties 377,307 387,307
Warranty and costs 170,474 149,363
Accrued salaries and
commissions 283,722 259,176
Litigation judgement 1,255,872 1,169,375
Excise and sales taxes 1,461,255 1,492,609
Other 1,846,136 2,137,795
---------- ----------

$7,883,452 $9,248,727
========== ==========

As of June 30, 1996, the Company was in arrears on its
federal and state payroll taxes aggregating $192,000 and
$340,661, respectively. The Company reached a settlement
agreement with the Internal Revenue Service permitting the
Company to retire the balance in monthly installments of
$100,000. The Company has repaid all federal taxes. The
remaining balance represents penalties and interest. In
February 1994, the Company reached a settlement agreement
with the New York State Department of Taxation and Finance
permitting the Company to retire the balance in monthly
installments.

NOTE 15 - COMMITMENTS AND CONTINGENCIES

Leases
------

The Company rents its operating facilities under long-term
lease agreements expiring at various dates through July
1997. These leases contain escalation clauses relating to
increases in real property taxes as well as certain
maintenance costs.

F-69

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)

Future minimum payments for the noncancellable facilities
and capital leases (principally milling machines) are as
follows:

Year Ended
June 30, Facilities Capital
---------- ---------- -----------

1997 $ 716,965 $ 525,449
1998 59,963 355,712
1999 - 253,584
2000 - 253,584
2001 - 128,174
---------- ----------

Total minimum obligations $ 776,928 1,516,503
==========

Less: Amount representing
interest 282,367
----------

Present value of net
minimum lease
obligations $1,234,136
==========

Rent expense for operating leases totalled approximately
$681,000 $618,000 and $628,000 for the three years ended
June 30, 1996, 1995 and 1994, respectively. Rent expense
for the years ended June 30, 1996, 1995 and 1994 is as
follows:

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

Minimum rent $ 609,000 $ 559,000 $ 573,000
Contingent rent 72,000 59,000 55,000
---------- ---------- ----------

Total $ 681,000 $ 618,000 $ 628,000
=========== ========== ==========

F-70

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)

Litigation
----------

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. The
defendants contested the Company's claims, and Hitachi
counterclaimed, alleging infringement by the Company of two
of its patents. In April 1995, prior to the commencement of
trial, FONAR and Hitachi settled. On May 26, 1995, the jury
rendered a verdict against General Electric awarding FONAR
$110,575,000 for infringement of two of its patents.
Subsequent to the verdict, General Electric made motions to
the court to enter judgement 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
from using the multi-angle oblique imaging technology
covered by one of its patents. On October 6, 1995, the
court awarded FONAR $62 million in damages against General
Electric for direct infringement on one of its patents and
granted an injunction against General Electric prohibiting
future violations of the patent. The injunction was stayed
pending appeal, however, subject to the posting of a bond.
With respect to the other patent, the judge agreed with the
jury's finding that the patent was valid, but disagreed with
the jury's finding of infringement and determined that
General Electric's MRI scanners did not infringe the patent.
General Electric has appealed the portion of the judgement
upholding the jury's award to damages to FONAR for direct
infringement and the issuance of the injunction. FONAR has
appealed the portion of the judgement overturning the jury's
findings. Oral arguments have been scheduled for October
1996.

F-71

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)

Litigation (Continued)
----------

On June 16, 1995, the Company filed an action against
Siemens Medical Systems, Inc. ("Siemens"), 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 is seeking injunctive relief and damages. In
its suit, FONAR has alleged that four of its patents were
infringed. Previously, in May 1995, Siemens had filed a
complaint against FONAR in the United States District Court
for the District of Delaware seeking a declaratory judgement
that the four patents were invalid and unenforceable, as
well as an adjudication that Siemens was not infringing on
the four patents. On June 14, 1995, Siemens 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.

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 judgement
that FONAR's U.S. Patents Nos. 3,789,832 and 4,871,966 are
invalid, unenforceable and not infringed. Motions have been
made by the Siemens affiliates and Philips affiliates to
transfer the action commenced by FONAR in District Court for
the Eastern District of New York to the Delaware District
Court and FONAR has moved to transfer the actions commenced
against it in the Delaware District Court to the Eastern
District of New York. Subsequently, the action was
transferred to U.S. District Court for the District of
Delaware. The respective parties are expected to vigorously
contest the claims against them. 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. In April 1996, the Company entered into an
agreement with Philips Electronics N.V.,

F-72

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)

Litigation (Continued)
----------

Philips Electronics North America Corp., Philips Medical
Systems North American and U.S. Philips Corp. settling 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.

In September of 1991, FONAR commenced an action against
Deccaid Services, Inc., Medical Funding of America, Inc.,
EQUIMED Inc. and several individual defendants, for
copyright infringement and misappropriation of trade secrets
in connection with servicing of FONAR manufactured MRI
equipment. The case was settled in July and August 1994,
pursuant to agreements whereby the sum of $1,150,000 was
paid to FONAR on behalf of the defendants, and all claims
the parties had against each other were released.

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).
In his complaint, Dr. Kivitz had claimed $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 judgement notwithstanding the verdict,
thereby vacating the entire award against both FONAR and
AMD, and determining that Dr. Kivitz is entitled to no
recovery whatsoever. The case was appealed by the plaintiff
and on February 27, 1995, the Appellate Court affirmed the
lower court's judgement notwithstanding the verdict as to
FONAR, but reversed the judgement as to AMD. Subsequently,
AMD filed a petition for review with the California Supreme
Court and was denied on May 17, 1995. As of June 30, 1996,
the verdict of $880,000, plus interest, was provided for.

F-73

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)

Litigation (Continued)
----------

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. The complaint alleges
unpaid fees for legal services and disbursements to the
amount of $664,371. The Company has answered the complaint,
asserting various defenses and a counter claim of $100,000
for a refund of fees. The plaintiff made a motion for
summary judgement which was granted as to the liability but
denied as to the amount of damages. The Company has
appealed this motion and in March 1995, the Appellate Court
reversed the granting of summary judgement against FONAR.
The case is ready for trial.

On October 4, 1993, the State of Texas and various
municipalities thereof commenced an action against the
Company in the District Court of Travis County, Texas to
collect $345,973 in sales and use taxes, penalties and
interest, together with attorneys fees of $25,000 and
additional accruals of interest and penalties. The Company
interposed an answer generally denying the claim. An
agreement was reached for $323,870 plus interest, a rate of
10% per annum payable in installments of $10,000 per month
until the full obligation has been satisfied.

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 is $5,000,000 in
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. In December 1993, a jury verdict was returned in
favor of the plaintiffs for $1,150,000 in compensatory
damages. The Company made a motion for judgement
notwithstanding the verdict, or in the alternative, for a
new trial. In July 1994, the court set aside the jury's
verdict and granted the Company a new trial. On March 24,
1995, a jury rendered a verdict in favor of the plaintiff
in the amount of $250,000.

F-74

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)

Litigation (Continued)
----------

Subsequently, the Company made a motion requesting judgement
as a matter of law dismissing the plaintiff's claims or in
the alternative a new trial or reduction of damages. The
Company's motion was denied and judgement was entered
against the Company in August 1995. The District Court's
decision was upheld by the Court of Appeals on appeal.

During February 1994, a FONAR subsidiary, ("Medical SNI"
formerly "Vonar Limited") issued shares to Long Investment,
Ltd., an Israeli company, in consideration for $700,000.
Long Investment, Ltd. claims the investment was made
assuming Medical SNI would complete a private offering. The
private offering was subsequently cancelled. Long
Investment, Ltd. appealed to the District Court to appoint
an arbitrator to decide if the Company should refund the
investment. The case went to arbitration during the year
and the parties are awaiting a decision. Based on its legal
counselor's opinion, management is of the opinion that the
claim will be dismissed.

On June 28, 1995, Horace Rubenstein commenced an action in
the Delaware Court of Chancery against the four directors of
the Company and FONAR, as nominal defendant, challenging the
recapitalization plan approved by the stockholders at the
annual meeting on April 3, 1995 (see Note 10). The complaint
alleges that the directors failed to act in the best
interests of the Company and its common stockholders
in adopting the plan, which permits Dr. Raymond V. Damadian,
the founder, President and principal stockholder of the
Company, and other holders of FONAR's Class B common stock,
to exchange their shares of Class B common stock for shares
of a new Class C common stock having greater voting power.
The action was brought as a class action on behalf of the
holders of the common stock and derivatively, for the
benefit of the Company, and seeks an unspecified amount of
damages and an order setting aside the recapitalization.

F-75

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)

Litigation (Continued)
----------

The defendants and the Company strongly believe that the
recapitalization, approved by the stockholders in tandem
with a proposal to distribute shares of a new class of
preferred stock to the holders of the common stock, is both
fair and in the best interests of the Company and its
stockholders. The defendant answered the complaint and the
parties are currently engaged in settlement negotiation.

The Company also is involved in a number of smaller
litigations which aggregate approximately $1,416,000. The
Company has interposed answers in all cases, except where an
answer is not yet due. The Company has established
provisions for most of the liabilities represented by these
smaller claims, and where provisions have not been
established, management believes it will prevail on the
merits and intends to vigorously contest the claims. Based
on its past experience dealing with such claims, the Company
anticipates it will be able to settle most of these smaller
litigations with provisions to pay over periods of time
which are manageable for the Company.

An entity has impliedly asserted that FONAR's equipment
infringes on at least one of the entity's patents. The
entity had sought royalties in the range of 2% or 3% of the
net selling price of FONAR's equipment for licenses under
their assertedly infringed patents. At July 1, 1995, the
Company entered into an agreement with the entity, whereby
the Company must pay 1.2% of the Company's future sales of
certain MRI apparatus.

License Agreement and Self-Insurance
------------------------------------

The Company entered into a license agreement during 1990
with an entity whereby the Company must pay a royalty of
1.35% on the Company's future sales of certain NMR imaging
apparatus through January 31, 1995 in the United States and
April 17, 1996 in Canada. Royalty expense charged to
operations for the years ended June 30, 1996, 1995 and 1994
approximated $15,000, $147,000 and $12,500, respectively.

F-76
FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 15 - COMMITMENTS AND CONTINGENCIES (Continued)

The Company is self-insured with respect to substantially
all insurable business risks except for insurance on certain
equipment pledged as collateral for long-term debt. During
the fiscal years ended June 30, 1996, 1995 and 1994, no
material claims arose.

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

Other income (expense) consists of:

For the Years Ended June 30,
-----------------------------------------
1996 1995 1994
---------- ---------- ----------

Interest income $ 89,330 $ 89,905 $ 158,539
Other income
(expense) 158,704 561,346 (122,117)
Gain on settlement
of various legal
disputes and
other claims 3,759,542 2,970,356 104,061
---------- ----------- -----------
$4,007,576 $3,621,607 $ 140,483
========== ========== ==========

Maintenance and repair expenses totalled approximately
$68,000, $67,000 and $133,000 for the years ended June 30,
1996, 1995 and 1994, respectively. Royalty expenses
approximated $15,000, $147,000 and $12,500 for the years
ended June 30, 1996, 1995 and 1994, respectively.
Amortization of intangible assets was approximately
$1,233,000, $1,431,000 and $1,372,000 for the years ended
June 30, 1996, 1995 and 1994, respectively.

F-77

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

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

Results of operations for the fourth quarter of fiscal
years 1996, 1995 and 1994 include the following charges or
(credits) which are related primarily to prior quarters:

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

Interest income -
related parties $ (451,920) $ (428,758) $(851,891)
Re-evaluation of
allowance for
doubtful accounts 761,314 - 221,791
Additional accruals - - 228,950
Re-evaluation of
inventories - 816,637 -
Capitalization of patent
and copyright costs - - (408,940)
Capitalization of
software development
costs (Note 2) - 76,511 -
Capitalization of
prototype scanners - - (636,943)
Gain on sale of
investments to
related parties - - 549,824
---------- ---------- ---------

$ 309,394 $ 464,390 $ (897,209)
========== =========== ==========

NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION

During the years ended June 30, 1996, 1995 and 1994, the
Company paid $668,956, $1,378,432 and $1,185,453 for
interest, respectively. During the years ended June 30,
1996, 1995 and 1994, the Company paid $68,552, $12,867 and
$31,573 for income taxes, respectively.

F-78

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)

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

During the year ended June 30, 1996:

a) Property and equipment with a book value of $411,347
was reclassified to inventory.

b) Receivables under a lease agreement for an MRI scanner
were acquired in exchange for common stock valued at
$351,000.

c) Advances for future legal fees of $475,000 were paid by
the issuance of common stock.

d) Common stock issued and options exercised in exchange
for notes receivable from stockholders totaled
$9,590,134.

e) An obligation of $217,226 was accrued pursuant to
special dividend rights of Class A non-voting preferred
stock.

During the year ended June 30, 1995:

a) Common stock issued and options exercised in exchange
for notes receivable from stockholders totalled
$9,771,127.

b) The purchase option under a sales-type lease of
$962,185 was exercised in consideration of a note
receivable of $454,000 and the assumption of debt of
$311,934 and accrued interest and penalties of
$196,251.

c) Property and equipment with a book value of $100,926
was reclassified to inventory.

d) Notes payable and accrued interest totalling $446,959
were repaid by the issuance of common stock.

e) Inventory purchased for resale of $149,813 was financed
under a capital lease.

f) Long-term debt of $224,657 and accrued interest of
$125,343 were assumed by an affiliate.

F-79

FONAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996

NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION (Continued)

During the year ended June 30, 1994:

a) Common stock issued and options exercised in exchange
for notes receivable from stockholders totalled
$8,585,862.

b) Net patent and deferred legal costs of $1,150,000 were
reclassed to prepaid expenses and other current assets.

c) Purchase options under three sales-type leases
aggregating $3,556,941 were exercised in consideration
of notes receivable aggregating $1,754,870 and
assumption of debt aggregating $1,802,121.

d) Accrued interest payable of $100,705 was converted to
long-term debt.

e) Income taxes approximating $188,000 were reclassified
to "Other current liabilities". Such taxes were
aggregated under a deferred payment agreement with
certain payroll taxes that are in arrears.

F-80

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. 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. 60 President, Chairman of
the Board and a
Director

Luciano B. Bonanni 41 Executive Vice
President

Timothy R. Damadian 32 Vice President of
Operations

David B. Terry 49 Secretary and Treasurer

Claudette J.V. Chan 59 Director

Robert J. Janoff 69 Director

Herbert Maisel 52 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.

Luciano B. Bonanni has been a Vice President of FONAR since
1981. Mr. Bonanni was an Electrical Engineer with the Aviation
Systems Group of Cardion Electronics (a subsidiary of General Signal
Corp.) for approximately two years before joining FONAR in April 1979.
He received his bachelor of science degree in electrical engineering
from Manhattan College in 1977.

Timothy R. Damadian has been a Vice President of FONAR since
July 1992. 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 in July 1992. Timothy Damadian is the son of Raymond V.
Damadian and nephew of David Terry and Claudette Chan.

David B. Terry is the Secretary and Treasurer of the Company.
Mr. Terry has been serving as Secretary and Treasurer since May 1990,
and previously served 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 broker
age 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 has been a
Senior Adjustor in Empire Insurance Group for more than 15 years. Mr.
Janoff also served, from June 1985 to June 1991, as President of
Action Data Management Strategies, Ltd., a supplier of computer pro
grams 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.

Herbert Maisel has been a Director of FONAR since February,
1989. Mr. Maisel has been the manager of Melville MRI, P.C., an MRI
scanning center located in Melville, New York, since January, 1992,
and of Damadian MRI in Garden City, P.C., an MRI scanning center
located in Garden City, New York since April, 1995. Mr. Maisel was
also manager of Damadian MRI in Islandia, P.C. from December, 1993 to
March, 1995. Prior to that time Mr. Maisel had been the President and
owner of Bagel World, Inc., a bagel bakery, from March 1984 to January
1992. Prior thereto, Mr. Maisel served as a supervisor of a
commercial printing plant.

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.

There is set forth in the following Summary Compensation
Table the compensation provided by the Company during fiscal 1996 to
its Chief Executive Officer and executive officer whose salary and
bonus were equal to at least $100,000, and there is set forth in the
following Option Grant Table and Option Exercise Table the stock
options granted and exercised by those individuals during fiscal 1996.

I. SUMMARY COMPENSATION TABLE

| |
| Long Term Compensation |
--------------------------------------
Annual Compensation | Awards | Payouts |
- -----------------------------------------------------------------------------------------------
| | |
(a) (b) (c) (d) (e) | (f) (g) | (h) | (i)
Name Other | | |
and Annual | Restricted | | All Other
Principal Compen- | Stock Options | LTIP | Compen-
Position Salary Bonus sation | Award(s) SARs | Payouts | sation
2 Year ($) ($) ($) | ($) (#) | ($) | ($)
- ---------------------------------------------------------------------------------------------------------------
| | |
Raymond V. 1996 $86,799.95 - - | - - | - | -
Damadian, 1995 $86,679.94 - - | - - | - | -
President & 1994 $86,799.94 - - | - - | - | -
CEO | | |
| | |
Luciano B. 1996 $99,999.64 $36,643.84 - | - - | - | -
Bonanni, 1995 $99,999.59 $39,259.89 - | - 35,000 | - | -
Executive 1994 $99,999.64 $11,827.75 - | - - | - | -
Vice President | | |
| | |

II. OPTION/SAR GRANTS IN LAST FISCAL YEAR

Potential Realizable
Value at Assumed
Annual Rates of Alternative
Stock Price to (f) and
Appreciation for (g): Grant
Individual Grants Option Term Date Value
_____________________________________________________________________________________________________________

(a) (b) (c) (d) (e) (f) (g) (f)
% of Total
Options/
SARs
Options/ Granted to
SARs Employees Excercise or Grant Date
Granted in Fiscal Base Price Expiration Present
Name (#) Year ($/Sh) Date 5% ($) 10% ($) Value $
_________ _________ _________ _________ _________ _________ _________ _________

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

Luciano B.
Bonanni, 0 - - - - - -
Executive
Vice President

III. OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE

Aggregated Options/SAR Exercises in Last Fiscal Year, amd FY-End Option/Sar Value

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

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

Exercisable/ Exercisable/
Unexercisable Unexercisable

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

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

Luciano B. 12,500 $0 0 -
Bonanni,
Executive
Vice President

EMPLOYEE COMPENSATION PLANS

The Company's 1986 Nonstatutory Stock Option Plan, adopted on
January 17, 1986, permitted the issuance of stock options covering an
aggregate of 1,250,000 shares of Common Stock. The 1986 Nonstatutory
Stock Option plan terminated on January 16, 1996.

The Company's 1986 Incentive Stock Option Plan, adopted on
January 17, 1986, permitted the issuance of stock options covering an
aggregate of 1,250,000 shares of Common Stock. The Plan was intended
to qualify as an incentive stock option plan under Section 422A of the
Internal Revenue Code of 1954, as amended. The 1986 Incentive Stock
Option Plan terminated on January 16, 1996.

The Company'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. The options have an exercise price equal to the fair market
value of the underlying stock on the date the option is granted, are
nontransferrable, 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,
1996, options to purchase 1,108,000 shares of Common Stock were
available for future grant under the plan.

The 1994 Stock Bonus Plan, adopted on December 1, 1993,
permitted the Company to issue an aggregate of 5,000,000 shares of
Common Stock as a bonus or compensation. As of June 30, 1996, no
shares of Common Stock were available for future grant.

The Company's 1995 Nonstatutory Stock Option Plan, adopted on
April 1, 1995, permits the issuance of stock options covering a
aggregate of 5,000,000 shares of Common Stock. The options may be
issued at such price and upon such terms and conditions as are
determined by the Company. The 1995 Nonstatutory Stock Option Plan
will terminate on March 31, 2005. As of June 30, 1996, options to
purchase 1,900,000 shares of Common Stock were available for future grant.

The Company's 1995 Stock Bonus Plan, adopted on April 1,
1995, permits the Company to issue an aggregate of 5,000,000 shares of
Common Stock as a bonus or compensation. The Company selects the
persons to whom bonus stock will be issued, the number of shares
awarded and such other terms and conditions as it deems advisable.
The 1995 Stock Bonus Plan will terminate on March 31, 2005. As of
June 30, 1996, 3,823,004 shares of Common Stock were available for
future grant.

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

The following table sets forth the number and percentage of shares
of the Company's securities held by each director, by each person known by
the Company to own in excess of five percent of the Company's voting
securities and by all officers and directors as a group as of September 3,
1996.

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 2,381,638 5.45%
Class C Stock 9,561,174 99.98%
Class A Preferred 477,328 6.08%

Claudette Chan
Director
Common Stock 4,000 *
Class A Preferred 800 *

Robert J. Janoff
Director
Common Stock (2) 25,000 *
Class A Preferred 2,000 *

Herbert Maisel
Director
Common Stock (3) 100 *
Class A Preferred 20 *

Luciano Bonanni
Executive Vice President
Common Stock 166,911 *
Class A Preferred 32,132 *

All Officers and Directors
as a Group (7 persons)
(2)(3) (4)
Common Stock 2,629,983 6.02%
Class C Stock 9,561,174 99.98%
Class A Preferred 524,747 6.68%
___________________________
* 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 presently exercisable options to purchase 15,000 shares
of the Company's Common Stock.

3. Includes 50 shares of the Company's Common Stock and 10 shares of
the Company's Class A Non-voting Preferred Stock which are held in the
name of Mr. Maisel as trustee for his minor daughter and 50 shares of
the Company's Common Stock and 10 shares of the Company's Class A
Non-voting Preferred Stock which are held by Mr. Maisel's wife.

4. Includes 96 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 188 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.

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 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 is being
leased to Macon Magnetic Resonance Imaging, P.C. ("Macon Center"), a
Georgia professional corporation wholly-owned by, and of which Dr.
Damadian is, the President.

Since May, 1990, Raymond V. Damadian M.D., MR Scanning
Centers Management Company, a Delaware corporation of which Raymond V.
Damadian is the sole shareholder, director and President ("RVDC"), has
been party to a service agreement with the Company for the servicing
of the scanner at the Macon Center. The term of the current one-year
service agreement runs from April, 1996 to April, 1997 and the current
annual price is $123,760. The current annual price was also in effect
during the prior year from April, 1995 to April, 1996.

By agreement dated June 27, 1990, Tallahassee Magnetic Resonance
Imaging, P.A., a Florida corporation of which Raymond V. Damadian is the
sole shareholder, director and President ("TMRI"), agreed to support the
Company's financial obligations to one of its secured lenders by agreeing
to be the lessee of one of its mobile scanners for a period of five years,
subject to the superior rights of the Company's secured lender. Effective
June 30, 1991, the lease arrangements were restructured to provide for a
five year term, commencing June 30, 1991, and the monthly payment was
fixed at $43,217, eliminating the previous per scan fee (with a minimum
monthly payment of $43,200). In addition, since service and maintenance
for the scanner is not included under the new lease, TMRI has been party
to a standard service agreement with the Company for the scanner since
June 30, 1991. The annual price is currently $120,000, and the term of the
current one-year service agreement runs from June 30, 1996 to June 29,
1997. The current annual price was also in effect during the prior
year from June 30, 1995 to June 29, 1996.

In addition, in fiscal years 1990 and 1992, RVDC leased four
MRI scanners previously leased by the Company to unrelated parties,
where the original lessees had defaulted or were unwilling to continue
to perform. RVDC thereby preserved the leases for the Company and
prevented the Company from defaulting with the lender. The following
is a description of these transactions.

By agreement dated April 1, 1990, RVDC agreed to assume the
financial and other obligations of the original lessee under a lease
for a mobile scanner dated June 29, 1988, on the same terms and
conditions as the original lessee. Effective June 30, 1991, the lease
arrangements were restructured to provide for a five year term,
commencing June 30, 1991. RVDC in turn provided the use of the
scanner to Albany Magnetic Imaging Center, P.C., a Georgia professional
corporation of which Raymond V. Damadian is the sole stockholder,
director and President ("Albany Center"). Effective December 1, 1993,
RVDC assigned its purchase option under the lease to the Albany
Center, and the Albany Center concurrently exercised the option and
purchased the scanner from the Company for a purchase price of
$1,128,844. 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 is
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). Effective December 1, 1993, the
Albany Center also assumed RVDC's service agreement for the scanner
for the balance of the contract year. The term of the current
one-year service contract runs from June 30, 1996 to June 29, 1997 at
the annual price of $120,522, compared to $122,256 for the prior year.

Pursuant to an agreement dated March 7, 1990, RVDC agreed to
assume the financial and other obligations of the original lessee
under a lease for a mobile scanner dated December 13, 1988, on the
same terms and conditions as the original lessee. Effective June 30,
1991, the lease arrangements were restructured to provide for a five
year term commencing June 30, 1991, and the monthly payment was fixed
at $42,387. In addition, RVDC has been party to a service agreement
with the Company for the scanner since June 30, 1991. The annual
price for the current one-year period, from June 30, 1996 to June 29,
1997, is $105,000, the same as in the prior year. RVDC in turn has
provided the use of the scanner to Central Island MRI, P.C., a New
York professional corporation of which Raymond V. Damadian is the sole
shareholder, director and President ("Staten Island Center").

By agreement dated March 7, 1990, RVDC agreed to assume the
financial and other obligations of the original lessee under a lease
for a mobile scanner dated August 16, 1988, on the same terms and
conditions as the original lessee. Effective June 30, 1991, the lease
arrangements were restructured to provide for a five year term, commencing
June 30, 1991. RVDC in turn provided the use of the scanner to Deerfield
Magnetic Resonance Imaging P.A., a Florida professional association, of
which Raymond V. Damadian is the sole shareholder, director and President
("Deerfield Center"). In July 1994, the lease between FONAR and RVDC was
terminated, and the Deerfield Center concurrently purchased the scanner
from the Company by assuming the Company's indebtedness to the lender
secured by the scanner in the amount of $508,180.07, was paid pursuant
to a note, guaranteed by the Company, with interest at 10% per annum over
a period of 18 months. In connection with assuming the debt to the lender,
the Deerfield Center assumed the remaining outstanding lease obligation of
RVDC to the Company respecting the scanner in the amount of $454,005.11.
This amount is to be paid pursuant to a promissory note, bearing interest
at the rate of 10% per annum, in 17 monthly installments (16
installments of $30,000 each and one installment of $7,274.79)
commencing January 1, 1996. The Deerfield Center is also party to a
service agreement with the Company for the period from June 30, 1996
to June 29, 1997 at a price of $120,000, the same price as was in
effect during the two prior years.

During fiscal 1992, RVDC agreed to assume the financial and
other obligations of the original lessee under a lease for a mobile
scanner dated June 30, 1989. The terms were restructured to provide
for a monthly payment of $24,421.44 commencing April 1, 1992 and to
extend the term of the lease seven years from that date. RVDC in turn
provided the use of the scanner 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"). Effective December 1, 1993, RVDC assigned its
purchase option under the lease to the 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. 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 is required to be paid pursuant to a promissory note, with
interest at 10% per annum, over a 45 month term commencing July 1,
1994 as follows: eleven installments of $15,000 each, thirty-three
installments of $35,000 each and one installment of $19,097.26. The
Daytona Beach Center currently is party to a service agreement with
the Company for the scanner at an annual price of $105,105.60, the
same price as was in effect during the prior two years. The term of the
current one-year service agreement runs from May 6, 1996 to May 5, 1997.

RVDC supported the Company's business by leasing two and
agreeing to purchase four MRI scanners from the Company in fiscal 1992.

By agreement dated September 30, 1991, RVDC agreed to lease
one of the Company's mobile scanners for a term of five years. RVDC
in turn provided the use of the scanner to Melville MRI, P.C., a New
York professional corporation of which Raymond V. Damadian is the sole
shareholder, director and President ("Melville Center"). Effective
June 30, 1994, RVDC assigned its purchase option under the lease to
the Melville Center, and the Melville Center concurrently exercised
the option and purchased the scanner from the Company for a purchase
price of $1,011,431.12. 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 is to be paid
concurrently with the payments to the lender pursuant to a note, with
interest at 10% per annum, providing for 60 monthly payment of
$2,367.58 each. In addition the Melville Center is party to a service
contract with the Company for the scanner, the annual fee for which
has been $125,000 since December 15, 1993. The term of the current
one-year service agreement runs from December 15, 1995 to December 14,
1996.

Pursuant to an agreement dated December 31, 1991, RVDC agreed
to lease one of the Company's scanners for a monthly lease payment of
$18,081.92 for a period of seven years commencing April 1, 1992. RVDC
in turn provided the use of the scanner to Damadian MRI at Astoria,
P.C. (the "Astoria Center"), a New York professional corporation of
which Raymond V. Damadian is the sole shareholder, director and
President. Effective November 13, 1993, the lease between the Company
and RVDC was terminated, and the scanner was leased directly by the
Company to the Astoria Center pursuant to a new lease providing for 84
monthly payments of $16,978.43 each commencing February 1, 1994. In
addition, the Astoria Center is party to a service agreement with the
Company for the scanner, the fee for which is $105,000 for the period
from October 27, 1996 to October 26, 1997, the same price as was in
effect during the prior year.

RVDC agreed to purchase four MRI scanners from the Company
pursuant to sales agreements dated April 29, 1992, May 26, 1992, June
3, 1992 and June 18, 1992, for sites in Bayside (Queens County),
Islandia (Suffolk County), Elmhurst (Queens County) and Forest Hills
(Queens County), New York. Each of the four sales agreements provided
for a purchase price of $1,000,000 payable in installments as follows:
(1) 10% down payment within 30 days of execution, (2) 10% within 30
days of delivery of the magnet and shielded room and (3) 80% in 84
monthly installments of $12,468.97 each (inclusive of interest at 8%
per annum) pursuant to a promissory note to be executed by RVDC upon
acceptance of the scanner.

Effective November 13, 1993, the sales agreement for the
scanner to be utilized in Islandia, New York was terminated, and the
Company instead leased the scanner to Damadian MRI at Islandia, P.C.
(the "Islandia Center"), a New York professional corporation of which
Raymond V. Damadian is the sole shareholder, director and President.
The lease provides for monthly payments of $15,586.21 for a term of 84
months commencing February 1, 1994. In addition, the Islandia Center
is party to a service agreement with the Company for the scanner, the
fee for which is $105,000 for the period from December 6, 1995 to
December 5, 1996, the same as in the prior year.

The scanner purchased by RVDC for Bayside (Queens County),
New York, is being provided to Bayside MRI, P.C. (the "Bayside
Center"), a New York professional corporation of which Raymond V.
Damadian is the sole stockholder, director and President, and the
scanner purchased by RVDC for Elmhurst (Queens County), New York, is
being provided to Elmhurst MRI, P.C. (the "Elmhurst Center"), a New
York professional corporation of which Raymond V. Damadian is the sole
stockholder, director and President. RVDC is party to a service
agreement with the Company for the scanner being provided to the
Bayside Center for the period January 11, 1996 to January 10, 1997 at
a price of $105,000 and the Elmhurst Center is party to a service
agreement with the Company for the Scanner being provided to the
Elmhurst Center for the period December 14, 1995 to December 13, 1996
at a price of $105,000. The current annual prices were also in effect
during the prior year.

The scanner purchased by RVDC for Forest Hills (Queens
County) is being provided to Damadian MRI at Forest Hills, P.C. (the
"Forest Hills Center"), a New York professional corporation of which
Raymond V. Damadian is the sole stockholder, director and President.
Commencing on October 11, 1996, upon the expiration of the warranty
for the scanner, RVDC will enter into a one-year service agreement for
the scanner at a price of $105,000.

In fiscal 1993, RVDC and its affiliates supported the Company
and its objectives by leasing one MRI scanner, purchasing one MRI
scanner and purchasing the Company's interest in three MRI scanning
centers.

Pursuant to an agreement dated December 31, 1992, RVDC agreed
to lease from the Company a mobile scanner, which is in turn being
leased to a third party in Bethesda, Maryland. The term of the lease
is for 84 months, and the monthly lease payment of $15,586.21 (commencing
January 1, 1993) is based on a principal amount of $1,000,000 amortized
over 84 months with an interest rate of 8% per annum. The lease includes
an option to RVDC to purchase the scanner. RVDC is party to a service
agreement with the Company for the scanner, the annual rate for which was
$120,000 for the period from June 22, 1995 to June 21, 1996 and is
$120,000 for the period from June 22, 1996 to June 21, 1997.

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 ("the "Bensonhurst
Center"). The purchase price of $923,000 is payable in 84 equal
monthly installments of $14,386.07 each commencing May 1, 1993, which
amount includes principal and interest at the rate of 8% per annum
amortized over the term. The partnership is also party to a service
agreement with the Company. The current annual rate is $105,000 for
the one year service contract from May 18, 1996 to May 17, 1997. The
current annual price was also in effect during the prior year from May
18, 1995 to May 17, 1996.

Pursuant to a sales agreement dated June 30, 1993 RVDC agreed
to purchase an MRI scanner from the Company which RVDC is planning to
utilize at a site located in Coral Gables, Florida (the "Coral Gables
Center"). The sales agreement provides for a purchase price of
$1,000,000 payable in installments as follows: (1) 10% down payment
within 30 days of execution, (2) 10% within 30 days of delivery of the
magnet and shielded room, and (3) 80% in 84 monthly installments of
$12,468.97 each (inclusive of interest at 8% per annum) pursuant to a
promissory note to be executed by RVDC upon acceptance of the Scanner.

Pursuant to an agreement dated April 6, 1993, First Coast
Magnetic Resonance Imaging, P.A., ("First Coast") a professional
association of which Dr. Damadian is the stockholder, director and
President, purchased the Company's partnership/joint venture interests
in two MRI scanning centers in Florida (one in Jacksonville and one in
Fort Meyers) for a purchase price of $3,200,000. The agreement provided
for payment of the purchase price as follows: $200,000 no later
than June 30, 1993 and the balance in (a) 36 equal monthly installments
of principal and interest (8% per annum) in the amount of $46,758.64
each and (b) one final 37th installment of principal in the amount
of $1,915,323.60. The centers are parties to service agreements with
the Company with prices as follows: Jacksonville: $105,416 for each of
the periods from February 15, 1994 to February 14, 1995, May 18, 1995
to May 17, 1996 and May 18, 1996 to May 17, 1997; Fort Myers $100,000
for the period from August 10, 1994 to August 9, 1995 and $65,000 for
each of the periods from July 19, 1995 to July 18, 1996 and July 19,
1996 to July 18, 1997.

In fiscal 1994, RVDC and its affiliates supported the Company
and its objectives by agreeing to purchase five MRI scanners and the
interests of a subsidiary of the Company in four limited partnerships.

Pursuant to a sales agreement dated February 3, 1994 and
amended April 1, 1994, RVDC agreed to purchase an MRI scanner from the
Company which RVDC is planning to utilize at a site located in
Manhattan, New York (the "West Side Center"). The sales agreement
provides for a purchase price of $800,000 payable in installments as
follows: (1) $100,000 down payment within 30 days of execution, and
(2) $700,000 in 84 monthly installments, commencing January 1, 1995,
of $11,346.73 each (inclusive of interest at 8% per annum) pursuant to
a promissory note.

Pursuant to a sales agreement dated March 31, 1994, RVDC
agreed to purchase an MRI scanner from the Company which RVDC is
planning to utilize at a site located in Israel (the "Israel Center").
The sales agreement provides for a purchase price of $1,000,000
payable in 84 monthly installments, commencing January 1, 1995, of
$16,209.66 each (inclusive of interest at 8% per annum) pursuant to a
promissory note.

Pursuant to a sales agreement dated April 1, 1994, RVDC
agreed to purchase an MRI scanner from the Company which RVDC is
planning to utilize at a site located in Cape Coral, Florida (the
"Cape Coral Center"). The sales agreement provides for a purchase
price of $1,000,000 payable in installments as follows: (1) $100,000
down payment within 30 days of execution, and (2) $900,000 in 84
monthly installments of $14,027.59 each (inclusive of interest at 8%
per annum) pursuant to a promissory note to be executed by RVDC upon
acceptance of the scanner.

Pursuant to a sales agreement dated May 18, 1994, RVDC agreed
to purchase an MRI scanner from the Company which RVDC is planning to
utilize at a site located in Orlando, Florida (the "Orlando Center").
The sales agreement provides for a purchase price of $1,000,000 payable
in installments as follows: (1) $100,000 within 30 days of execution,
and (2) $900,000 in 84 monthly installments of $14,027.59 each
(inclusive of interest at 8% per annum) pursuant to a promissory note
to be executed by RVDC upon acceptance of the scanner.

Pursuant to an agreement dated March 31, 1994, the Company
sold an MRI scanner to Ellwood City MRI Center Limited Partnership, a
Pennsylvania limited partnership of which RVDC is the general partner.
The sales agreement provided for a purchase price of $400,000, the
first $200,000 of which was paid subsequent to the fiscal year end and
the second $200,000 of which will be paid by the transfer of RVDC's
distributions until the sum of $200,000 is reached. The partnership
is utilizing the scanner to set up an MRI scanning center in Ellwood
City, Pennsylvania.

Pursuant to an agreement dated September 30, 1993, Advanced
Medical Diagnostics Corporation ("AMD"), a subsidiary of FONAR, sold
its interests in a partnership operating an MRI scanning center in
Southfield Michigan to RVDC for $600,000. The purchase price is pay
able with interest at 10% per annum, over a period of 48 months
commencing October 1, 1993 as follows: $2,000 per month for the first
year, $8,333.33 per month for the second year, $16,666.67 per month
for the third year and $20,909.91 for the fourth and fifth years. The
partnership is party to a service agreement for the scanner at a cur
rent annual fee of $144,000, for the period January 29, 1996 to January
28, 1997. For the two prior years, the fee also was $144,000.

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 Center"), 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 Center is a Florida professional corporation of
which Raymond V. Damadian is the sole stockholder, director and
President. The partnership has been party to a service agreement for
the scanner at an annual fee of $108,200 for the periods from May 19,
1994 to May 18, 1995 and May 19, 1995 to May 18, 1996.

Pursuant to an agreement dated September 30, 1993, AMD sold
to Dade County MRI, P.A. (the "Dade County Center") 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 Dade County Center is a Florida professional
association of which Raymond V. Damadian is the sole stockholder,
director and President.

Pursuant to an agreement dated December 31, 1993, AMD sold
its interests in a partnership operating an MRI scanning center in San
Francisco to RVDC. The purchase price of $265,000 is payable, with
interest at 10% per annum, at the rate of $9,405.88 per month over a
period of 36 months commencing January 1, 1995. The partnership was
party to a service agreement with the Company for the scanner at an
annual fee of $110,384 from March 20, 1994 to March 19, 1996. The
partnership is presently inactive.

Pursuant to an agreement dated December 31, 1993, AMD sold
its interest in a joint venture operating an MRI scanning center in
Philadelphia, Pennsylvania to Liberty MRI, P.C. (the "Liberty Center").
The purchase price of $400,000 is payable, with interest at 10% per
annum, at a rate of $9,348.70 per month over a period of 60 months
commencing January 1, 1995. The Liberty Center is a Pennsylvania
professional corporation of which Raymond V. Damadian is the sole
stockholder, director and President. The Liberty Center was party to
a service agreement with the Company for the scanner at an annual fee
of $102,700 from November 2, 1993 to November 1, 1995. The current
service agreement runs from November 2, 1995 to November 1, 1996 at an
annual fee of $108,426.

West Palm Beach MRI, P.A. (the "West Palm Beach Center"), a
Florida professional association of which Raymond V. Damadian is the
sole stockholder, director and President, has been party to a service
agreement with the Company for its scanner at an annual fee of
$105,000 since March 1, 1994.

In fiscal 1995, RVDC supported the Company and its objectives
by agreeing to purchase seven MRI scanners.

Pursuant to a sales agreement dated July 12, 1994, RVDC agreed
to purchase an MRI scanner from the Company which RVDC is planning to
utilize at a site located in Ft. Lauderdale, Florida (the "Ft. Lauderdale
Center"). The sales agreement provides for a purchase price of $800,000
payable in installments as follows: (1) $80,000 down payment within 30
days of execution and (2) $720,000 in 84 monthly installments of $11,222.07
each (inclusive of interest at 8% per annum) pursuant to a promissory note
to be executed by RVDC upon acceptance of the scanner.

Pursuant to a sales agreement dated July 12, 1994, RVDC
agreed to purchase an MRI scanner from the Company which RVDC is
planning to utilize at a site located in Leeds, England (the "Leeds
Center"). The sales agreement provides for a purchase price of
$800,000 payable in installments as follows: (1) $80,000 down payment
within 30 days of execution and (2) $720,000 in 84 monthly
installments of $11,222.07 each (inclusive of interest at 8% per
annum) pursuant to a promissory note to be executed by RVDC upon
acceptance of the scanner.

Pursuant to a sales agreement dated October 1, 1994,
RVDC agreed to purchase an MRI scanner from the Company which RVDC is
planning to utilize at a site located in St. Petersburg, Florida (the
"St. Petersburg Center"). The sales agreement provides for a purchase
price of $800,000 payable in installments as follows: (1) $80,000
down payment within 30 days of execution and (2) $720,000 in 84
monthly installments of $11,222.07 each (inclusive of interest at 8%
per annum) pursuant to a promissory note to be executed by RVDC upon
acceptance of the scanner.

Pursuant to a sales agreement dated October 4, 1994,
RVDC agreed to purchase an MRI scanner from the Company which RVDC is
planning to utilize at a site located in Boca Raton, Florida (the
"Boca Raton Center"). The sales agreement provides for a purchase
price of $800,000 payable in installments as follows: (1) $80,000
down payment within 30 days of execution and (2) $720,000 in 84
monthly installments of $11,222.07 each (inclusive of interest at 8%
per annum) pursuant to a promissory note to be executed by RVDC upon
acceptance of the scanner.

Pursuant to a sales agreement dated November 25, 1994,
RVDC agreed to purchase an MRI scanner from the Company which RVDC is
planning to utilize at a site located in Birmingham, England (the
"Birmingham Center"). The sales agreement provides for a purchase
price of $800,000 payable in installments as follows: (1) $80,000
down payment within 30 days of execution and (2) $720,000 in 84
monthly installments of $11,222.07 each (inclusive of interest at 8%
per annum) pursuant to a promissory note to be executed by RVDC upon
acceptance of the scanner.

Pursuant to a sales agreement dated January 4, 1995,
RVDC agreed to purchase an MRI scanner from the Company which RVDC is
planning to utilize at a site located in Sarasota, Florida (the
"Sarasota Center"). The sales agreement provides for a purchase price
of $800,000 payable in installments as follows: (1) $80,000 down
payment within 30 days of execution and (2) $720,000 in 84 monthly
installments of $11,222.07 each (inclusive of interest at 8% per
annum) pursuant to a promissory note to be executed by RVDC upon
acceptance of the scanner.

Pursuant to a sales agreement dated January 16, 1995,
RVDC agreed to purchase an MRI scanner from the Company which RVDC is
planning to utilize at a site located in Largo, Florida (the "Largo II
Center"). The sales agreement provides for a purchase price of
$800,000 payable in installments as follows: (1) $80,000 down payment
within 30 days of execution and (2) $720,000 in 84 monthly
installments of $11,222.07 each (inclusive of interest at 8% per
annum) pursuant to a promissory note to be executed by RVDC upon
acceptance of the scanner.

Pursuant to an agreement dated April 1, 1995, RVDC assigned
its right to purchase an MRI scanner from a third party for $85,000
and FONAR assumed the obligations of RVDC under the agreement. RVDC
also sold FONAR an MRI machine for $23,000 pursuant to an agreement
dated April 1, 1995.

Damadian MRI in Largo, P.A. (the "Largo I Center"), a Florida
professional association of which Raymond V. Damadian is the sole
stockholder, director and President, was party to a service agreement
with the Company for its scanner at an annual fee of $120,000 for the
period from October 15, 1994 to October 14, 1995. For the period from
October 15, 1995 through May 23, 1996, the charge for service was
$66,500. The Largo I Center closed on May 23, 1996.

In fiscal 1996, RVDC supported the Company and its objectives
by agreeing to purchase nine MRI scanners.

Pursuant to a sales agreement dated July 6, 1995, RVDC agreed
to purchase an MRI scanner from the Company which RVDC is planning to
utilize at a site located in Panama City, Florida (the "Panama City
Center"). The sales agreement provides for a purchase price of
$590,000 payable in installments as follows: (1) $59,000 down payment
within 30 days of execution and (2) $531,000 in 84 monthly installments
of $8,276.28 each (inclusive of interest at 8% per annum) pursuant to a
promissory note to be executed by RVDC upon acceptance of the scanner.

Pursuant to a sales agreement dated August 4, 1995, RVDC
agreed to purchase an MRI scanner from the Company which RVDC is
planning to utilize at a site located in Gainesville, Florida (the
"Gainesville Center"). The sales agreement provides for a purchase
price of $450,000 payable in installments as follows: (1) $45,000
down payment within 30 days of execution and (2) $405,000 in 84
monthly installments of $6,312.42 each (inclusive of interest at 8%
per annum) pursuant to a promissory note to be executed by RVDC upon
acceptance of the scanner.

Pursuant to a sales agreement dated August 4, 1995, RVDC agreed
to purchase an MRI scanner from the Company which RVDC is planning to
utilize at a site located in Newark, New Jersey (the "Newark Center").
The sales agreement provides for a purchase price of $590,000 payable in
installments as follows: (1) $59,000 down payment within 30 days of
execution and (2) $531,000 in 84 monthly installments of $8,276.28 each
(inclusive of interest at 8% per annum) pursuant to a promissory note to
be executed by RVDC upon acceptance of the scanner.

Pursuant to a sales agreement dated September 20, 1995, RVDC
agreed to purchase an MRI scanner from the Company which RVDC is
planning to utilize at a site located in Patterson, New Jersey (the
"Patterson Center"). The sales agreement provides for a purchase
price of $450,000 payable in installments as follows: (1) $45,000
down payment within 30 days of execution and (2) $405,000 in 84
monthly installments of $6,312.42 each (inclusive of interest at 8%
per annum) pursuant to a promissory note to be executed by RVDC upon
acceptance of the scanner.

Pursuant to a sales agreement dated October 4, 1995, RVDC
agreed to purchase an MRI scanner from the Company which RVDC is
planning to utilize at a site located in Atlanta, Georgia (the
"Atlanta Center"). The sales agreement provides for a purchase price
of $450,000 payable in installments as follows: (1) $45,000 down
payment within 30 days of execution and (2) $405,000 in 84 monthly
installments of $6,312.42 each (inclusive of interest at 8% per annum)
pursuant to a promissory note to be executed by RVDC upon acceptance
of the scanner.

Pursuant to a sales agreement dated October 4, 1995, RVDC
agreed to purchase an MRI scanner from the Company which RVDC is
planning to utilize at a site located in Trenton, New Jersey (the
"Trenton Center"). The sales agreement provides for a purchase price
of $450,000 payable in installments as follows: (1) $45,000 down
payment within 30 days of execution and (2) $405,000 in 84 monthly
installments of $6,312.42 each (inclusive of interest at 8% per annum)
pursuant to a promissory note to be executed by RVDC upon acceptance
of the scanner.

Pursuant to a sales agreement dated October 24, 1995, RVDC
agreed to purchase an MRI scanner from the Company which RVDC is
planning to utilize at a site located in Naples, Florida (the "Naples
Center"). The sales agreement provides for a purchase price of
$450,000 payable in installments as follows: (1) $45,000 down payment
within 30 days of execution and (2) $405,000 in 84 monthly
installments of $6,312.42 each (inclusive of interest at 8% per annum)
pursuant to a promissory note to be executed by RVDC upon acceptance
of the scanner.

Pursuant to a sales agreement dated January 19, 1996, RVDC
agreed to purchase an MRI scanner from the Company which RVDC is
planning to utilize at a site located in Savannah, Georgia (the
"Savannah Center"). The sales agreement provides for a purchase price
of $450,000 payable in installments as follows: (1) $45,000 down
payment within 30 days of execution and (2) $405,000 in 84 monthly
installments of $6,312.42 each (inclusive of interest at 8% per annum)
pursuant to a promissory note to be executed by RVDC upon acceptance
of the scanner.

Pursuant to a sales agreement dated February 7, 1996, RVDC
agreed to purchase an MRI scanner from the Company which RVDC is
planning to utilize at a site located in Buffalo, New York (the
"Buffalo Center"). The sales agreement provides for a purchase price
of $450,000 payable in installments as follows: (1) $45,000 down
payment within 30 days of execution and (2) $405,000 in 84 monthly
installments of $6,312.42 each (inclusive of interest at 8% per annum)
pursuant to a promissory note to be executed by RVDC upon acceptance
of the scanner.

Pursuant to a sales agreement dated April 1, 1996, RVDC
agreed to purchase an MRI scanner with certain upgrades from the
Company which RVDC has contributed to Orlando MRI Associates, Limited
Partnership (the "Orlando Partnership"), a limited partnership in
which RVDC is the general partner. 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.
Commencing October 8, 1996, the Orlando Partnership will enter into a
service agreement for the scanner with the Company at an annual fee of
$70,000, which fee will remain in effect for five years. As at June
30, 1996, the Orlando Partnership was indebted to the Company in the
amount of $21,063. Timothy Damadian, a Vice President of the Company,
is a limited partner in Orlando.

For the year ended June 30, 1996 total receipts by the Company
from RVDC and its affiliates were $4,287,067, as compared to receipts of
$4,013,100 in fiscal 1995 and receipts of $4,913,968 in fiscal 1994.

RVDC executed and delivered to the Company a promissory note,
dated June 30, 1992 in the principal amount of $4,284,692 with interest
thereon at the rate of 10% per annum, payable in quarterly installments
of interest only during the first year and thereafter, amortized over a
five-year period. The note represented the indebtedness of RVDC to the
Company incurred during fiscal 1992 for lease payments, service contract
fees, management fees and reimbursable expenses and incorporated and
superseded the outstanding balance of the note to the Company from RVDC
dated June 30, 1991 in the principal amount of $1,996,100 (which was
amortized over five years with interest at 10%). The note is guaranteed
by the Macon Center, Albany Center, Staten Island Center, Deerfield Center,
Daytona Beach Center and Melville Center and is secured by certain assets
of RVDC and the guarantors. These security interests are in certain cases
subordinate to the security interests of unrelated lenders.

TMRI executed and delivered to the Company a promissory note
dated June 30, 1992 in the principal amount of $803,272, with
interest thereon at the rate of 10% per annum, payable in quarterly
installments of interest only during the first year and thereafter,
amortized over a five year period. The note represents the indebtedness
of TMRI to the Company during fiscal 1992 for lease payments, service
contract fees and reimbursable expenses and incorporates and supersedes
the outstanding balance of the note to the Company from TMRI dated June
30, 1991 in the principal amount of $169,200 (which was amortized over
five years with interest at 10%).

Pursuant to an agreement dated March 3, 1994, Network MRI,
Inc. ("Network") engaged the Company to disassemble, transport and
reinstall an MRI scanner purchased by Network from a third party.
Luciano Bonanni, the Executive Vice President of the Company, is the
President, director and shareholder of Network. The agreement provides
for a price of $120,000 payable as follows: (1) $5,000 upon the
giving of notice by Network to commence the deinstallation, (2)
$15,000 upon the completion of the installation of the magnet and
shielded room and (3) $100,000 in 36 monthly installments of $3,133.64
each (inclusive of interest at 8% per annum) pursuant to a note
executed upon completion of the reinstallation.

Pursuant to an agreement dated June 20, 1994, MRI
Enterprises, Inc. ("Enterprises"), a New York corporation of which
Luciano Bonanni is the stockholder, director and President, engaged
the Company to disassemble, transport and reinstall an MRI scanner
purchased by Enterprises from a third party. The agreement provided
for a price of $120,000 payable as follows: (1) $5,000 upon the
giving of notice by Enterprises to commence the deinstallation, (2)
$15,000 upon the completion of the installation of the magnet and
shielded room and (3) $100,000 with interest at 8% per annum pursuant
to a note executed upon completion of the reinstallation.

In addition, as of June 30, 1995, Enterprises assumed the
liability of a third party to FONAR which had defaulted in its
obligation to pay for service for an MRI scanner being provided by
Enterprises to the third party. The liability, in the amount of
$50,604.00 was assumed by Enterprises in exchange for FONAR assigning
the account receivable to Enterprises. The liability is payable by
Enterprises to FONAR amortized over a period of thirty-six months with
interest at 8% per annum commencing on January 1, 1996.

Enterprises was indebted to the Company as at June 30, 1996,
in the amount of $204,539 pursuant to a promissory note in the
original principal amount of $324,235 with interest at the rate of 10%
per annum. The original principal amount of this note represents the
liability of a third party to the Company for service and other items
which was assumed by Enterprises in connection with Enterprises'
acquisition of an MRI scanner and assumption of said party's finance
lease covering the scanner.

The aggregate indebtedness of Enterprises and Network to the
Company as at June 30, 1996 was $419,068.

Pursuant to an agreement dated August 3, 1993 MRI Special
ties, Inc. ("Specialties") engaged the Company to deinstall, transport
and reinstall an MRI scanner purchased from a third party. Timothy
Damadian, a Vice President of the Company, is the stockholder, director
and President of Specialities. The agreement provides for a price of
$120,000 payable in 36 monthly installments of $3,760.36 each (inclusive
of interest at 8% per annum) pursuant to a note executed and delivered
by Specialties upon the completion of the reinstallation. The agreement
also provides that the Company will provide a Four Post Canopy and Steel
upgrade, Signal Plus Surface Coils and Whisper Gradients for the MRI
scanner. The scanner is owned by Canarsie MRI Associates ("Canarsie"),
a joint venture partnership of which Specialties is an owner, and
Canarsie is party to a service agreement for the scanner with the
Company at an annual fee of $70,000 for the period September 1, 1994
through August 31, 1995 and $73,500 for the period September 1, 1995
through August 31, 1996. The annual fee for the following two annual
periods will not exceed $77,000 and $80,500, respectively.

Pursuant to an agreement dated January 2, 1996, Guardian MRI,
Inc. ("Guardian") engaged the Company to deinstall, transport and
reinstall an MRI scanner purchased for Pompano MRI Associates
("Pompano") from a third party. Timothy Damadian, a Vice President of
the Company, is a stockholder, director and officer of Guardian.
Pompano is a joint venture partnership of which Guardian is an owner.
The agreement provides for a price of $120,000 payable in 36 monthly
installments of $3,760.36 each (inclusive of interest at 8% per annum)
pursuant to a note executed and delivered by Guardian upon the
completion of the reinstallation. The agreement also provides that
the Company will provide a six month warranty for the scanner and a
service agreement thereafter at an annual price of $70,000. In
addition, the agreement provides that the Company will provide updated
software, Signal Plus Surface Coils, Whisper Gradients and a Four Post
Canopy and Steel upgrade for the scanner.

As at June 30, 1996, the aggregate indebtedness of
Specialties and Canarsie to the Company was $95,807 and the aggregate
indebtedness of Guardian and Pompano to the Company was $124,929.

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, 1996 and 1995.

Consolidated Statements of Operations for the Three
Years Ended June 30, 1996, 1995 and 1994.

Consolidated Statements of Stockholders' Equity
for the Three Years Ended June 30, 1996, 1995 and 1994.

Consolidated Statements of Cash Flows for the Three
Years Ended June 30, 1996, 1995 and 1994.

Notes to Consolidated Financial Statements.

The following consolidated financial statement schedules
are included in Item 14 (d).

Supplementary Schedules

Report of Independent Certified Public Accountants on Schedules.

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.

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.

11. Statement Re Computation Of Per Share Earnings. See Exhibits.

22.1 Subsidiaries of the Registrant. Incorporated herein by
reference to Exhibit 22.1 Form 10-K for the fiscal year ended June 30,
1989, Commission File No. 0-10248.

d) FINANCIAL STATEMENT SCHEDULES
[See pages S-1 through S-3]

INDEPENDENT AUDITORS' REPORT ON SCHEDULES

To the Board of Directors
FONAR Corporation and Subsidiaries

In connection with our audit of the consolidated financial
statements of FONAR Corporation and Subsidiaries as at June
30, 1996 and 1995, and for the years in the three-year period
ended June 30, 1996, we have also audited the supplemental
schedules listed in the accompanying index to consolidated
financial statements and schedules. Our audit was made for
the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. These schedules are
presented for purposes of complying with the Securities and
Exchange Commission's rules and regulations under the
Securities Exchange Act of 1934 and are not otherwise a
required part of the basic consolidated financial statements.
The supplemental schedules have been subjected to the auditing
procedures applied in the audit of the basic consolidated
financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth
therein in relation to the basic consolidated financial
statements taken as a whole.

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

New York, New York
October 7, 1996

S-1

FONAR CORPORATION AND SUBSIDIARIES
SCHEDULE II - ACCOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS
FOR THE THREE YEARS ENDED JUNE 30, 1996

Deductions Balance
------------------------------- At End of Period
Balance At Amounts -------------------------------
Beginning Amounts Written Non-
Name of Debtor of Period Additions Collected Off Current Current
-------------- -------------- -------------- -------------- -------------- -------------- --------------

For the Year Ended June 30, 1994:
Diagnostic Imaging Corp. $ 154,644 $5,271,621 (b) $5,175,878 $ - $ 250,387 $ -
MRI Enterprises, Inc. 21,639 3,287,750 (c) 3,180,172 - 129,217 -
L. Bonanni 120,468 - 18,768 - 101,700 (a) -
For the Year Ended June 30, 1995:
Diagnostic Imaging Corp. $ 250,387 $ 389,050 (d) $ 639,437 $ - $ - $ -
MRI Enterprises, Inc. 129,217 4,026,488 (e) 3,738,214 - 417,491 -
L. Bonanni 101,700 107,344 25,969 - 183,075 (a) -
For the Year Ended June 30, 1996:
MRI Enterprises, Inc. $ 417,491 $4,362,360 $4,528,739 $ - $ 251,112 $ -
L. Bonanni 183,075 4,687 46,969 - 140,793 -

(a) Remaining balances on note receivable (with interest at 10%) for exercise of options to purchase shares of common stock. These
notes are included in the accompanying consolidated balance sheets under the caption "Notes receivable from stockholders".

(b) Note receivable, with interest at 10% (which was paid in full in the first quarter of fiscal 1995) for exercise of options and
purchase of 2,975,000 shares of common stock by a company in which an officer of the Company was a director. The note is
included in the accompanying consolidated balance sheets under the caption "Notes receivable from stockholders".

(c) Note receivable, with interest at 10% (which was paid in full in the first quarter of fiscal 1995) for exercise of options and
purchase of 1,850,000 shares of common stock by a company owned by an officer of the Company. The note is included in the
accompanying consolidated balance sheets under the caption "Notes receivable from stockholders".

(d) Note receivable with interest at 10% (which was paid in full during fiscal 1995) for exercise of options and purchase of 250,000
shares of common stock by a company in which an officer of the Company was a director. The note is included in the accompanying
consolidated balance sheets under the caption "Notes receivable from stockholders".

(e) Note receivable with interest at 10% (which was paid in full in the first quarter of fiscal 1996) for exercise of options and
purchase of 1,050,000 shares of common stock by a company owned by an officer of the Company. The note is included in the
accompanying consolidated balance sheets under the caption "Notes receivable from stockholders".

S-2

FONAR CORPORATION AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JUNE 30, 1996

Balance At Other Balance At
Beginning Additions Add End of
Description of Period At Cost Deletions (Deduct) Period
----------- ----------- ---------- ---------- -------- -----------

For the Year Ended June 30, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts in accounts receivable $ 2,114,263 $ 287,310 $ (77,020) $ - $ 2,324,553
Allowance for doubtful accounts in notes receivable - current 600,000 108,411 - - 708,411
Allowance for doubtful accounts in accounts receivable
and investments in affiliates 1,250,000 - - - 1,250,000
Allowance for possible losses - net investment in sales-type
leases 115,000 - - - 115,000
Accumulated amortization of other intangible assets 5,821,762 203,266 - - 6,025,028
Accumulated amortization of capitalized software
development costs 3,722,746 1,168,416 (287,596) - 4,603,566
----------- ---------- ---------- -------- -----------
$13,623,771 $1,767,403 $(364,616) $ - $15,026,558
----------- ---------- ---------- -------- -----------
For the Year Ended June 30, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts in accounts receivable $ 2,324,553 $ 116,514 $ - $ - $ 2,441,067
Allowance for doubtful accounts in notes receivable - current 708,411 - - - 708,411
Allowance for doubtful accounts in accounts receivable
and investments in affiliates 1,250,000 - - - 1,250,000
Allowance for possible losses - net investment in sales-type
leases 115,000 - - - 115,000
Accumulated amortization of other intangible assets 6,025,028 176,276 (169,163) - 6,032,141
Accumulated amortization of capitalized software
development costs 4,603,566 1,255,012 - - 5,858,578
----------- ---------- ---------- -------- -----------
$15,026,558 $1,547,802 $(169,163) $ - $16,405,197
----------- ---------- ---------- -------- -----------

For the Year Ended June 30, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts in accounts receivable $ 2,441,067 $ 472,326 $(210,573) $ - $ 2,702,820
Allowance for doubtful accounts in notes receivable - current 708,411 - - - 708,411
Allowance for doubtful accounts in accounts receivable
and investments in affiliates 1,250,000 - - - 1,250,000
Allowance for possible losses - net investment in sales-type
leases 115,000 - - - 115,000
Accumulated amortization of other intangible assets 6,032,141 219,478 - - 6,251,619
Accumulated amortization of capitalized software
development costs 5,858,578 1,013,615 - - 6,872,193
----------- ---------- ---------- -------- -----------
$16,405,197 $1,705,419 $(210,573) $ - $17,900,043
----------- ---------- ---------- -------- -----------

S-3

SIGNATURES

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

FONAR CORPORATION

Dated: October 11, 1996

By: /s/ Raymond Damadian
Raymond V. Damadian,
President

Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.

Signature Title Date

/s/ Raymond Damadian Chairman of the October 11, 1996
Raymond V. Damadian Board of Directors,
President and a
Director (Principal
Executive Officer)

/s/ Claudette J.V. Chan Director October 11, 1996
Claudette J.V. Chan

/s/ Robert J. Janoff Director October 11, 1996
Robert J. Janoff

/s/ Herbert Maisel Director October 11, 1996
Herbert Maisel

FONAR CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON STOCK

EXHIBIT 11
WEIGHTED AVERAGE NUMBER OF SHARES
NUMBER OF FOR THE YEARS ENDED
SHARES ALLOCATION ------------------------------------
ISSUED RATIO JUNE 30, JUNE 30, JUNE 30,
1996 1995 1994
-------- --------- ---------- ---------- ----------

NUMBER OF SHARES OUTSTANDING
AT BEGINNING OF YEAR 49,047,021 34,430,329 28,367,408

JULY 1 - SEPTEMBER 30 987,750 320 / 365 865,973
2,035,500 322 / 365 1,793,114
1,366,500 313 / 365 1,172,270

OCTOBER 1 - DECEMBER 31 1,093,050 228 / 365 682,782
1,539,700 234 / 365 988,800
1,333,200 235 / 365 858,928

JANUARY 1 - MARCH 31 1,481,566 137 / 365 556,095
1,600,000 135 / 365 591,233
1,345,875 145 / 365 533,451

APRIL 1 - JUNE 30 1,079,500 45 / 365 133,089
1,817,375 55 / 365 275,062
2,017,346 44 / 365 245,055

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING @ JUNE 30
BEFORE STOCK DIVIDEND - 10/20/96 0 38,078,538 31,177,112

LESS : CLASS B COMMON STOCK 0 (3,194,556) (3,202,189)

WEIGHTED AVERAGE NUMBER OF SHARES AVAILABLE FOR STOCK
DIVIDEND 0 34,883,982 27,974,923

STOCK DIVIDEND - CLASS A NON-VOTING PREFERRED STOCK
( 1 SHARE OF PREFERRED STOCK FOR 5 SHARES OF COMMON STOCK) 0 41,860,778 33,569,908

CLASS B COMMON STOCK 0 3,194,556 3,202,189

STOCK DIVIDEND ADJUSTMENT - CLASS A NON-VOTING PREFERRED STOCK 231,510 0 0

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING @ JUNE 30 51,516,470 45,055,334 36,772,097

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

NET (LOSS) INCOME PER WEIGHTED AVERAGE SHARE OUTSTANDING (0.07) (0.04) (0.01)